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Income Taxes | 12 Months Ended
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Jan. 29, 2023
Income Tax Disclosure [Abstract] |
Income Taxes | Income Taxes The Company's regional income before income taxes and equity in net gains (losses) of equity method investments was as follows:
| Fiscal Year Ended
(in thousands) | January 29, 2023 |  | January 30, 2022 |  | January 31, 2021
Domestic | $ | (59,961) |  |  | $ | (16,593) |  |  | $ | (26,170) |
Foreign | 138,428 |  |  | 155,662 |  |  | 89,145 |
Total | $ | 78,467 |  |  | $ | 139,069 |  |  | $ | 62,975 |
The provision for income taxes consisted of the following:
| Fiscal Year Ended
(in thousands) | January 29, 2023 |  | January 30, 2022 |  | January 31, 2021
Current income tax provision (benefit) |  |  |  |  |
Federal | $ | 8,291 |  |  | $ | 1,078 |  |  | $ | 6,716 |
State | 17 |  |  | 211 |  |  | (69) |
Foreign | 24,231 |  |  | 16,374 |  |  | 4,801 |
Subtotal | 32,539 |  |  | 17,663 |  |  | 11,448 |
Deferred income tax provision (benefit) |  |  |  |  |
Federal | (23,730) |  |  | (1,797) |  |  | (7,012) |
State | (28) |  |  | — |  |  | 20 |
Foreign | 8,563 |  |  | (327) |  |  | (1,019) |
Subtotal | (15,195) |  |  | (2,124) |  |  | (8,011) |
Provision for income taxes | $ | 17,344 |  |  | $ | 15,539 |  |  | $ | 3,437 |
The provision for income taxes reconciles to the amount computed by applying the statutory federal rate to income before taxes as follows:
| Fiscal Year Ended
(in thousands) | January 29, 2023 |  | January 30, 2022 |  | January 31, 2021
Federal income tax at statutory rate | $ | 16,478 |  |  | $ | 29,194 |  |  | $ | 13,309 |
State income taxes, net of federal benefit | (4,134) |  |  | 272 |  |  | (186) |
Foreign taxes differential, including withholding taxes | (11,636) |  |  | (6,611) |  |  | (2,688) |
Tax credits generated | (6,922) |  |  | (9,008) |  |  | (4,361) |
Changes in valuation allowance | 6,500 |  |  | 1,778 |  |  | (438) |
Gain on intra-entity asset transfer of intangible assets | (8,735) |  |  | — |  |  | — |
Changes in uncertain tax positions | 826 |  |  | 180 |  |  | 1,841 |
Equity compensation | 430 |  |  | (2,698) |  |  | (3,573) |
GILTI and Subpart F income | 7,385 |  |  | 441 |  |  | 270 |
Transaction costs | 13,729 |  |  | — |  |  | — |
Nondeductible officers compensation | 1,326 |  |  | 3,052 |  |  | 1,702 |
Other | 2,097 |  |  | (1,061) |  |  | (2,439) |
Provision for income taxes | $ | 17,344 |  |  | $ | 15,539 |  |  | $ | 3,437 |
The Company’s tax expense benefited from its operations in lower tax jurisdictions, such as Switzerland, research tax credits, the recognition of excess tax benefits related to share-based compensation and from an intra-entity assignment of intangible assets that received a tax basis step-up. The Company's tax expense increased due to disallowed transaction costs, change in the valuation allowance and an increase in global intangible low-taxed income ("GILTI"), driven by the capitalization of R&D costs as mandated by the Tax Cuts and Jobs Act (the "Tax Act"). On December 6, 2016, the Company was granted a tax holiday ("Tax Holiday") with an effective date of January 30, 2017. The Tax Holiday provides Semtech (International) AG with a 70% reduction to the Swiss Cantonal tax rate, bringing the statutory Swiss Cantonal tax rate down from 12.56% to 3.77%. The maximum benefit under this Tax Holiday is CHF 500.0 million of cumulative after tax profit, which equates to a maximum potential tax savings of CHF 44.0 million. The Tax Holiday was effective for five years and could be extended for an additional five years if the Company met certain staffing targets by January 30, 2022. Semtech (International) AG has met these staffing guidelines, and therefore, the tax holiday is extended for an additional five years ending January 31, 2027. On May 19, 2019, Switzerland approved the Federal Act on Tax Reform ("Swiss Tax Reform"). One main component of the Swiss Tax Reform included reduction of Cantonal income tax rates. The Swiss Tax Reform dropped the statutory Swiss Cantonal tax rate down from 12.56% to 8.46%. Semtech’s Tax Holiday provides Semtech (International) AG with a 70% reduction to this new Swiss Cantonal tax rate, bringing the statutory Swiss Cantonal tax rate down from 8.46% to 2.54%. All other provisions of the existing Tax Holiday discussed above still apply. The Tax Act imposed a U.S. tax on GILTI income that is earned by certain foreign affiliates owned by a U.S. stockholder. In accordance with guidance issued by the FASB, the Company has made a policy election to treat future taxes related to GILTI as a current period expense in the reporting period in which the tax is incurred. Prior to the enactment of the Tax Act, with few exceptions, U.S. federal income and foreign withholding taxes had not been provided on the excess of the amount for financial reporting over the tax basis of investments in the Company’s foreign subsidiaries that were essentially permanent in duration. With the