Income Taxes

The components of pretax income are summarized as follows (in millions):



	Years Ended December 31,
	2017		2016		2015
Domestic	$	474.2	$	466.2	$	456.3
Foreign	337.6		361.2		395.9
Total pretax income	$	811.8	$	827.4	$	852.2

The provision for income taxes is summarized as follows (in millions):



	Years Ended December 31,
	2017			2016			2015
Current provision:
Federal	$	594.3		$	121.4		$	181.4
States	13.9			10.3			15.9
Foreign	45.4			46.0			43.3
Total current provision	653.6			177.7			240.6
Deferred (benefit) provision:
Federal	(128.7		)	57.2			(16.7		)
States	(17.7		)	4.3			(0.4		)
Foreign	(1.6		)	(4.5		)	(5.0		)
Total deferred (benefit) provision	(148.0		)	57.0			(22.1		)
Total provision for income taxes	$	505.6		$	234.7		$	218.5

The provision for income taxes differs from the amount computed by applying the federal statutory rate to pretax income as follows (in millions):



	Years Ended December 31,
	2017			2016			2015
Expected provision at 35% rate	$	284.1		$	289.6		$	298.3
State taxes, net of federal benefit	12.0			8.9			8.9
Foreign income at different tax rates	(46.4		)	(53.4		)	(68.9		)
R&D tax credits	(15.1		)	(16.8		)	(12.7		)
Share-based compensation	—			10.5			13.2
Release of valuation allowance	(1.7		)	(0.7		)	—
Domestic production activities	(12.4		)	(9.5		)	(15.1		)
Non-deductible compensation	1.6			2.4			3.7
Cost sharing adjustment^(*)	—			—			(13.2		)
Impact of the U.S. Tax Cuts and Jobs Act	289.5			—			—
Other	(6.0		)	3.7			4.3
Total provision for income taxes	$	505.6		$	234.7		$	218.5

________________________________


^(*)	Represents cumulative impact through fiscal year 2014 for the change in treatment of share-based compensation as a result of the U.S. Tax Court decision in Altera Corp. v. Commissioner, 145 T.C. No. 3 (2015).

On December 22, 2017, the U.S. Tax Cuts and Jobs Act (the “Tax Act”) was enacted into law. Effective January 1, 2018, the Tax Act provides for significant changes to U.S. income tax law, including the reduction of the U.S. federal corporate income tax rate from 35% to 21% and the creation of a minimum tax on foreign earnings. In addition, the Tax Act imposed a one-time transition tax on accumulated foreign earnings through December 31, 2017. The Company recognized a provisional income tax charge of $289.5 million, which is included as a component of the income tax provision on our Consolidated Statements of Operations.

Included in the provisional amounts is (i) a one-time transition tax of $431.2 million on the Company’s accumulated foreign earnings, which the Company has elected to pay over eight years, (ii) $134.5 million related to the re-measurement of the Company’s deferred tax assets at the revised U.S. statutory rates and (iii) $65.1 million of other accrued taxes on foreign distributable earnings, primarily related to withholding taxes and certain foreign timing differences. These impacts were partially offset by $341.3 million related to the reversal of deferred tax liabilities previously accrued on foreign earnings.

The Company’s tax expense of $431.2 million on the Company's accumulated foreign earnings is based on estimates of the effects of the Tax Act as the analysis requires significant data from the Company's foreign subsidiaries which is not regularly collected or analyzed, including the impact of certain foreign timing differences as well as the effect of foreign earnings upon the Company’s ability to utilize foreign tax credits.

In addition, the provisional amount includes the remeasurement of certain U.S. deferred tax assets and liabilities of $134.5 million, foreign withholding taxes and the impact of certain foreign timing differences of $65.1 million. The Company has computed the amounts based on information available to it, including its expectation that the settlement of certain foreign basis differences will affect the amount of U.S. minimum tax upon reversal; however there is still uncertainty as to the application of the Tax Act.

As the Company collects and prepares the necessary data, interprets the Tax Act and reviews any additional guidance issued by the U.S. Treasury Department, state revenue and taxation authorities and other standard-setting bodies, the Company may make adjustments to the provisional amounts noted above which may materially impact its provision for income taxes from continuing operations in the period in which the adjustments are made. The accounting for the tax effects of the Tax Act will be completed in 2018.

In 2015, the United States Tax Court (the “Court”) issued an opinion favorable to Altera Corporation (“Altera”) with respect to Altera’s litigation with the Internal Revenue Service (“IRS”). The litigation relates to the treatment of share-based compensation expense in an inter-company cost-sharing arrangement with Altera’s foreign subsidiary. In its opinion, the Court accepted Altera’s position of excluding share-based compensation from its inter-company cost-sharing arrangement. As a result, the Company has reversed the inclusion of share-based compensation in its cost-sharing arrangement as a cumulative adjustment in the quarter ended September 30, 2015. In accordance with the Tax Act, the effect of the cumulative adjustment was remeasured.

In 2016, the IRS filed an appeal to the Altera decision rendered by the Court, which appeal is currently pending. The Company will continue to monitor ongoing developments and potential impacts to its financial statements.

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



	As of December 31,
	2017			2016
Deferred tax assets:
Net operating loss carry-forwards	$	18.3		$	23.8
Research and other credit carry-forwards	198.8			137.5
Deferred revenue	103.5			125.6
Stock-based compensation	31.1			52.3
Cost sharing adjustment	12.4			69.9
Reserves and accruals not currently deductible	76.7			141.3
Other	12.8			12.8
Total deferred tax assets	453.6			563.2
Valuation allowance	(214.5		)	(154.4		)
Deferred tax assets, net of valuation allowance	239.1			408.8
Deferred tax liabilities:
Property and equipment basis differences	(42.5		)	(58.1		)
Purchased intangibles	(12.4		)	(28.8		)
Unremitted foreign earnings	(25.4		)	(311.4		)
Deferred compensation and other	(10.4		)	(11.0		)
Total deferred tax liabilities	(90.7		)	(409.3		)
Net deferred tax assets (liabilities)	$	148.4		$	(0.5	)

Based on changes provided by the Tax Act, the Company re-measured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%.

