INCOME TAXES

In 2016, 2017, and 2018, we recorded net tax provisions of $1.4 billion, $769 million, and $1.2 billion. We have tax benefits relating to excess stock-based compensation deductions and accelerated depreciation deductions that are being utilized to reduce our U.S. taxable income. Cash taxes paid, net of refunds, were $412 million, $957 million, and $1.2 billion for 2016, 2017, and 2018.

The U.S. Tax Act was signed into law on December 22, 2017. The U.S. Tax Act significantly revised the U.S. corporate income tax by, among other things, lowering the statutory corporate tax rate from 35% to 21%, eliminating certain deductions, imposing a mandatory one-time tax on accumulated earnings of foreign subsidiaries, introducing new tax regimes, and changing how foreign earnings are subject to U.S. tax. The U.S. Tax Act also enhanced and extended the option to claim accelerated depreciation deductions by allowing full expensing of qualified property, primarily equipment, through 2022. We reasonably estimated the effects of the U.S. Tax Act and recorded provisional amounts in our financial statements as of December 31, 2017. We recorded a provisional tax benefit for the impact of the U.S. Tax Act of approximately $789 million. This amount was primarily comprised of the remeasurement of federal net deferred tax liabilities resulting from the permanent reduction in the U.S. statutory corporate tax rate to 21% from 35%, after taking into account the mandatory one-time tax on the accumulated earnings of our foreign subsidiaries. The amount of this one-time tax was not material. In 2018, we completed our determination of the accounting implications of the U.S. Tax Act.

The components of the provision for income taxes, net are as follows (in millions):



	Year Ended December 31,
	2016			2017			2018
Current taxes:
U.S. Federal	$	1,136		$	(137	)	$	(129	)
U.S. State	208			211			322
International	327			724			563
Current taxes	1,671			798			756
Deferred taxes:
U.S. Federal	116			(202		)	565
U.S. State	(31		)	(26		)	5
International	(331		)	199			(129		)
Deferred taxes	(246		)	(29		)	441
Provision for income taxes, net	$	1,425		$	769		$	1,197

U.S. and international components of income before income taxes are as follows (in millions):



	Year Ended December 31,
	2016			2017			2018
U.S.	$	4,551		$	5,630		$	11,157
International	(659		)	(1,824		)	104
Income before income taxes	$	3,892		$	3,806		$	11,261

The items accounting for differences between income taxes computed at the federal statutory rate and the provision recorded for income taxes are as follows (in millions):



	Year Ended December 31,
	2016			2017			2018
Income taxes computed at the federal statutory rate (1)	$	1,362		$	1,332		$	2,365
Effect of:
Tax impact of foreign earnings	(69		)	1,178			119
State taxes, net of federal benefits	110			114			263
Tax credits	(119		)	(220		)	(419		)
Stock-based compensation (2)	189			(917		)	(1,086		)
Domestic production activities deduction	(94		)	—			—
2017 Impact of U.S. Tax Act	—			(789		)	(157		)
Other, net	46			71			112
Total	$	1,425		$	769		$	1,197

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(1)	The U.S. Tax Act reduced the U.S. federal statutory rate from 35% to 21% beginning in 2018.


(2)	Includes non-deductible stock-based compensation and beginning in 2017, excess tax benefits from stock-based compensation. For 2017 and 2018, our tax provision includes $1.3 billion and $1.6 billion of excess tax benefits from stock-based compensation.

Our provision for income taxes in 2017 was lower than in 2016 primarily due to excess tax benefits from stock-based compensation and the one-time favorable effect of the U.S. Tax Act, partially offset by an increase in the proportion of foreign losses for which we may not realize a tax benefit and audit-related developments.

We regularly assess whether it is more likely than not that we will realize our deferred tax assets in each taxing jurisdiction in which we operate. In performing this assessment with respect to each jurisdiction, we review all available evidence, including recent cumulative loss experience and expectations of future earnings, capital gains, and investment in such jurisdiction, the carry-forward periods available to us for tax reporting purposes, and other relevant factors. In Q2 2017, we recognized an estimated charge to tax expense of $600 million to record a valuation allowance against the net deferred tax assets in Luxembourg.

Our provision for income taxes in 2018 was higher than in 2017 primarily due to an increase in U.S. pre-tax income and the one-time provisional tax benefit of the U.S. Tax Act recognized in 2017. This was partially offset by the reduction to the U.S. federal statutory tax rate in 2018, a decline in the proportion of foreign losses for which we may not realize a tax benefit and an increase in excess tax benefits from stock-based compensation.

Certain foreign subsidiary earnings are subject to U.S. taxation under the U.S. Tax Act, which also repeals U.S. taxation on the subsequent repatriation of those earnings. We intend to invest substantially all of our foreign subsidiary earnings, as well as our capital in our foreign subsidiaries, indefinitely outside of the U.S. in those jurisdictions in which we would incur significant, additional costs upon repatriation of such amounts.

Deferred income tax assets and liabilities are as follows (in millions):



	December 31,
	2017			2018
Deferred tax assets (1):
Loss carryforwards U.S. - Federal/States	$	211		$	222
Loss carryforwards - Foreign	2,149			2,551
Accrued liabilities, reserves, and other expenses	901			1,064
Stock-based compensation	1,026			1,293
Deferred revenue	349			321
Assets held for investment	35			69
Depreciation and amortization	279			2,386
Other items	167			94
Tax credits	381			734
Total gross deferred tax assets	5,498			8,734
Less valuation allowance (2)	(2,538		)	(4,950		)
Deferred tax assets, net of valuation allowance	2,960			3,784
Deferred tax liabilities:
Depreciation and amortization	(2,568		)	(3,579		)
Acquisition related intangible assets	(531		)	(682		)
Other items	(58		)	(67		)
Net deferred tax assets (liabilities), net of valuation allowance	$	(197	)	$	(544	)

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(1)	Deferred tax assets are presented net of tax contingencies.


