. 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						Nine months ended
(in thousands)	May 31, 2017			May 31, 2016			May 31, 2017			May 31, 2016
Income before income taxes	$	85,229		$	88,857		$	264,539		$	261,177
Total provision for income taxes	$	19,815		$	22,076		$	65,832		$	66,669
Effective tax rate		23.2	%		24.8	%		24.9	%		25.5%	(1)

(

)

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

2016

and reduced the Company’s effective tax rate

for the

nine

months ended

May 31, 2016

25.5

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. and benefits from R&D and foreign tax credits partially offset by additional state and local income taxes.

FactSet Operational Realignment

Effective

September 1, 2016,

FactSet realigned certain aspects of its global operations from FactSet Research Systems Inc., its U.S. parent company, to FactSet UK Limited, a U.K. operating company, to better position the Company to serve its growing client base outside the U.S. This realignment allows the Company to further implement strategic corporate objectives and helps achieve operational and financial efficiencies, while complementing FactSet’s increasing global growth and reach. As a result of the realignment, the Company expects an approximate benefit of

250

basis point to its fiscal

2017

annual effective tax rate.

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)	May 31, 2017			August 31, 2016
Current
Receivable reserve	$	619		$	531
Deferred rent		1,184			1,022
Other		820			1,605
Net current deferred tax assets	$	2,623		$	3,158
Non-current
Depreciation on property, equipment and leasehold improvements	$	3,335		$	5,194
Deferred rent		10,539			9,626
Stock-based compensation		18,154			19,927
Purchased intangible assets, including acquired technology		(31,495	)		(24,645	)
Other		4,566			3,304
Net non-current deferred tax assets	$	5,099		$	13,406
Total deferred tax assets	$	7,722		$	16,564

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

(in thousands)	May 31, 2017			August 31, 2016
Current
Other	$	1,781		$	291
Net current deferred tax liabilities	$	1,781		$	291
Non-current
Stock-based compensation	$	(944	)	$	—
Depreciation on property, equipment and leasehold improvements		(441	)		—
Purchased intangible assets, including acquired technology		25,928			1,666
Other		(1,504	)		42
Net non-current deferred tax liabilities	$	23,039		$	1,708
Total deferred tax liabilities	$	24,820		$	1,999

U.S. income taxes have been provided on filing-basis undistributed foreign earnings and profits as of

May 31, 2017,

as FactSet plans to permanently reinvest these amounts and use the earnings to fund non-U.S. operations and working capital needs as well as facilities overseas. This includes, but is

not

limited to, capital expenditures and acquisitions intended to further FactSet’s global growth strategy. At each reporting period, FactSet assesses its position with regard to the undistributed foreign earnings of its subsidiaries. To the extent that earnings can

longer be indefinitely reinvested, the Company will accrue the tax impact, if any, attributable to those earnings, including the impact of foreign tax credits, at such time. If such earnings are repatriated, additional tax expense

may

result, although the flexibility inherent in the U.S. Internal Revenue Code

may

permit the ultimate distribution to be tax-free depending on the nature of the distribution. Therefore the Company does

not

believe it is practicable to estimate, with reasonable accuracy, the hypothetical amount of the unrecognized deferred tax liability on its undistributed foreign earnings given the many factors and assumptions necessary to estimate the amount of the federal income tax that

may

be payable in the future on the undistributed earnings..

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,

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

May 31, 2017,

the Company had gross unrecognized tax benefits totaling

$10.8

million, including

$1.3

million of accrued interest, recorded as

on-current taxes payable

within the Consolidated Balance Sheet. 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

months. However, FactSet has

reason to believe that such audits will result in the payment of additional taxes and/or penalties that would 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

months.

The following table summarizes the changes in the balance of gross unrecognized tax benefits during the

first

nine

months of fiscal

2017:

(in thousands)
Unrecognized income tax benefits at August 31, 2016	$	8,782
Additions based on tax positions related to the current year		1,359
Additions for tax positions of prior years		2,461
Statute of limitations lapse		(1,822	)
Unrecognized income tax benefits at May 31, 2017	$	10,780

In the normal course of business, the Company’s tax filings are subject to audit by federal, state and foreign tax authorities. At

May 31, 2017,

the Company remained subject to examination in the following major tax jurisdictions:

Major Tax Jurisdictions	Open Tax Years
U.S.
Federal		2014	through	2017
State (various)		2010	through	2017
Europe
France		2013	through	2017
United Kingdom		2012	through	2017