Income Taxes

12 Months Ended

Dec. 31, 2019

INCOME TAXES

Income before provision for income taxes for the years ended December 31, 2019, 2018, and 2017, consisted of the following (in millions):


	Years Ended December 31,
	2019		2018		2017
U.S.	$	1,053.7	$	852.7	$	774.7
Foreign	448.5		426.8		330.1
Total income before provision for income taxes	$	1,502.2	$	1,279.5	$	1,104.8

The provision for income taxes for the years ended December 31, 2019, 2018, and 2017, consisted of the following (in millions):


	Years Ended December 31,
	2019		2018		2017
Current
Federal	$	82.0	$	89.5	$	352.1
State	26.5		21.1		13.0
Foreign	18.0		9.9		8.7
	$	126.5	$	120.5	$	373.8
Deferred
Federal	$	8.5	$	(4.1)	$	62.8
State	3.2		(0.3)		(0.3)
Foreign	(17.8)		38.4		(2.4)
	$	(6.1)	$	34.0	$	60.1
Total income tax expense	$	120.4	$	154.5	$	433.9

Income tax expense differs from amounts computed by applying the statutory federal income rate of 21% for the years ended December 31, 2019, and 2018, and 35% for the year ended December 31, 2017, as a result of the following (in millions):


	Years Ended December 31,
	2019		2018		2017
Federal tax at statutory rate	$	315.5	$	268.7	$	386.7
Increase (reduction) in tax resulting from:
State taxes, net of federal benefits	29.7		20.8		16.0
Foreign rate differential	(56.2)		(44.7)		(115.7)
U.S. tax on foreign earnings	55.0		43.7		8.4
Research and development credit	(32.7)		(25.2)		(15.3)
Share-based compensation not benefited	13.5		9.9		10.8
Domestic production activities deduction	—		—		(7.9)
Reversal of unrecognized tax benefits	(8.4)		(5.2)		(62.4)

Tax Cuts and Jobs Act impact	—		0.5		317.8
Excess tax benefits related to share-based compensation arrangements	(146.5)		(116.2)		(102.8)
Deferred tax remeasurement due to Swiss Tax Reform	(51.3)		—		—
Other	1.8		2.2		(1.7)
Total income tax expense	$	120.4	$	154.5	$	433.9

Deferred income taxes reflect tax carry forwards and the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities are as follows (in millions):


	December 31,
	2019		2018
Deferred tax assets:
Share-based compensation expense	$	95.6	$	87.2
Expenses deducted in later years for tax purposes	42.0		29.1
Intangible assets	362.3		351.9
Research and other credits	56.1		40.1
Other	10.4		9.0
Gross deferred tax assets	$	566.4	$	517.3
Valuation allowance	(57.2)		(42.3)
Deferred tax assets	$	509.2	$	475.0
Deferred tax liabilities:
Fixed assets	$	(75.3)	$	(42.2)
Intangible assets	(8.3)		(7.5)
Other	—		(0.1)
Deferred tax liabilities	$	(83.6)	$	(49.8)
Net deferred tax assets	$	425.6	$	425.2

In December 2017, the 2017 Tax Act was enacted, which includes a number of changes in existing tax law impacting businesses, including a one-time deemed repatriation of cumulative undistributed foreign earnings and a permanent reduction in the U.S. federal statutory rate from 35% to 21%, effective on January 1, 2018. The Securities Exchange Commission (“SEC”) issued guidance for a measurement period of one year from the enactment date to finalize the accounting for effects of the 2017 Tax Act. The Company recorded an income tax expense of $317.8 million in its 2017 income tax provision related to the 2017 Tax Act, which included a provisional estimate of $270.2 million related to the one-time deemed repatriation toll charge (“Toll Tax”) and a provisional estimate of $47.6 million income tax expense due to the re-measurement of its net deferred tax assets at a reduced U.S. federal statutory rate of 21%. In December 2018, the Company completed its accounting for the effect of the 2017 Tax Act within the measurement period under the SEC guidance and reflected a net $0.5 million increase in the 2018 income tax expense.

The Company repatriated $1.6 billion of its cumulative undistributed foreign earnings back to the U.S. in June 2018 without any significant U.S. income tax consequences. The Company intends to repatriate earnings from its Swiss subsidiary as needed, since the U.S. and foreign tax implications of such repatriations are not expected to be significant. The Company will continue to indefinitely reinvest earnings from the rest of our foreign subsidiaries, which are not significant.

