Income Taxes

12 Months Ended

Dec. 31, 2019

Income Tax Expense and Effective Tax Rate

The following table shows our income tax expense and our effective tax rate for the years ended December 31, 2019, 2018, and 2017:



(in millions)	2019			2018			2017
Income before income taxes and equity in net loss of unconsolidated entities	$	198.5		$	232.9		$	181.1
Equity in net loss of unconsolidated entities	(0.9		)	(2.1		)	(1.3		)
Total	$	197.6		$	230.8		$	179.8
Income tax expense	$	45.6		$	47.8		$	42.9
Effective tax rate	23.1		%	20.7		%	23.9		%

Our effective tax rate in 2019 was 23.1%, an increase of 2.4 percentage points compared with 20.7% in 2018, primarily due to minimum taxes and non-deductible expenses in 2019.

Our effective tax rate in 2018 was 20.7%, a decrease of 3.2 percentage points compared with 23.9% in 2017, primarily due to the 2018 tax impacts of the Tax Cuts and Jobs Act of 2017 (Tax Reform Act) and also because of updates to our provisional tax estimates recorded in 2017.

The amount of accumulated undistributed earnings of our foreign subsidiaries was approximately $240.5 million as of December 31, 2019. In February 2019, we repatriated approximately $45.8 million of these foreign earnings to the U.S. Otherwise, we generally consider our U.S. directly-owned foreign subsidiary earnings to be permanently reinvested. We have not recorded deferred income taxes on the $240.5 million primarily because most of these earnings were previously subject to the one-time deemed mandatory repatriation tax under the Tax Reform Act. We maintain a deferred tax liability for foreign withholding taxes on certain foreign affiliate parent companies that are not indefinitely reinvested.

The following table reconciles our income tax expense at the U.S. federal income tax rate to income tax expense as recorded:



	2019					2018					2017
(in millions, except percentages)	Amount			%		Amount			%		Amount			%
Income tax expense at U.S. federal rate	$	41.5		21.0	%	$	48.5		21.0	%	$	63.0		35.0	%
State income taxes, net of federal income tax benefit	7.5			3.8		7.4			3.2		3.0			1.7
Impacts of Tax Reform Act ⁽¹⁾	—			—		(2.3		)	(1.0	)	(10.6		)	(5.9	)
Stock-based compensation activity	(2.2		)	(1.1	)	(2.6		)	(1.1	)	0.3			0.2
Equity in net income of unconsolidated subsidiaries (including holding gains upon acquisition)	0.3			0.2		1.0			0.4		1.2			0.7
Book gain over tax gain on sale of HelloWallet	—			—		—			—		(6.8		)	(3.8	)
Net change in valuation allowance related to non-U.S. deferred tax assets, primarily net operating losses	(2.1		)	(1.1	)	(0.2		)	(0.1	)	0.1			0.1
Difference between U.S. federal statutory and foreign tax rates	1.1			0.6		0.2			0.1		(5.2		)	(2.9	)
Change in unrecognized tax benefits	(0.9		)	(0.5	)	1.0			0.4		1.2			0.7
Credits and incentives	(2.2		)	(1.1	)	(3.6		)	(1.6	)	(3.7		)	(2.1	)
Foreign tax provisions (GILTI, FDII, and BEAT)⁽²⁾	(1.4		)	(0.7	)	(3.7		)	(1.6	)	—			—
Non-deductible expenses and other, net	4.0			2.0		2.1			0.9		0.4			0.2
Total income tax expense	$	45.6		23.1	%	$	47.8		20.7	%	$	42.9		23.9	%

(1) Impacts of the Tax Reform Act (change in U.S. tax rate, deemed mandatory repatriation, and deferred taxes).

(2) The Tax Reform Act established the Global Intangible Low-Tax Income (GILTI) provision, which taxes U.S. allocated expenses and certain income from foreign operations; the Foreign-Derived Intangible Income (FDII) provision, which allows a deduction against certain types of U.S. taxable income resulting in a lower effective U.S. tax rate on such income; and the Base Erosion Anti-abuse Tax (BEAT), which is a new minimum tax based on cross-border service payments by U.S. entities.

Income tax expense consists of the following:



	Year ended December 31
(in millions)	2019			2018			2017
Current tax expense:
U.S.
Federal	$	28.3		$	31.0		$	40.3
State	9.4			11.1			6.6
Non-U.S.	14.0			12.3			9.9
Current tax expense	51.7			54.4			56.8
Deferred tax expense (benefit):
U.S.
Federal	0.2			(3.0		)	(10.9		)
State	—			(1.7		)	(1.9		)
Non-U.S.	(6.3		)	(1.9		)	(1.1		)
Deferred tax expense, net	(6.1		)	(6.6		)	(13.9		)
Income tax expense	$	45.6		$	47.8		$	42.9

The following table provides our income before income taxes and equity in net income (loss) of unconsolidated entities, generated by our U.S. and non-U.S. operations:



	Year ended December 31
(in millions)	2019		2018		2017
U.S.	$	159.7	$	188.2	$	143.5
Non-U.S.	38.8		44.7		37.6
Income before income taxes and equity in net loss of unconsolidated entities	$	198.5	$	232.9	$	181.1

Deferred Tax Assets and Liabilities

We recognize deferred income taxes for the temporary differences between the carrying amount of assets and liabilities for financial statement purposes and their tax basis. The tax effects of the temporary differences that give rise to the deferred income tax assets and liabilities are as follows:



