NOTE 10 — Income Taxes

The Tax Act was enacted in December 2017. The Tax Act significantly changed U.S. tax law by, among other things, lowering U.S. corporate income tax rates, implementing a territorial tax system and imposing a one-time transition tax on deemed repatriated earnings of foreign subsidiaries. The Tax Act reduced the U.S. corporate income tax rate from 35% to 21%, effective January 1, 2018.

The SEC staff issued Staff Accounting Bulletin No. 118 ("SAB 118") to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act and allows the registrant to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. We applied the guidance in SAB 118 when accounting for the enactment date effects of the Tax Act in 2017 and throughout 2018. At December 31, 2017, we had not completed our accounting for all of the enactment date income tax effects of the Tax Act under Accounting Standards Codification 740, Income Taxes, for the following aspects: remeasurement of deferred tax assets and liabilities, one-time transition tax, and tax on GILTI. At December 31, 2018, we have completed our accounting for all of the enactment date income tax effects of the Tax Act. During 2018, we recognized immaterial adjustments to the provisional amounts recorded at December 31, 2017 and included these adjustments as a component of income tax expense from continuing operations.

While the Tax Act provides for a modified territorial tax system, beginning in 2018, GILTI provisions will be applied providing an incremental tax on low taxed foreign income. The GILTI provisions require us to include in our U.S. income tax return foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary’s tangible assets. During 2018, we made an accounting policy election to treat taxes related to GILTI as a current period expense when incurred.

Effective for tax years beginning after December 31, 2017, the Tax Act provides a foreign-derived intangible income (“FDII”) deduction, which is derived from the taxpayer’s Foreign Derived Deduction Eligible Income ("FDDEI") among other factors. For tax years 2018 to 2025, the allowable deduction is 37.5% of the gross FDII after the taxable income limitation, and 21.875% thereafter. For tax years 2018 to 2025, this equates to a 13.125% effective tax rate on excess returns earned directly by a U.S. corporation from foreign derived sales (including licenses and leases) or services, and 16.406% thereafter. The preferential rate is reflected on the U.S. tax return as a deduction for FDII.

The following table summarizes our U.S. and foreign income (loss) before income taxes:



	Year Ended December 31,
	2018		2017			2016
	(In millions)
U.S.	$	32	$	(45	)	$	(47	)
Foreign	453		462			324
Total	$	485	$	417		$	277

Provision for Income Taxes

The following table summarizes our provision for income taxes:



	Year Ended December 31,
	2018			2017			2016
				(In millions)
Current income tax expense:
Federal	$	186		$	12		$	(41	)
State	42			6			6
Foreign	167			130			65
Current income tax expense	395			148			30
Deferred income tax (benefit) expense:
Federal	(273		)	(94		)	(5		)
State	(25		)	(1		)	(3		)
Foreign	(10		)	(8		)	(6		)
Deferred income tax (benefit) expense:	(308		)	(103		)	(14		)
Income tax expense	$	87		$	45		$	16

We reduced our current income tax payable by $34 million, $100 million and $76 million for the years ended December 31, 2018, 2017 and 2016 for tax deductions attributable to stock-based compensation.

Deferred Income Taxes

As of December 31, 2018 and 2017, the significant components of our deferred tax assets and deferred tax liabilities were as follows:



	December 31,
	2018			2017
	(In millions)
Deferred tax assets:
Provision for accrued expenses	$	87		$	44
Deferred loyalty rewards	166			131
Net operating loss and tax credit carryforwards	123			122
Stock-based compensation	67			52
Property and equipment	55			—
Other	68			52
Total deferred tax assets	566			401
Less valuation allowance	(80		)	(76		)
Net deferred tax assets	$	486		$	325
Deferred tax liabilities:
Goodwill and intangible assets	(486		)	(499		)
Property and equipment	—			(131		)
Other	—			(6		)
Total deferred tax liabilities	$	(486	)	$	(636	)
Net deferred tax liability	$	—		$	(311	)

As of December 31, 2018, we had federal, state, and foreign net operating loss carryforwards (“NOLs”) of approximately $84 million, $91 million and $404 million. If not utilized, the federal and state NOLs will expire at various times between 2019 and 2038. Foreign NOLs of $250 million may be carried forward indefinitely, and foreign NOLs of $154 million expire at various times starting from 2019.

As of December 31, 2018, we had a valuation allowance of approximately $80 million related to certain NOL carryforwards for which it is more likely than not the tax benefits will not be realized. The valuation allowance increased by $4 million from the amount recorded as of December 31, 2017 primarily due to the historic NOL carryforwards of acquired entities as well as foreign NOLs for which realization is not certain. The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period change, or if objective negative evidence in the form of cumulative losses is no longer present and additional weight may be given to subjective evidence such as our projections for growth.