As of December 31, 2017 and 2016, the Company had a valuation allowance on its U.S. domestic deferred tax assets of approximately $214.5 million and $154.4 million, respectively. The balance at December 31, 2017 consisted of approximately $191.0 million and $19.7 million against the Company's California and Massachusetts deferred tax assets, respectively, which the Company believes are not more likely than not to be utilized in future years. The remaining deferred tax assets on which the Company recorded a valuation allowance of approximately $3.8 million related to losses that are capital in nature and may carry forward to offset future capital gains only. The valuation allowance increased in 2017 and 2016 by $60.1 million and $8.2 million, respectively, primarily related to the change in California and Massachusetts R&D tax credits.

As of December 31, 2017, the Company had federal and California net operating loss carry-forwards of approximately $66.7 million and $123.9 million, respectively. The California net operating loss carry-forwards of $123.9 million are expected to expire unused. The Company also had federal and California tax credit carry-forwards of approximately $2.6 million and $222.4 million, respectively. Unused net operating loss carry-forwards will expire at various dates beginning in the year 2018. The California tax credit carry-forwards will carry forward indefinitely.

As of December 31, 2017, 2016, and 2015, the total amount of gross unrecognized tax benefits was $264.5 million, $223.1 million, and $216.1 million, respectively. As of December 31, 2017, approximately $259.8 million of the $264.5 million gross unrecognized tax benefits, if recognized, would affect the effective tax rate. The increase in unrecognized tax benefits for the fiscal year 2017 was primarily related to changes in estimates resulting from the Tax Act.

A reconciliation of the beginning and ending amount of the Company's total gross unrecognized tax benefits was as follows (in millions):



	Years Ended December 31,
	2017			2016			2015
Balance at beginning of year	$	223.1		$	216.1		$	199.2
Tax positions related to current year:
Additions	64.6			27.2			18.1
Tax positions related to prior years:
Additions	1.8			1.0			5.3
Reductions	(16.6		)	(4.1		)	(2.9		)
Settlements	(4.0		)	(14.3		)	—
Lapses in statutes of limitations	(4.4		)	(2.8		)	(3.6		)
Balance at end of year	$	264.5		$	223.1		$	216.1

As of December 31, 2017, 2016, and 2015, the Company had accrued interest and penalties related to unrecognized tax benefits of $40.7 million, $31.3 million, and $24.1 million, respectively, to other long-term liabilities in the Consolidated Balance Sheets. The Company recognized an expense for net interest and penalties of $8.5 million, $6.0 million, and $2.5 million in its Consolidated Statements of Operations during the years ended December 31, 2017, 2016, and 2015, respectively.

The Company engages in continuous discussions and negotiations with tax authorities regarding tax matters in various jurisdictions. There is a greater than remote likelihood that the balance of the gross unrecognized tax benefits will decrease by approximately $48.0 million within the next twelve months due to lapses of applicable statutes of limitation and the completion of tax review cycles in various tax jurisdictions.

The Company conducts business globally and, as a result, Juniper Networks or one or more of its subsidiaries files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business the Company is subject to examination by taxing authorities throughout the world, including such major jurisdictions as the Netherlands, U.K., France, Germany, Japan, China, Australia, India, and the U.S. With few exceptions, the Company is no longer subject to U.S. federal, state and local, and non-U.S. income tax examinations for years before 2007.

The Company is currently under examination by the IRS for the 2007 through 2009 tax years. In March 2016, the IRS concluded its field audit and issued a final assessment. The Company is appealing this assessment. The Company regularly assesses the likelihood of an adverse outcome resulting from such examinations. As of December 31, 2017, the Company believes the resolution of the audits is unlikely to have a material effect on its consolidated financial condition or results of operations.

In December 2017, the UK tax authorities concluded its audit of the 2013 through 2015 tax years, which did not have a material impact to the Company's financial statements.

The Company is also subject to separate ongoing examinations by the UK tax authorities for the 2016 tax year, the German tax authorities for the 2010 through 2013 tax years, the Australia tax authorities for the 2016 and 2017 tax years, and the India tax authorities for the 2003 tax year, the 2004 through 2008 tax years, and the 2009 through 2014 tax years. As of December 31, 2017, the Company is not aware of any other examinations by tax authorities in any other major jurisdictions in which it files income tax returns.

In 2008, the Company received a proposed adjustment from the India tax authorities related to the 2004 tax year. In 2009, the India tax authorities commenced a separate investigation of the Company's 2004 through 2008 tax returns and are disputing the Company's determination of taxable income due to the cost basis of certain fixed assets. The Company accrued $4.6 million in penalties and interest in 2009 related to this matter. The Company understands that in accordance with the administrative and judicial process in India, the Company may be required to make payments that are substantially higher than the amount accrued in order to ultimately settle this issue. The Company strongly believes that any assessment it may receive in excess of the amount accrued would be inconsistent with applicable India tax laws and intends to defend this position vigorously.

The Company is pursuing all available administrative remedies relative to these matters. The Company believes that it has adequately provided for any reasonably foreseeable outcomes related to these proposed adjustments and the ultimate resolution of these matters is unlikely to have a material effect on its consolidated financial condition or results of operations; however, there is still a possibility that an adverse outcome of these matters could have a material effect on its consolidated financial condition and results of operations.