enactment of the Tax Act, all historic and current foreign earnings are taxed in the U.S. Depending on the jurisdiction, these foreign earnings are potentially subject to a withholding tax, if repatriated. As of January 29, 2023, the historical undistributed earnings of the Company’s foreign subsidiaries are intended to be permanently reinvested outside of the U.S. Notwithstanding the U.S. taxation of these amounts, the Company has determined that none of its current foreign earnings will be permanently reinvested. If the Company needed to remit all or a portion of its historical undistributed earnings to the U.S. for investment in its domestic operations, any such remittance could result in increased tax liabilities and a higher effective tax rate. Determination of the amount of the unrecognized deferred tax liability on these unremitted earnings is not practicable. The components of the net deferred income tax assets and liabilities at January 29, 2023 and January 30, 2022 were as follows:
(in thousands) | January 29, 2023 |  | January 30, 2022
Non-current deferred tax assets: |  |  |
Inventory reserve | $ | 6,127 |  |  | $ | 5,734 |
Bad debt reserve | 20 |  |  | 26 |
Foreign tax credits | 3,294 |  |  | 3,304 |
Research credit carryforward | 61,699 |  |  | 13,498 |
NOL carryforward | 95,955 |  |  | 7,839 |
Payroll and related accruals | 10,433 |  |  | 11,743 |
Share-based compensation | 4,014 |  |  | 5,256 |
Foreign pension deferred | 474 |  |  | 1,412 |
Accrued sales reserves | 684 |  |  | 1,012 |
Research and development charges | 14,835 |  |  | 7,263 |
Goodwill and other intangibles | 17,979 |  |  | — |
Leasing deferred assets | 3,932 |  |  | 4,311 |
OID interest | 19,421 |  |  | 723 |
Other reserves | 8,255 |  |  | — |
Other deferred assets | 4,265 |  |  | 1,516 |
Valuation allowance | (156,850) |  |  | (17,506) |
Total non-current deferred tax assets | 94,537 |  |  | 46,131 |
Non-current deferred tax liabilities: |  |  |
Goodwill and other intangibles | — |  |  | (1,530) |
Property, plant and equipment | (26,908) |  |  | (6,990) |
Repatriation of foreign earnings | — |  |  | (4,709) |
Leasing deferred liabilities | (3,780) |  |  | (4,139) |
Other non-current deferred tax liabilities | (5,130) |  |  | (2,093) |
Total non-current deferred tax liabilities | (35,818) |  |  | (19,461) |
Net deferred tax assets | $ | 58,719 |  |  | $ | 26,670 |
As of January 29, 2023, the Company had U.S. gross federal and state research credits available of approximately $9.6 million and $18.5 million, respectively, which are available to offset taxable income. In connection with the Sierra Wireless Acquisition, the Company acquired approximately $2.5 million of fully reserved U.S. research credit carryforwards. The Company's U.S. credits will expire between fiscal years 2029 through 2043. The Company also had gross Canadian research credits available of approximately $57.6 million. Included in the $57.6 million are $47.0 million of Canadian research credit carryforwards that were acquired in connection with the Sierra Wireless Acquisition. These credits will expire by fiscal year 2043. As of January 29, 2023, the Company had U.S. gross federal net operating loss ("NOL") carryforwards of $74.0 million and state NOL carryforwards of $105.3 million, which, subject to certain limitations, are available to offset future taxable income through fiscal year 2043. The federal NOL carryforwards are primarily NOLs acquired in the Sierra Wireless Acquisition. These will expire at various dates through 2038 for losses generated prior to tax year 2018. For losses generated during tax year 2018 and future years, the NOL carryforward period is indefinite, but the loss utilization will be limited to 80% of taxable income. A portion of these losses may be subject to annual limitations due to ownership change provisions under Section 382 of the Internal Revenue Code ("IRC"). This limitation may result in the expiration of NOLs before utilization. The Company has not yet finalized the IRC section 382 analysis as of January 29, 2023, and it will be subject to change as part of the Sierra Wireless Acquisition purchase accounting. Additionally, in connection with the Sierra Wireless Acquisition, the Company acquired approximately $21.0 million, $162.5 million, and $97.6 million of fully reserved gross NOLs in Canada, France, and Luxembourg respectively. As of January 29, 2023 and January 30, 2022, the Company had approximately $215.6 million and $44.1 million of net deferred tax assets, respectively, the majority of which are in the U.S., Canada and France. The Company has recorded valuation allowances of $156.9 million and $17.5 million against its deferred tax assets at January 29, 2023 and January 30, 2022, respectively, based on the Company's assessment of its ability to utilize its deferred tax assets. The large increase in valuation allowance was mainly due to the Sierra Wireless Acquisition (discussed in Note 3). In connection with the acquisition, the Company reassessed the valuation