Income Taxes

6 Months Ended

Nov. 03, 2019

17. Income Taxes

Effective Income Tax Rate

We recorded income tax expense of $3.6 million, or 51.5% of income before income taxes, for the

six-

month period ended November 3, 2019, compared with income tax expense of $2.2 million, or 35.1% of income before income taxes, for the

six-month

period ended October 28, 2018. Our effective income tax rates for the

six-month

periods ended November 3, 2019, and October 28, 2018, were based upon the estimated effective income tax rate applicable for the full year after giving effect to any significant items related specifically to interim periods. The effective income tax rate can be affected over the fiscal year by the mix and timing of actual earnings from our U.S. operations and foreign subsidiaries located in China and Canada versus annual projections, as well as changes in foreign currency exchange rates in relation to the U.S. dollar.

The following schedule summarizes the principal differences between income tax expense at the U.S. federal income tax rate and the effective income tax rate reflected in the consolidated financial statements:


	2020			2019
U.S. federal income tax rate		21.0	%		21.0	%
Global Intangible Low Taxed Income Tax (GILTI)		17.3			2.1
Foreign income tax rate differential		10.2			7.8
Tax effects of Chinese foreign exchange gains		2.4			2.8
Change in estimate of U.S. valuation allowance		0.8			1.2
Other		(0.2	)		0.2

		51.5	%		35.1	%

The increase in our effective income tax rate reflects the continued shift in the mix of our taxable income that is mostly earned by our foreign operations located in China and Canada at higher income tax rates in relation to the U.S.

More importantly

, this current mix of our taxable income has resulted in a significant increase in our GILTI Tax, which represents a U.S. income tax on our foreign earnings.

Deferred Income Taxes

Valuation Allowance

In accordance with ASC Topic 740, we evaluate our deferred income taxes to determine if a valuation allowance is required. ASC Topic 740 requires that companies assess whether a valuation allowance should be established based on the consideration of all available evidence using a

“more-likely-than-not”

standard, with significant weight being given to evidence that can be objectively verified. Since the company operates in multiple jurisdictions, we assess the need for a valuation allowance on a

jurisdiction-by-jurisdiction

basis, taking into account the effects of local tax law.

Based on our assessments at November 3, 2019, October 28, 2018, and April 28, 2019, valuation allowances against our deferred income taxes pertain to the following jurisdictions:


(dollars in thousands)	November 3, 2019		October 28, 2018		April 28, 2019
U.S. state loss carryforwards and credits	$	711		756		666
U.S. foreign income tax credits		—		4,550		82

	$	711		5,306		748

Undistributed Earnings

In accordance with ASC Topic 740, we assess whether the undistributed earnings from our foreign subsidiaries will be reinvested indefinitely or eventually distributed to our U.S. parent company. ASC Topic 740 requires that a deferred tax liability should be recorded for undistributed earnings from foreign subsidiaries that will not be reinvested indefinitely. Based on our assessment as of November 3, 2019, it is our intention not to permanently invest our undistributed earnings from our foreign subsidiaries. Also, we assess the recognition of U.S. foreign income tax credits associated with foreign withholding and income tax payments and whether it is

more-likely-than-not

that our foreign income tax credits will not be realized. If it is determined that any foreign income tax credits need to be recognized or it is

more-likely-than-not

our foreign income tax credits will not be realized, an adjustment to our provision for income taxes will be recognized at that time.

As a result of the 2017 Tax Cuts and Jobs Act, a U.S. corporation is allowed a 100% dividend received deduction for earnings and profits received from a 10% owned foreign corporation. Therefore, a deferred tax liability will be required for withholding taxes that are incurred by our foreign subsidiaries at the time earnings and profits are distributed. As a result, at November 3, 2019, October 28, 2018, and April 28, 2019, we recorded a deferred income tax liability of $3.2 million, $3.1 million, and $3.5 million, respectively, for withholding taxes on undistributed earnings and profits from our foreign subsidiaries.

Uncertainty In Income Taxes

In accordance with ASC Topic 740, an unrecognized income tax benefit for an uncertain income tax position can be recognized in the first interim period if the

more-likely-than-not

recognition threshold is met by the reporting period, or is effectively settled through examination, negotiation, or litigation, or the statute of limitations for the relevant taxing authority to examine and challenge the tax position has expired. If it is determined that any of the above conditions occur regarding our uncertain income tax positions, an adjustment to our unrecognized income tax benefits will be recorded at that time.

At November 3, 2019, we had a $914,000 total gross unrecognized income tax benefit that was recorded to income taxes payable- long-term in the accompanying Consolidated Balance Sheets. At October 28, 2018, we had a $820,000 total gross unrecognized income tax benefit, of which $440,000 and $380,000 were classified as income taxes payable – long-term and

non-current

deferred income taxes, respectively, in the accompanying Consolidated Balance Sheets. At April 28, 2019, we had a $903,000 total gross unrecognized income tax benefit, of which $523,000 and $380,000 were classified as income taxes payable – long-term and

non-current

deferred income taxes respectively, in the accompanying Consolidated Balance Sheets.

At November 3, 2019, our $914,000 total gross unrecognized income tax benefit would favorably affect the income tax rate in future periods. At October 28, 2018, our $820,000 total gross unrecognized income tax benefit included $440,000 that, if recognized, would favorably affect the income tax rate in future periods. At April 28, 2019, our $903,000 total gross unrecognized income tax benefit included $523,000 that, if recognized, would favorably affect the income tax rate in future periods.

Our gross unrecognized income tax benefit of $914,000 relates to income tax positions for which significant change is currently not expected within the next year. This amount primarily relates to double taxation under applicable income tax treaties with foreign tax jurisdictions.