	As of December 31
(in millions)	2019			2018
Deferred tax assets:
Stock-based compensation expense	$	7.6		$	4.7
Accrued liabilities	18.0			17.0
Deferred revenue	5.5			3.7
Net operating loss carryforwards - U.S.	0.2			0.2
Net operating loss carryforwards - Non-U.S.	4.5			2.4
Deferred royalty revenue	0.2			0.3
Allowance for doubtful accounts	1.4			1.4
Deferred rent	8.0			7.4
Unrealized exchange losses, net	—			0.2
Other	0.6			0.6
Total deferred tax assets	46.0			37.9

Deferred tax liabilities:
Acquired intangible assets	(82.7		)	(16.5		)
Property, equipment, and capitalized software	(25.8		)	(26.7		)
Unrealized exchange gains, net	(1.1		)	—
Prepaid expenses	(9.1		)	(7.1		)
Investments in unconsolidated entities	(6.3		)	(4.8		)
Withholding tax - foreign dividends	(3.0		)	(3.0		)
Total deferred tax liabilities	(128.0		)	(58.1		)
Net deferred tax liability before valuation allowance	(82.0		)	(20.2		)
Valuation allowance	(2.3		)	(2.0		)
Deferred tax liability, net	$	(84.3	)	$	(22.2	)

The deferred tax assets and liabilities are presented in our Consolidated Balance Sheets as follows:



	As of December 31
(in millions)	2019			2018
Deferred tax asset, net	$	10.7		$	—
Deferred tax liability, net	(95.0		)	(22.2		)
Deferred tax liability, net	$	(84.3	)	$	(22.2	)

The following table summarizes our U.S. net operating loss (NOL) carryforwards:



	As of December 31
(in millions)			2019			2018
			Expiration Dates			Expiration Dates
U.S. federal NOLs subject to expiration dates	$	0.8	2023	$	1.0	2023

The net decrease in the U.S. federal NOL carryforwards as of December 31, 2019 compared with 2018 primarily reflects the utilization of U.S. federal NOLs. We have not recorded a valuation allowance against the U.S. federal NOLs of $0.8 million because we expect the benefit of the U.S. federal NOLs to be fully utilized before expiration.

The following table summarizes our NOL carryforwards for our non-U.S. operations:



	As of December 31
(in millions)	2019		2018
Non-U.S. NOLs subject to expiration dates from 2021 through 2039	$	6.8	$	5.5
Non-U.S. NOLs with no expiration date	14.6		5.1
Total	$	21.4	$	10.6

Non-U.S. NOLs not subject to valuation allowances	$	11.7	$	2.0

The change in non-U.S. NOL carryforwards as of December 31, 2019 compared with 2018 primarily reflects U.K. NOLs for which a valuation allowance is not recorded. The losses may be carried forward indefinitely and have no expiration.

In assessing the realizability of our deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. We recorded a valuation allowance against all but approximately $11.7 million of the non-U.S. NOLs, reflecting the likelihood that the benefit of these NOLs will not be realized.

Unrecognized Tax Benefits

We conduct business globally and as a result, we file income tax returns in U.S. federal, state, local, and foreign jurisdictions. In the normal course of business, we are subject to examination by tax authorities throughout the world. The open tax years for our U.S. Federal tax returns and most state tax returns include the years 2014 to the present.

We are currently under audit by federal, state, and local tax authorities in the U.S. as well as tax authorities in certain non-U.S. jurisdictions. It is likely that the examination phase of some of these federal, state, local, and non-U.S. audits will conclude in 2020. It is not possible to estimate the effect of current audits on previously recorded unrecognized tax benefits.

As of December 31, 2019, our Consolidated Balance Sheet included a current liability of $10.8 million and a non-current liability of $3.0 million for unrecognized tax benefits. As of December 31, 2018, our Consolidated Balance Sheet included a current liability of $6.6 million and a noncurrent liability of $7.1 million for unrecognized tax benefits. These amounts include interest and penalties, less any associated tax benefits.

The table below reconciles the beginning and ending amount of the gross unrecognized tax benefits as follows:



(in millions)	2019			2018
Gross unrecognized tax benefits - beginning of the year	$	13.1		$	18.7
Increases as a result of tax positions taken during a prior-year period	3.0			0.8
Decreases as a result of tax positions taken during a prior-year period	(0.2		)	(0.3		)
Increases as a result of tax positions taken during the current period	1.2			1.6
Decreases relating to settlements with tax authorities	(3.8		)	(2.5		)
Reductions as a result of lapse of the applicable statute of limitations	(0.7		)	(5.2		)
Gross unrecognized tax benefits - end of the year	$	12.6		$	13.1

In 2019, we recorded a net increase of $4.0 million of gross unrecognized tax benefits before settlements and lapses of statutes of limitations, of which $1.1 million increased our income tax expense by $1.1 million.

In addition, we reduced our unrecognized tax benefits by $4.5 million for settlements and lapses of statutes of limitations, of which $2.1 million decreased our income tax expense by $1.9 million.

As of December 31, 2019, we had $12.6 million of gross unrecognized tax benefits, of which $12.6 million, if recognized, would reduce our effective income tax rate and decrease our income tax expense by $12.4 million.

We record interest and penalties related to uncertain tax positions as part of our income tax expense. The following table summarizes our gross liability for interest and penalties:



	As of December 31
(in millions)	2019		2018
Liabilities for interest and penalties	$	1.6	$	1.3

We recorded the increase in the liabilities for penalties and interest, net of any tax benefits, to income tax expense in our Consolidated Statements of Income in 2019.