Due to the one-time transition tax on the deemed repatriation of post-1986 undistributed foreign subsidiary earnings and profits, the majority of previously unremitted earnings have now been subjected to U.S. federal income tax. To the extent that this repatriation resulted in differences between the book and tax carrying values of Expedia Group’s investment in foreign subsidiaries whose offshore earnings are not indefinitely reinvested, or to the extent that future distributions from these subsidiaries will be taxable, a deferred tax liability has been accrued. The amount of undistributed earnings in foreign subsidiaries where the foreign subsidiary has or will invest undistributed earnings indefinitely outside of the United States, and for which future distributions could be taxable, was $104 million as of December 31, 2018. The unrecognized deferred tax liability related to the U.S. federal income tax consequences of these earnings was $22 million as of December 31, 2018.

Reconciliation of U.S. Federal Statutory Income Tax Rate to Effective Income Tax Rate

A reconciliation of amounts computed by applying the federal statutory income tax rate to income before income taxes to total income tax expense is as follows:



	Year Ended December 31,
	2018			2017			2016
				(In millions)
Income tax expense at the federal statutory rate of 21% for 2018 and 35% for 2017 and 2016	$	102		$	146		$	97
Foreign tax rate differential	(42		)	(82		)	(67		)
Federal research and development credit	(23		)	(16		)	(15		)
Excess tax benefits related to stock-based compensation	(10		)	(60		)	(40		)
Unrecognized tax benefits and related interest	23			27			33
Change in valuation allowance	8			4			(14		)
Return to provision true-ups	(7		)	1			(14		)
trivago stock-based compensation	7			5			17
State taxes	11			3			—
Non-deductible goodwill impairment	16			—			—
Tax Act transition tax	—			144			—
U.S. statutory tax rate change	—			(158		)	—
Global intangible low-taxed income	13			—			—
Foreign-derived intangible income	(38		)	—			—
Other, net	27			31			19
Income tax expense	$	87		$	45		$	16

Our effective tax rate was lower than the 21% federal statutory income tax rate in 2018 and 35% in 2017 and 2016 due to earnings in foreign jurisdictions outside of the United States, primarily Switzerland, where the statutory income tax rate is lower. In addition, excess tax benefits relating to stock-based payments also decrease our effective tax rate in all years.

The increase in our effective tax rate for 2018 compared to 2017 was due to one-time tax benefits in the prior year period and return to provision true-ups, as well as an increase in losses generated in foreign jurisdictions at tax rates below the 21% federal statutory rate.

Unrecognized Tax Benefits and Interest

A reconciliation of the beginning and ending amount of gross unrecognized tax benefits and interest is as follows:



	2018			2017			2016
				(In millions)
Balance, beginning of year	$	261		$	220		$	171
Increases to tax positions related to the current year	24			35			43
Increases to tax positions related to prior years	2			4			8
Decreases to tax positions related to prior years	—			(1		)	(2		)
Reductions due to lapsed statute of limitations	(2		)	(3		)	(5		)
Settlements during current year	—			(1		)	—
Interest and penalties	8			7			5
Balance, end of year	$	293		$	261		$	220

As of December 31, 2018, we had $293 million of gross unrecognized tax benefits, $180 million of which, if recognized, would affect the effective tax rate. As of December 31, 2017, we had $261 million of gross unrecognized tax benefits, $155 million of which, if recognized, would affect the effective tax rate. As of December 31, 2016, we had $220 million of gross unrecognized tax benefits, $181 million of which, if recognized, would affect the effective tax rate.

As of December 31, 2018 and 2017, total gross interest and penalties accrued was $30 million and $22 million, respectively. We recognized interest (benefit) expense in 2018, 2017 and 2016 of $8 million, $7 million and $5 million in connection with our unrecognized tax benefits.

The Company is routinely under audit by federal, state, local and foreign income tax authorities. These audits include questioning the timing and the amount of income and deductions, and the allocation of income and deductions among various tax jurisdictions. The Internal Revenue Service ("IRS") is currently examining Expedia Group’s U.S. consolidated federal income tax returns for the periods ended December 31, 2009 through December 31, 2013. As of December 31, 2018, for the Expedia Group, Inc. & Subsidiaries group, statute of limitations for tax years 2009 through 2017 remain open to examination in the federal jurisdiction and most state jurisdictions. For the HomeAway and Orbitz groups, statutes of limitations for tax years 2001 through 2015 remain open to examination in the federal and most state jurisdictions due to NOL carryforwards.

During 2017, the IRS issued proposed adjustments related to transfer pricing with our foreign subsidiaries for our 2009 to 2010 audit cycle. The proposed adjustments would increase our U.S. taxable income by $105 million, which would result in federal tax expense of approximately $37 million, subject to interest. We do not agree with the position of the IRS and are formally protesting the IRS position.