The Company’s tax holiday obtained in 2007 for business operations in Switzerland ended on December 31, 2017. The Company received a new tax ruling in Switzerland for new business operations. The new ruling is effective for years 2018 through 2022, which will be extended for the next five years thereafter to the extent certain terms and conditions continue to be met. The new ruling allows for a reduced cantonal tax rate based on various thresholds of investment, including the ownership, development, and use of the non-U.S. intellectual property rights and employment in such jurisdiction. The tax benefits from Swiss tax holidays for the years ended December 31, 2019, and 2018, were insignificant, while for the year ended December 31, 2017, was approximately $10.9 million, or $0.09 per diluted share.

In August 2019, Swiss tax reform was enacted, which resulted in a higher statutory rate for the Company's Swiss entity for years after 2019. The Company remeasured its Swiss deferred tax asset at the enacted tax rate and recorded an income tax benefit of $51.3 million in its 2019 tax provision.

As of December 31, 2019, and 2018, the Company had valuation allowances of $57.2 million and $42.3 million, respectively, primarily related to California deferred tax assets generated by California R&D credit forwards, which have no expiration period. The Company recorded a valuation allowance against its California deferred tax assets, as it is more likely than not these deferred tax assets will not be realized as a result of the computation of California taxes under the single sales factor.

The Company recorded a net increase of its gross unrecognized tax benefits of $17.9 million during the year ended December 31, 2019. The net increase was primarily due to increases related to 2019 uncertain tax positions, partially offset by the reversal of gross unrecognized tax benefits in connection with the expiration of certain statutes of limitation in various

jurisdictions and an audit conclusion. The Company had gross unrecognized tax benefits of approximately $96.7 million, $78.8 million, and $65.4 million as of December 31, 2019, 2018, and 2017, respectively, which, if recognized, would result in a reduction of the Company’s effective tax rate. The Company included interest expense accrued on unrecognized tax benefits as a component of its income tax expense. As of December 31, 2019, 2018, and 2017, gross interest related to unrecognized tax benefits accrued was $2.9 million, $2.6 million, and $1.8 million, respectively. A majority of the Company’s net unrecognized tax benefits and related interest is presented in other long-term liabilities on the Consolidated Balance Sheets.

A reconciliation of the beginning and ending amounts of gross unrecognized income tax benefits for the years ended December 31, 2019, 2018, and 2017, are as follows (in millions):


	Years Ended December 31,
	2019		2018		2017
Beginning balance	$	78.8	$	65.4	$	106.0
Increases related to tax positions taken during the current year	26.5		22.5		21.1

Increases related to tax positions taken during a prior year	1.2		—		—
Decreases related to tax positions taken during a prior year	—		(0.9)		(46.5)
Decreases related to settlements with tax authorities	(3.8)		—		(0.5)
Decreases related to expiration of statute of limitations	(6.0)		(8.2)		(14.7)
Ending balance	$	96.7	$	78.8	$	65.4

The Company files federal, state, and foreign income tax returns in many U.S. and OUS jurisdictions. Years before 2016 are closed for the significant jurisdictions. Certain of the Company’s unrecognized tax benefits could change due to activities of various tax authorities, including potential assessment of additional tax, possible settlement of audits, or through normal expiration of various statutes of limitations, which could affect the Company’s effective tax rate in the period in which they change. Due to the uncertainty related to the timing and potential outcome of audits, the Company cannot estimate the range of reasonably possible change in unrecognized tax benefits that may occur in the next 12 months.

The Company is subject to the examination of its income tax returns by the Internal Revenue Service and other tax authorities. The outcome of these audits cannot be predicted with certainty. The Company’s management regularly assesses the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of the Company’s provision for income taxes. If any issues addressed in the Company’s tax audits are resolved in a manner not consistent with management’s expectations, the Company could be required to adjust its provision for income taxes in the period such resolution occurs.

In July 2015, a U.S. Tax Court opinion (the “2015 Opinion”) was issued involving an independent third party related to intercompany charges for share-based compensation. Based on the findings of the U.S. Tax Court, the Company was required to, and did, refund to its foreign subsidiaries the share-based compensation element of certain intercompany charges made in prior periods. Starting in 2015, direct share-based compensation has been excluded from intercompany charges. In June 2019, the Ninth Circuit Court of Appeals (the "Ninth Circuit") reversed the 2015 Opinion (the “Ninth Circuit Opinion”). Subsequently, a re-hearing of the case was requested, but the rehearing request was denied by the Ninth Circuit on November 12, 2019. However, a petition for appeal to the U.S. Supreme Court can be filed within 90 days of the denial. Since the Ninth Circuit Opinion potentially is subject to further judicial review, the Company continues to treat its share-based compensation expense in accordance with the 2015 Opinion and continues to recognize the related tax benefits in its financial statements based upon its evaluation of the position in light of the present facts. In the event of a final opinion that reverses the 2015 Opinion, there may be an adverse impact to the Company’s income tax expense and effective tax rate.