Income Taxes

9 Months Ended

Sep. 30, 2020

Income Tax Disclosure [Abstract]

INCOME TAXES

INCOME TAXES

Our effective tax rate was 4% for the three months ended September 30, 2020, compared to an effective tax rate of 24% for the same period last year. Our effective tax rate was 8% for the nine months ended September 30, 2020, compared to an effective tax rate of 16% for the same period last year. The effective tax rates for the periods presented are primarily comprised of U.S. federal and state taxes, withholding taxes, foreign taxes and excess tax benefits from stock-based compensation expense. The tax rates for the three months ended September 30, 2020 and September 30, 2019 were impacted by U.S. federal and state taxes, withholding taxes and foreign taxes that were $17.5 million and $32.7 million, respectively. The U.S. federal and state taxes included a tax benefit of $16.0 million from the foreign-derived intangible income deduction for the three months ended September 30, 2020. The tax rates for the three months ended September 30, 2020 and September 30, 2019 were impacted by excess tax benefits from stock-based compensation expense of $12.5 million and $6.9 million, respectively.

The tax rates for the nine months ended September 30, 2020 and September 30, 2019 were impacted by U.S. federal and state taxes, withholding taxes and foreign taxes of $74.8 million and $75.4 million, respectively. The U.S. federal and state taxes included a tax benefit of $25.6 million from the foreign-derived intangible income deduction for the nine months ended September 30, 2020. The tax rates for the nine months ended September 30, 2020 and September 30, 2019 were impacted by excess tax benefits from stock-based compensation expense of $37.6 million and $34.6 million, respectively, and release of reserves of $9.0 million and $10.0 million, respectively, on uncertain tax positions and the interest due to the expiration of the statute of limitations. The provision for income taxes for the nine months ended September 30, 2019 was further impacted by an increase in tax expense of $10.3 million for an unrecognized tax benefit related to the opinion of the U.S. Court of Appeals for the Ninth Circuit (the “Ninth Circuit”) in Altera Corporation and Subsidiaries vs. Commissioner of Internal Revenue (“Altera”) described below, regarding stock-based compensation expense in cost sharing arrangements.

As of September 30, 2020 and December 31, 2019, unrecognized tax benefits were $67.1 million and $67.5 million, respectively. If recognized, $61.7 million of the unrecognized tax benefits would favorably affect our effective tax rate. It is our policy to include accrued interest and penalties related to unrecognized tax benefits in income tax expense. As of September 30, 2020 and December 31, 2019, accrued interest and penalties were $13.1 million and $14.1 million, respectively. It is reasonably possible that our gross unrecognized tax benefits will decrease by up to $4.0 million in the next 12 months, due to the lapse of the statute of limitations. This decrease, if recognized, would positively impact our effective tax rate, and would be recognized as additional tax benefits.

We file income tax returns in the U.S. federal jurisdiction and in various U.S. state and foreign jurisdictions. Generally, we are no longer subject to U.S. state and foreign income tax examinations by tax authorities for tax years prior to 2010. We are no longer subject to examination by U.S federal income tax authorities for tax years prior to 2015. We currently have ongoing tax audits in the United Kingdom, Canada and several other foreign jurisdictions. The focus of these audits is the inter-company profit allocation.

On June 7, 2019, the Ninth Circuit overturned the U.S. Tax Court’s decision in Altera and ruled in favor of the Commissioner, validating the regulations requiring that stock-based compensation be included in a cost sharing arrangement. On June 22, 2020, the Supreme Court of the United States (the “Supreme Court”) issued an order declining the petition for certiorari in Altera. As a result, the Ninth Circuit’s decision requiring that stock-based compensation be included in cost sharing arrangements is the controlling law at present. However, as we are no longer part of a cost sharing arrangement, this does not impact our future income tax provisions. The Ninth Circuit’s decision, together with Supreme Court’s order, did not have a material impact on our condensed consolidated financial statements.

    On March 27, 2020, the President signed into law the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The CARES Act provides numerous tax provisions and other stimulus measures, including temporary changes regarding the prior and future utilization of net operating losses, temporary changes to the prior and future limitations on interest deductions, temporary suspension of certain payment requirements for the employer portion of Social Security taxes, technical corrections from prior tax legislation for tax depreciation of certain qualified improvement property and the creation of certain refundable employee retention credits. We do not expect there to be a material tax impact on our condensed consolidated financial statements at this time and will continue to assess the implications of the CARES Act and its continuing developments and interpretations.

On July 9, 2020, the United States Department of the Treasury (the “U.S. Treasury”) and the Internal Revenue Service (the “IRS”) released final Section 250 regulations, providing guidance on foreign-derived intangible income deduction and global intangible low-taxed income. Generally, the final regulations are applicable for taxable years beginning on or after January 1, 2021. However, taxpayers may apply the final regulations for taxable years beginning on or after January 1, 2018. We have elected to apply the final regulations to the year ending December 31, 2020 and included the tax impact from the final regulations on our foreign-derived intangible income deduction calculation.

On September 29, 2020, the U.S. Treasury and the IRS released final regulations related to foreign tax credits that were the subject of proposed regulations issued in December 2019 and proposed certain provisions in proposed regulations issued in December 2019. The final and proposed regulations provide administrative guidance for the foreign tax credit regime, which was updated in the 2017 Tax Cuts and Jobs Act. Generally, the provisions that were included in the 2019 proposed regulations apply to taxable years ending on or after December 16, 2019, except as otherwise specified. We are in the process of analyzing the tax impact from the final regulations on our foreign tax credit calculation.