15. INCOME TAXES

Income tax expense is based on taxable income determined in accordance with current enacted laws and tax rates. Deferred income taxes are recorded for the temporary differences between the financial statement and tax bases of assets and liabilities using currently enacted tax rates.

Provision for Income Taxes

The provision for income taxes is as follows:

	Three months ended						Six months ended
(in thousands)	February 29, 2016			February 28, 2015			February 29, 2016			February 28, 2015
U.S. operations	$	66,375		$	64,881		$	137,274		$	130,839
Non-U.S. operations		18,544			16,301			35,047			31,033
Income before income taxes	$	84,919		$	81,182		$	172,321		$	161,872

U.S. operations	$	13,704		$	15,157		$	37,776		$	40,817
Non-U.S. operations		3,453			4,427			6,818			3,597
Total provision for income taxes	$	17,157		$	19,584		$	44,594		$	44,414
Effective tax rate		20.2	% (1)		24.1	% (2)		25.9	%		27.4	%

(1)

n December 2015, the Consolidated Appropriations Act, 2016 (the “

2016

ACT”)

was

signed into law. The ACT reinstated and made permanent the U.S. Federal R&D tax credit (the “R&D tax credit”), which had previously expired on December 31, 2014. The reenactment of the R&D tax credit was retroactive to January 1, 2015 and by providing for a permanent R&D tax credit, the

2016

ACT eliminates the yearly uncertainty surrounding the extension of the credit. Prior to the reenactment of the R&D tax credit, FactSet had not been permitted to factor it into its effective tax rate as it was not currently enacted tax law. The reenactment resulted in a

discrete income tax benefit of $7.3

million during the second quarter of fiscal 201

and reduced the Company’s effective tax rate for the quarter to

20.2

(2)

December 2014, the Tax Increase Prevention Act of 2014 (the “

2014

ACT”)

was

signed into

law. The

2014

ACT reinstated the U.S. Federal R&D tax credit, which had previously expired on December 31, 2013. The reenactment of the credit was retroactive to January 1, 2014 and extended through the end of the 2014 calendar year. Prior to the reenactment of the tax credit, FactSet had not been permitted to factor it into its effective tax rate because it was not currently enacted tax law. The reenactment resulted in a discrete income tax benefit of $5.1 million during the second quarter of fiscal 2015 and reduced the Company’

s effective tax rate for the qu

arter to 24.1%.

FactSet’s effective tax rate is based on recurring factors and nonrecurring events, including the taxation of foreign income. The Company’s effective tax rate will vary based on, among other things, changes in levels of foreign income, as well as discrete and other nonrecurring events that may not be predictable. The effective tax rate was lower than the U.S. statutory rate of 35.0% in both periods presented above primarily due to foreign income, which is subject to lower statutory tax rates than in the U.S., benefits from foreign tax credits and deductions due to U.S. production activities partially offset by additional state and local income taxes.

Deferred Tax Assets and Liabilities

The significant components of deferred tax assets that are recorded in the Consolidated Balance Sheets were as follows:

(in thousands)	February 29, 2016			August 31, 2015
Current
Receivable reserve	$	523		$	541
Deferred rent		1,054			794
Other		1,820			770
Net current deferred tax assets	$	3,397		$	2,105

Non-current
Depreciation on property, equipment and leasehold improvements	$	7,895		$	10,880
Deferred rent		8,341			5,108
Stock-based compensation		18,854			17,562
Purchased intangible assets, including acquired technology		(21,544	)		(17,533	)
Other		4,198			4,582
Net non-current deferred tax assets	$	17,744		$	20,599
Total deferred tax assets	$	21,141		$	22,704

The significant components of deferred tax liabilities that are recorded in the Consolidated Balance Sheets were as follows:

(in thousands)	February 29, 2016			August 31, 2015
Current
Other	$	321		$	562
Net current deferred tax liabilities	$	321		$	562

Non-current
Purchased intangible assets, including acquired technology	$	1,727		$	1,886
Stock-based compensation		(60	)		—
Other		(198	)		(189	)
Net non-current deferred tax liabilities	$	1,469		$	1,697
Total deferred tax liabilities	$	1,790		$	2,259

A provision has not been made for additional U.S. Federal taxes as all undistributed earnings of foreign subsidiaries are considered to be invested indefinitely or will be repatriated free of additional tax. The amount of such undistributed earnings of these foreign subsidiaries included in consolidated retained earnings was immaterial at February 29, 2016 and August 31, 2015. As such, the unrecognized deferred tax liability on those undistributed earnings was immaterial. These earnings could become subject to additional tax if they are remitted as dividends, loaned to FactSet, or upon sale of the subsidiary’s stock.

Unrecognized Tax Positions

Applicable accounting guidance prescribes a comprehensive model for the financial statement recognition, measurement, classification and disclosure of uncertain tax positions that a company has taken or expects to take on a tax return. A company can recognize the financial effect of an income tax position only if it is more likely than not (greater than 50%) that the tax position will prevail upon tax examination, based solely on the technical merits of the tax position. Otherwise, no benefit or expense can be recognized in the consolidated financial statements. The tax benefits recognized are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. Additionally, companies are required to accrue interest on all tax exposures for which reserves have been established consistent with jurisdictional tax laws.

As of February 29, 2016, the Company had gross unrecognized tax benefits totaling $8.5 million, including $1.6 million of accrued interest, recorded as

on-current taxes payable

within the Consolidated Balance Sheet. Approximately $0.9 million of these unrecognized tax benefits would have affected the current year effective tax rate if realized as of February 29, 2016. Unrecognized tax benefits represent tax positions taken on tax returns but not yet recognized in the consolidated financial statements. When applicable, the Company adjusts the previously recorded tax expense to reflect examination results when the position is ultimately settled. The Company regularly engages in discussions and negotiations with tax authorities regarding tax matters in various jurisdictions. It is reasonably possible that certain federal, foreign and state tax matters may be concluded in the next 12 months. However, FactSet has no reason to believe that such audits will result in the payment of additional taxes and/or penalties that could have a material adverse effect on the Company’s results of operations or financial position, beyond current estimates. Any changes in accounting estimates resulting from new developments with respect to uncertain tax positions will be recorded as appropriate. The Company does not currently anticipate that the total amounts of unrecognized tax benefits will significantly change within the next 12 months.

The following table summarizes the changes in the balance of gross unrecognized tax benefits during the first six months of fiscal 2016:

(in thousands)
Unrecognized income tax benefits at August 31, 2015	$	6,776
Additions based on tax positions related to the current year		785
Additions for tax positions of prior years		927
Unrecognized income tax benefits at February 29, 2016	$	8,488

In the normal course of business, the Company’s tax filings are subject to audit by federal, state and foreign tax authorities. At February 29, 2016, the Company remained subject to examination in the following major tax jurisdictions:

Major Tax Jurisdictions	Open Tax Years
U.S.
Federal		2013	through	2016
State (various)		2010	through	2016
Europe
France		2013	through	2016
United Kingdom		2012	through	2016