Income Taxes

Consolidated income (loss) before taxes for United States ("U.S.") and foreign operations consisted of the following (in thousands):



	Years Ended December 31,
	2018			2017		2016
United States	$	(491,523	)	$	90,206	$	90,900
Foreign	797,263			470,063		219,697
Total	$	305,740		$	560,269	$	310,597

The income tax (benefit) provision attributable to income before income taxes is as follows (in thousands):



	December 31,
	2018			2017			2016
Current
U.S. Federal	$	(637	)	$	(19,856	)	$	60
U.S. State	198			51			79
Foreign	1,749			1,674			1,633
Total	1,310			(18,131		)	1,772
Deferred
U.S. Federal	(483,681		)	(309,423		)	5,081
U.S. State	(14,973		)	(1,431		)	1,275
Total	(498,654		)	(310,854		)	6,356
Total income tax benefit	$	(497,344	)	$	(328,985	)	$	8,128

The reconciliation of the U.S. federal statutory tax rate to the actual tax rate is as follows:



	December 31,
	2018		2017		2016
U.S. Federal statutory rate	21.0	%	35.0	%	35.0	%
Foreign tax credits, net of valuation allowance	(154.9	)%	(136.1	)%	(61.5	)%
Non-taxable foreign income	(48.8	)%	(20.1	)%	(20.7	)%
Foreign tax rate differential	(20.8	)%	(17.0	)%	(14.5	)%
Global intangible low-taxed income	28.3	%	—	%	—	%
Change in tax rate	—	%	(11.8	)%	—	%
Repatriation of foreign earnings	—	%	81.0	%	51.6	%
Valuation allowance, other	9.3	%	5.9	%	7.5	%
Other, net	3.2	%	4.4	%	5.2	%
Effective income tax rate	(162.7	)%	(58.7	)%	2.6	%

Wynn Macau SA received a five-year exemption from Macau's 12% Complementary Tax on casino gaming profits through December 31, 2020. Accordingly, for the years ended December 31, 2018, 2017 and 2016, the Company was exempt from the payment of such taxes totaling $96.8 million, $63.0 million and $27.3 million or $0.90, $0.61 and $0.27 per diluted share, respectively. The Company's non-gaming profits remain subject to the Macau Complementary Tax and its casino winnings remain subject to the Macau special gaming tax and other levies in accordance with its concession agreement.

Wynn Macau SA also entered into an agreement with the Macau government that provides for an annual payment of MOP 12.8 million (approximately $1.6 million) as complementary tax otherwise due by stockholders of Wynn Macau SA on dividend distributions through 2020. As a result of the stockholder dividend tax agreements, income tax expense includes $1.6 million for each of the years ended December 31, 2018, 2017 and 2016.

The Macau special gaming tax is 35% of gross gaming revenue. U.S. tax laws only allow a foreign tax credit ("FTC") up to 21% of foreign source income. In February 2010, the Company and the IRS entered into a Pre-Filing Agreement ("PFA") providing that the Macau special gaming tax qualifies as a tax paid in lieu of an income tax and could be claimed as a U.S. FTC.

In December 2017, the U.S. Tax Cuts and Jobs Act ("U.S. tax reform") was enacted. Also in December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act, which allowed the Company to record provisional amounts during a measurement period not to extend beyond one year from the enactment date. For the year ended December 31, 2017, the Company recorded a provisional net tax benefit of $339.9 million based on the Company's initial analysis of the U.S. tax reform. During the fourth quarter of 2018, the Company finalized its analysis of U.S. tax reform, which was further clarified by guidance issued by the Internal Revenue Service in the fourth quarter of 2018. The guidance addressed the treatment of foreign-sourced royalties and the allocation of interest expense and other expenses to foreign source income. As a result, the Company adjusted its valuation allowance for FTC carryovers and recorded a net tax benefit of $390.9 million, which is incremental to the $339.9 million provisional net tax benefit recorded in 2017.

