Income Taxes

9 Months Ended

Sep. 30, 2019

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

We determine our provision for income taxes for interim periods using an estimate of our annual effective tax rate. We record any changes affecting the estimated annual effective tax rate in the interim period in which the change occurs, including discrete tax items.

For the three months ended September 30, 2019, the effective tax rate was 27.4% expense on pre-tax income, compared to 13.3% expense on pre-tax income for the three months ended September 30, 2018. For the nine months ended September 30, 2019, the effective tax rate was 24.5% expense on pre-tax income, compared to 13.1% expense on pre-tax income for the nine months ended September 30, 2018. The increase in the effective tax rate for both periods was primarily driven by an increase in U.S. federal and state taxable income.

We are subject to taxation in the United States and various other state and foreign jurisdictions. During 2017, the Internal Revenue Service (“IRS”) issued proposed adjustments related to transfer pricing with our foreign subsidiaries for our 2009 to 2010 audit cycle. On July 12, 2019, we settled the audit for an immaterial impact to the consolidated financial statements. In addition, we are under examination by the IRS for our 2011 through 2013 tax years. During the fourth quarter of 2019, the IRS issued final adjustments related to transfer pricing with our foreign subsidiaries for our 2011 to 2013 audit cycle. The proposed adjustments would increase our U.S. taxable income by $696 million, which would result in federal tax of approximately $244 million subject to interest. We do not agree with the position of the IRS and are formally protesting the IRS position. Subsequent years remain open to examination by the IRS. We do not anticipate a significant impact to our gross unrecognized tax benefits within the next 12 months related to these years.