allowances and evaluated the recoverability of its deferred tax assets, considering all available evidence such as earnings history and tax planning strategies. After weighing all positive and negative evidence, the Company maintains a valuation allowance for assets if it is more likely than not that some, or all, of its deferred tax assets will not be realized. Positive evidence considered included reversing taxable temporary differences. Negative evidence considered included the cumulative pre-tax losses recorded during the three-year period ended January 29, 2023, on both an annual and cumulative basis. In jurisdictions where the Company has cumulative losses, the Company has recorded a full valuation allowance on deferred tax assets. In the U.S. and Canada the Company has deferred tax assets for which partial valuation allowances have been recorded. Changes in the valuation allowance for the three years ended January 29, 2023 are summarized in the table below:
| Fiscal Year Ended
(in thousands) | January 29, 2023 |  | January 30, 2022 |  | January 31, 2021
Beginning balance | $ | 17,506 |  |  | $ | 15,751 |  |  | $ | 16,189 |
Assumed valuation allowance from Sierra Wireless Acquisition | 116,528 |  |  | — |  |  | — |
Additions | 22,816 |  |  | 2,605 |  |  | 1,208 |
Releases | — |  |  | (850) |  |  | (1,646) |
Ending balance | $ | 156,850 |  |  | $ | 17,506 |  |  | $ | 15,751 |
As part of the Sierra Wireless Acquisition, the Company established a valuation allowance of $116.5 million through purchase accounting. The current year additions of $22.8 million primarily consists of valuation allowance on deferred tax assets related to Convertible Note Hedge Transactions (discussed in Note 10), disallowed interest expense carried forward under IRC section 163j ("Section 163j") and state deferred taxes. The change in the valuation allowance related to the Convertible Note Hedge Transaction of $16.3 million is included in statements of Shareholders Equity. The change in the valuation allowance for Section 163j and state deferred taxes of $6.5 million is included in the fiscal year 2023 provision for income taxes in the Consolidated Statements of Income. Uncertain Tax Positions The Company uses a two-step approach to recognize and measure uncertain tax positions ("UTP"). The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement. A reconciliation of the beginning and ending amount of gross unrecognized tax benefits (before federal impact of state items) is as follows:
| Fiscal Year Ended
(in thousands) | January 29, 2023 |  | January 30, 2022
Beginning balance | $ | 27,051 |  |  | $ | 26,850 |
Assumed uncertain tax positions related to Sierra Wireless Acquisition | 3,578 |  |  | — |
Net additions based on tax positions related to the current year | 700 |  |  | 925 |
Additions based on tax positions related to prior years | 533 |  |  | 464 |
Reductions as a result of lapsed statutes | — |  |  | (991) |
Reductions for settlements with tax authorities | (391) |  |  | (197) |
Ending balance | $ | 31,471 |  |  | $ | 27,051 |
Included in the balance of gross unrecognized tax benefits at January 29, 2023 and January 30, 2022, are $12.6 million and $9.3 million, respectively, of net tax benefits (after federal impact of state items) that, if recognized, would impact the effective tax rate. The liability for UTP is reflected on the Balance Sheets as follows:
| Fiscal Year Ended
(in thousands) | January 29, 2023 |  | January 30, 2022
Deferred tax assets - non-current | $ | 17,446 |  |  | $ | 16,346 |
Other long-term liabilities | 12,641 |  |  | 9,335 |
Total uncertain tax positions | $ | 30,087 |  |  | $ | 25,681 |
The Company’s policy is to include net interest and penalties related to unrecognized tax benefits within the provision for taxes in the Statements of Income. The Company had approximately $1.9 million of net interest and penalties accrued at January 29, 2023. Tax years prior to 2013 (the Company’s fiscal year 2014) are generally not subject to examination by the IRS except for items involving tax attributes that have been carried forward to tax years whose statute of limitations remains open. For state returns in the U.S., the Company is generally not subject to income tax examinations for years prior to 2012 (the Company’s fiscal year 2013). The Company has a significant tax presence in Switzerland for which Swiss tax filings have been examined through fiscal year 2020. The Company is also subject to routine examinations by various foreign tax jurisdictions in which it operates. The Company believes that adequate provisions have been made for any adjustments that may result from tax examinations. However, the outcome of tax examinations cannot be predicted with certainty. If any issues addressed in the Company’s tax examinations are resolved in a manner not consistent with the Company's expectations, the Company could be required to adjust its provision for income taxes in the period such resolution occurs.

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