During the years ended December 31, 2018, 2017 and 2016, the Company recognized tax benefits of $82.8 million, $746.6 million and $170.5 million, respectively (net of valuation allowance and uncertain tax positions), for FTCs generated from the earnings of Wynn Macau SA.

Accounting standards require recognition of a future tax benefit to the extent that realization of such benefit is more likely than not; otherwise, a valuation allowance is applied. During the years ended December 31, 2018 and 2017, the aggregate valuation allowance for deferred tax assets decreased by $746.6 million and increased by $103.7 million, respectively. The 2018 decrease is primarily related to the expiration of FTCs. The 2017 increase is primarily related to FTC carryforwards and other foreign deferred tax assets that are not considered more likely than not realizable.

The Company recorded tax benefits resulting from the exercise of nonqualified stock options and the value of vested restricted stock and accrued dividends of $2.0 million, $2.6 million and $0.8 million for the years ended December 31, 2018, 2017 and 2016, respectively, in excess of the amounts reported for such items as compensation costs under accounting standards related to stock-based compensation.

The tax effects of significant temporary differences representing net deferred tax assets and liabilities consisted of the following (in thousands):



	December 31,
	2018			2017
Deferred tax assets—U.S.:
Foreign tax credit carryforwards	$	3,187,797		$	3,616,872
Disallowed interest expense carryforward	67,368			—
Construction in progress	42,528			5,009
Receivables, inventories, accrued liabilities and other	10,878			19,356
Stock-based compensation	5,477			5,084
Other tax credit carryforwards	4,946			1,999
Intangibles and related other	489			3,486
Other	2,279			86
	3,321,762			3,651,892
Less: valuation allowance	(2,500,027		)	(3,273,292		)
	821,735			378,600
Deferred tax liabilities—U.S.:
Property and equipment	(70,560		)	(111,988		)
Redemption Note fair value	—			(13,139		)
Prepaid insurance, maintenance and taxes	(12,430		)	(10,391		)
Other	(2,293		)	(2,549		)
	(85,283		)	(138,067		)
Deferred tax assets—Foreign:
Net operating loss carryforwards	94,244			74,345
Property and equipment	41,520			36,299
Pre-opening expenses	8,421			10,717
Other	651			1,493
	144,836			122,854
Less: valuation allowance	(143,872		)	(117,175		)
	964			5,679
Deferred tax liabilities—Foreign:
Property and equipment	(964		)	(5,679		)

Net deferred tax asset	$	736,452		$	240,533

FTC carryforwards of $545.7 million expired as of December 31, 2018. As of December 31, 2018, the Company had FTC carryforwards (net of uncertain tax positions) of $3.19 billion. Of this amount, $110.9 million will expire in 2019, $530.4 million in 2020, $540.3 million in 2021, $756.0 million in 2023, $710.7 million in 2024, $47.2 million in 2025 and $492.4 million in 2027. The Company has a disallowed interest carryforward of $294.2 million which does not expire. The Company has no U.S. tax loss carryforwards. The Company incurred foreign tax losses of $340.0 million, $319.1 million and $317.3 million during the tax years ended December 31, 2018, 2017 and 2016, respectively. These foreign tax loss carryforwards expire in 2021, 2020 and 2019, respectively.

In assessing the need for a valuation allowance, the Company considered whether it is more likely than not that the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income. In the assessment of the valuation allowance, appropriate consideration was given to all positive and negative evidence including recent operating profitability, forecast of future earnings and the duration of statutory carryforward periods.

As of December 31, 2018 and 2017, the Company had valuation allowances of $2.49 billion and $3.27 billion, respectively, provided on FTCs expected to expire unutilized and valuation allowances of $5.3 million and $3.5 million provided on other U.S. deferred tax assets. As of December 31, 2018 and 2017, the Company had valuation allowances of $143.9 million and $117.2 million, respectively, provided on its foreign deferred tax assets.