(2)	Relates primarily to deferred tax assets that would only be realizable upon the generation of net income in certain foreign taxing jurisdictions and future capital gains.

As of December 31, 2018, our federal, foreign, and state net operating loss carryforwards for income tax purposes were approximately $627 million, $7.8 billion, and $919 million. The federal, foreign, and state net operating loss carryforwards are subject to limitations under Section 382 of the Internal Revenue Code and applicable foreign and state tax law. If not utilized, a portion of the federal, foreign, and state net operating loss carryforwards will begin to expire in 2029, 2019, and 2019, respectively. As of December 31, 2018, our tax credit carryforwards for income tax purposes were approximately $1.7 billion. If not utilized, a portion of the tax credit carryforwards will begin to expire in 2022. As of December 31, 2018, our federal capital loss carryforwards for income tax purposes was approximately $261 million. If not utilized, a portion of the capital loss carryforwards will begin to expire in 2022.

Tax Contingencies

We are subject to income taxes in the U.S. (federal and state) and numerous foreign jurisdictions. Significant judgment is required in evaluating our tax positions and determining our provision for income taxes. During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. We establish reserves for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes will be due. These reserves are established when we believe that certain positions might be challenged despite our belief that our tax return positions are fully supportable. We adjust these reserves in light of changing facts and circumstances, such as the outcome of tax audits. The provision for income taxes includes the impact of reserve provisions and changes to reserves that are considered appropriate.

The reconciliation of our tax contingencies is as follows (in millions):



	December 31,
	2016			2017			2018
Gross tax contingencies – January 1	$	1,181		$	1,710		$	2,309
Gross increases to tax positions in prior periods	355			223			164
Gross decreases to tax positions in prior periods	(133		)	(139		)	(90		)
Gross increases to current period tax positions	308			518			1,088
Settlements with tax authorities	—			—			(36		)
Lapse of statute of limitations	(1		)	(3		)	(21		)
Gross tax contingencies – December 31 (1)	$	1,710		$	2,309		$	3,414

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(1)	As of December 31, 2018, we had approximately $3.4 billion of accrued tax contingencies, of which $1.7 billion, if fully recognized, would decrease our effective tax rate.

As of December 31, 2017 and 2018, we had accrued interest and penalties, net of federal income tax benefit, related to tax contingencies of $107 million and $127 million. Interest and penalties, net of federal income tax benefit, recognized for the years ended December 31, 2016, 2017, and 2018 was $9 million, $40 million, and $20 million.

We are under examination, or may be subject to examination, by the Internal Revenue Service (“IRS”) for the calendar year 2005 and thereafter. These examinations may lead to ordinary course adjustments or proposed adjustments to our taxes or our net operating losses with respect to years under examination as well as subsequent periods. As previously disclosed, we have received Notices of Proposed Adjustment (“NOPAs”) from the IRS for transactions undertaken in the 2005 and 2006 calendar years relating to transfer pricing with our foreign subsidiaries. The IRS is seeking to increase our U.S. taxable income by an amount that would result in additional federal tax of approximately $1.5 billion, subject to interest. On March 23, 2017, the U.S. Tax Court issued its decision regarding the issues raised in the IRS NOPAs. The Tax Court rejected the approach from the IRS NOPAs in determining transfer pricing adjustments in 2005 and 2006 for the transactions undertaken with our foreign subsidiaries and adopted, with adjustments, our suggested approach. In September 2017, the IRS appealed the decision to the U.S. Court of Appeals for the Ninth Circuit. We will continue to defend ourselves vigorously in this matter. If the Tax Court decision were reversed on appeal or if the IRS were to successfully assert transfer pricing adjustments of a similar nature to the NOPAs for transactions in subsequent years, we could be subject to significant additional tax liabilities.

In October 2014, the European Commission opened a formal investigation to examine whether decisions by the tax authorities in Luxembourg with regard to the corporate income tax paid by certain of our subsidiaries comply with European Union rules on state aid. On October 4, 2017, the European Commission announced its decision that determinations by the tax authorities in Luxembourg did not comply with European Union rules on state aid. Based on that decision the European Commission announced an estimated recovery amount of approximately €250 million, plus interest, for the period May 2006 through June 2014, and ordered Luxembourg tax authorities to calculate the actual amount of additional taxes subject to recovery. Luxembourg computed an initial recovery amount, consistent with the European Commission’s decision, that we deposited into escrow in March 2018, subject to adjustment pending conclusion of all appeals. In December 2017, Luxembourg appealed the European Commission’s decision. In May 2018, we appealed. We believe the European Commission’s decision to be without merit and will continue to defend ourselves vigorously in this matter. We are also subject to taxation in various states and other foreign jurisdictions including China, Germany, India, Japan, Luxembourg, and the United Kingdom. We are under, or may be subject to, audit or examination and additional assessments by the relevant authorities in respect of these particular jurisdictions primarily for 2008 and thereafter.

We expect the total amount of tax contingencies will grow in 2019. In addition, changes in state, federal, and foreign tax laws may increase our tax contingencies. The timing of the resolution of income tax examinations is highly uncertain, and the amounts ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ from the amounts accrued. It is reasonably possible that within the next 12 months we will receive additional assessments by various tax authorities or possibly reach resolution of income tax examinations in one or more jurisdictions. These assessments or settlements could result in changes to our contingencies related to positions on tax filings in years through 2018. The actual amount of any change could vary significantly depending on the ultimate timing and nature of any settlements. We cannot currently provide an estimate of the range of possible outcomes.