Income Taxes

3 Months Ended

Mar. 31, 2023

Income Tax Disclosure [Abstract]

INCOME TAXES

INCOME TAXES

Our effective tax rate was 7% for the three months ended March 31, 2023, compared to an effective tax rate of negative 6% for the same period last year. The tax rates for the three months ended March 31, 2023 and 2022 were composed of U.S. federal and state taxes, withholding taxes and foreign taxes that amounted to $85.8 million and $38.5 million, respectively. The tax rate for the three months ended March 31, 2023 was impacted by a tax benefit of $38.2 million from the FDII deduction and excess tax benefits from stock-based compensation expense of $26.3 million. The tax rate for the three months ended March 31, 2022 was impacted by a tax benefit of $14.4 million from the FDII deduction and excess tax benefits from stock-based compensation expense of $32.2 million.

As of March 31, 2023 and December 31, 2022, unrecognized tax benefits were $70.4 million and $67.4 million, respectively. If recognized, $61.2 million of the unrecognized tax benefits as of March 31, 2023 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 both March 31, 2023 and December 31, 2022, accrued interest and penalties totaled $9.3 million. It is reasonably possible that our gross unrecognized tax benefits will decrease by up to $15.2 million in the next 12 months, due to the lapse of statutes of limitation in various jurisdictions. This decrease, if recognized, would favorably 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 examination by U.S federal income tax authorities for tax years prior to 2015. We are no longer subject to U.S. state and foreign income tax examinations by tax authorities for tax years prior to 2010. We currently have ongoing tax audits in the United Kingdom, Canada, Germany and several other foreign jurisdictions. The focus of these audits is the inter-company profit allocation.

On January 4, 2022, the U.S. Treasury published another tranche of final regulations regarding the foreign tax credit. These final regulations impose new requirements that a foreign tax must meet in order to be creditable against U.S. income taxes, and generally apply to tax years beginning on or after December 28, 2021. On July 26, 2022, the U.S. Treasury released corrections to the final regulations. These final regulations adversely impact our ability to claim foreign tax credits in the United States for certain taxes imposed by certain foreign jurisdictions.

On August 16, 2022, the United States enacted the Inflation Reduction Act of 2022 that, among other changes, provides for changes to the U.S. corporate income tax system, including a 15% minimum tax based on financial statement income for companies with three-year average annual adjusted financial statement income exceeding $1 billion, and a 1% excise tax on net repurchases of stock after December 31, 2022, if any. We considered the applicable tax law changes, and there is no impact to our tax provision for the three months ended March 31, 2023. We will continue to evaluate the impact of these tax law changes on future periods.