The Company had the following activity for unrecognized tax benefits as follows (in thousands):



	December 31,
	2018			2017			2016
Balance at beginning of period	$	95,236		$	90,523		$	88,314
Increases based on tax positions of the current year	8,926			8,520			5,930
Reductions due to lapse in statutes of limitations	(4,692		)	(3,807		)	(3,721		)
Balance at end of period	$	99,470		$	95,236		$	90,523

As of December 31, 2018, 2017 and 2016, unrecognized tax benefits of $99.5 million, $95.2 million and $90.3 million, respectively, were recorded as reductions in deferred income taxes, net. As of December 31, 2016, $0.2 million of unrecognized tax benefits were recorded in other long-term liabilities. The Company had no unrecognized tax benefits recorded in other long-term liabilities as of December 31, 2018 and 2017.

As of December 31, 2018, 2017 and 2016, $31.0 million, $26.9 million and $22.6 million, respectively, of unrecognized tax benefits would, if recognized, impact the effective tax rate.

The Company recognizes penalties and interest related to unrecognized tax benefits in the provision for income taxes. During the year ended December 31, 2018, the Company recognized no interest and penalties. During each of the years ended December 31, 2017 and 2016, the Company recognized $0.9 million in interest in the provision for income taxes.

The Company anticipates that the 2014 statute of limitations will expire in the next 12 months for certain foreign tax jurisdictions. Also, the Company's unrecognized tax benefits include certain income tax accounting methods, which govern the timing and deductibility of income tax deductions. As a result, the Company's unrecognized tax benefits could increase up to $5.1 million over the next 12 months.

The Company files income tax returns in the U.S. federal jurisdiction, various states and foreign jurisdictions. The Company's income tax returns are subject to examination by the IRS and other tax authorities in the locations where it operates. The Company's 2002 to 2014 domestic income tax returns remain subject to examination by the IRS to the extent tax attributes carryforward to future years. The Company's 2015 to 2017 domestic income tax returns also remain subject to examination by the IRS. The Company's 2014 to 2017 Macau income tax returns remain subject to examination by the Financial Services Bureau.

The Company has participated in the IRS Compliance Assurance Program ("CAP") for the 2012 through 2018 tax years and will continue to participate in the IRS CAP for the 2019 tax year.

In February 2017 and 2018, the Company received notification that the IRS completed its examination of the Company's 2015 and 2016 U.S. income tax returns, respectively. There were no changes in its unrecognized tax benefits as a result of the completion of these examinations.

On December 31, 2016, the statute of limitations for the 2011 Macau Complementary tax return expired. As a result of the expiration of the statute of limitations for the Macau Complementary Tax return, the total amount of unrecognized tax benefits decreased by $3.7 million.

In April 2016, the Financial Services Bureau commenced an examination of the 2011 and 2012 Macau income tax returns of Palo. In June 2016, the Financial Services Bureau concluded its examination with no changes.

On December 31, 2017, the statute of limitations for the 2012 Macau Complementary tax return expired. As a result of the expiration of the statute of limitations for the Macau Complementary Tax return, the total amount of unrecognized tax benefits decreased by $3.8 million.

On December 31, 2018, the statute of limitations for the 2013 Macau Complementary tax return expired. As a result of the expiration of the statute of limitations for the Macau Complementary Tax return, the total amount of unrecognized tax benefits decreased by $4.7 million.

In March 2017, the Financial Services Bureau commenced an examination of the 2013 and 2014 Macau income tax returns of Wynn Macau SA. In July 2018, the Financial Services Bureau issued final tax assessments for the Company for the years 2013 and 2014. While no additional tax was due, adjustments were made to the Company’s tax loss carryforwards

In July 2017, the Financial Services Bureau commenced an examination of the 2013 and 2014 Macau income tax returns of Palo. In February 2018, the Financial Services Bureau concluded its examination with no changes.