Note 9. Income Tax

The income tax benefit for the three months ended July 30, 2016 was primarily due to a tax benefit of $12.7 million from a net reduction in unrecognized tax benefits, offset by current income tax expense of $7.2 million. The net reduction in unrecognized tax benefits arose from the release of $13.8 million due to expiration of the statute of limitations in certain non-US jurisdictions, which was partially offset by penalties and interest of $0.8 million accrued on the outstanding unrecognized tax benefit balance, and the accrual of an additional $0.3 million for a prior year tax position. The income tax benefit for the six months ended July 30, 2016 was primarily due to a tax benefit of $12.5 million from a net reduction in unrecognized tax benefits and a deferred tax benefit of $2.5 million for the portion of a payment to the Company’s former Chief Executive Officer that became deductible after his departure from the Company in April 2016, offset by current income tax expense of $4.5 million. The net reduction in unrecognized tax benefits arose from the release of $14.3 million due to expiration of the statute of limitations in certain non-U.S. jurisdictions, which was partially offset by penalties and interest of $1.5 million accrued on the outstanding unrecognized tax benefit balance, and the accrual of an additional $0.3 million for a prior year tax position.

The income tax expense for the three months ended August 1, 2015 was primarily due to current income tax liability of $15.2 million and a $6.7 million provision to record a valuation allowance against certain deferred tax assets in a non-U.S. jurisdiction. These tax expenses for the three months ended August 1, 2015 were partially offset by a tax benefit of $11.7 million from a net reduction in unrecognized tax benefits, and true-up adjustments of $4.8 million, primarily related to the filing of tax returns. The net reduction in unrecognized tax benefits arose from the release of $13.8 million due to expiration of the statute of limitations and settlement of audits in certain non-U.S. jurisdictions, which was partially offset by penalties and interest of $2.1 million accrued on the outstanding unrecognized tax benefit balance. The income tax expense for the six months ended August 1, 2015 was primarily due to current income tax liability of $19.5 million, a $6.7 million provision to record a valuation allowance against certain deferred tax assets in a non-U.S. jurisdiction and an additional provision of $3.1 million related to a $15.4 million payment to the Company’s former Chief Executive Officer. These tax expenses for the six months ended August 1, 2015 were partially offset by tax benefits of $14.8 million from a net reduction in unrecognized tax benefits, and true-up adjustments of $4.8 million, primarily related to the filing of tax returns. The net reduction in unrecognized tax benefits arose from the release of $17.8 million due to expiration of the statute of limitations and settlement of audits in certain non-U.S. jurisdictions, which was partially offset by penalties and interest of $3.0 million accrued on the outstanding unrecognized tax benefit balance.

It is reasonably possible that the amount of unrecognized tax benefits could increase or decrease significantly due to changes in tax law in various jurisdictions, new tax audits and changes in the U.S. dollar as compared to foreign currencies within the next 12 months. Excluding these factors, uncertain tax positions may decrease by as much as $9.9 million from the lapse of statutes of limitation in various jurisdictions during the next 12 months. Government tax authorities from several non-U.S. jurisdictions are also examining the Company’s tax returns. The Company believes that it has adequately provided for any reasonably foreseeable outcomes related to its tax audits and that any settlement will not have a material effect on its results at this time.

The Company operates under tax incentives in certain countries that may be extended if certain additional requirements are satisfied. The tax incentives are conditional upon meeting certain employment and investment thresholds. The impact of these tax incentives decreased foreign taxes by $1.3 million and $2.2 million for the three and six months ended July 30, 2016, respectively, and $1.6 million and $4.9 million for the three and six months ended August 1, 2015, respectively. The benefit of the tax incentives on net income per share was less than $0.01 per share for the three and six months ended July 30, 2016, compared to a benefit of less than $0.01 per share for the three months ended August 1, 2015 and $0.01 per share for the six months ended August 1, 2015.

 

The Company’s principal source of liquidity as of July 30, 2016 consisted of approximately $1.6 billion of cash, cash equivalents and short-term investments, of which approximately $850 million was held by foreign subsidiaries (outside Bermuda). Approximately $650 million of this amount held by foreign subsidiaries is related to undistributed earnings, most of which have been indefinitely reinvested outside of Bermuda. These funds are primarily held in China, Israel, the United States and Switzerland. The Company plans to use such amounts to fund various activities outside of Bermuda including working capital requirements, capital expenditures for expansion, funding of future acquisitions or other financing activities. If such funds were needed by the parent company in Bermuda or if the amounts were otherwise no longer considered indefinitely reinvested, the Company would incur a tax expense of approximately $200 million.