Income Taxes

12 Months Ended

Dec. 31, 2018

The provision for (benefit from) income taxes consists of the following (in thousands):



	Year Ended December 31,
	2018			2017			2016
				*As Adjusted			*As Adjusted
Current provision:
Federal	$	(336	)	$	(445	)	$	(55	)
State	163			137			135
Foreign	22,204			9,512			5,098
	22,031			9,204			5,178
Deferred provision:
Federal	(2,026		)	(5,934		)	(4,462		)
State	(377		)	(886		)	(746		)
Foreign	(31,948		)	1,056			3,860
	(34,351		)	(5,764		)	(1,348		)
Provision for (benefit from) income taxes	$	(12,320	)	$	3,440		$	3,830

*As adjusted to reflect the impact of the full retrospective adoption of Topic 606. See Note 2 for further details.

The components of loss before provision for income taxes by U.S. and foreign jurisdictions were as follows (in thousands):



	Year Ended December 31,
	2018			2017			2016
				*As Adjusted			*As Adjusted
United States	(153,290		)	(61,259		)	(403,161		)
Foreign	114,266			(52,147		)	(7,258		)
Total	$	(39,024	)	$	(113,406	)	$	(410,419	)

*As adjusted to reflect the impact of the full retrospective adoption of Topic 606. See Note 2 for further details.

The effective income tax rate differs from the federal statutory income tax rate applied to the loss before provision for income taxes due to the following (in thousands):



	Year Ended December 31,
	2018			2017			2016
				*As Adjusted			*As Adjusted
Tax computed at U.S. federal statutory rate	$	(8,195	)	$	(38,558	)	$	(139,542	)
State taxes, net of federal benefit	98			64			37
Tax rate differential for international subsidiaries	(41,429		)	23,532			8,020
Stock-based compensation	(93,073		)	(116,953		)	(27,133		)
Tax credits	(44,695		)	(21,038		)	(16,452		)
Foreign restructuring and amortization	(625,292		)	2,794			3,169
Non-deductible expenses	9,657			2,833			1,892
Tax effects associated with Topic 606	(23,073		)	3,314			2,076
Other	408			607			896
Valuation allowance	813,274			146,845			170,867
Provision for income taxes	$	(12,320	)	$	3,440		$	3,830

*As adjusted to reflect the impact of the full retrospective adoption of Topic 606. See Note 2 for further details.

Significant components of our deferred tax assets are shown below (in thousands). A valuation allowance has been recognized to offset our deferred tax assets, as necessary, by the amount of any tax benefits that, based on evidence, are not expected to be realized.



	December 31,
	2018			2017
				*As Adjusted
Deferred tax assets:
Net operating loss carryforwards	$	610,314		$	518,620
Accrued expenses	13,482			10,613
Credit carryforwards	120,594			75,879
Stock-based compensation	44,510			35,782
Note hedge	22,742			35,181
Depreciation and amortization	593,348			—
Other	23,183			14,771
Total deferred tax assets	1,428,173			690,846
Less valuation allowance	(1,337,350		)	(583,235		)
	90,823			107,611
Deferred tax liabilities:
Depreciation and amortization	(22,183		)	(20,708		)
Convertible notes	(24,887		)	(43,616		)
Tax effects associated with Topic 606	(23,531		)	(53,601		)
Other	(1,568		)	(1,759		)
Net deferred tax assets	$	18,654		$	(12,073	)

*As adjusted to reflect the impact of the full retrospective adoption of Topic 606. See Note 2 for further details.

In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB 118), which allows us to record provisional amounts for the Tax Act during a measurement period not to extend beyond one year of the enactment date, with further clarifications made recently with the issuance of ASU 2018-05. We have completed our accounting for the income tax effects of the Tax Act during the fourth quarter of fiscal year ended December 31, 2018, and did not have any significant adjustments to our provisional amounts. We have elected to record taxes associated with our GILTI as period costs if and when incurred. We determined that the unremitted earnings of our foreign subsidiaries will no longer be considered indefinitely reinvested, except in certain designated jurisdictions in which the resident entity is a service provider that is not expected to generate substantial amounts of cash in excess of what may be reinvested by the local entity. We have not provided for state income or withholding taxes on the undistributed earnings of foreign subsidiaries which are considered indefinitely invested outside of the U.S. The amount of unrecognized deferred tax liability on these undistributed earnings is not expected to be material at December 31, 2018.

As of December 31, 2018, we had U.S. federal net operating loss and federal tax credit carryforwards of approximately $2.4 billion and $89.7 million, respectively. The federal tax credits and a portion of the federal net operating loss carryforwards will begin to expire in 2024 if not utilized. In addition, we had state net operating loss and state tax credit carryforwards of approximately $1.3 billion and $65.2 million, respectively. The state net operating loss will begin to expire in 2019 if not utilized, and the tax effected amount due to expire in 2019 is immaterial. State tax credits and a portion of the federal net operating loss carryforwards can be carried forward indefinitely. Utilization of our net operating loss and credit carryforwards may be subject to annual limitation due to the ownership change limitations provided by the Internal Revenue Code and similar state provisions. Such an annual limitation could result in the expiration of the net operating loss and tax credit carryforwards before utilization.

We maintain a full valuation allowance against our U.S. and certain foreign deferred tax assets as of December 31, 2018. We regularly assess the need for a valuation allowance against our deferred tax assets. In making that assessment, we consider both positive and negative evidence related to the likelihood of realization of the deferred tax assets to determine, based on the weight of available evidence, whether it is more likely than not that some or all of the deferred tax assets will not be realized. Due to cumulative losses over recent years and based on all available evidence, we have determined that it is more likely than not that our U.S. and certain foreign deferred tax assets will not be realized as of December 31, 2018. We have determined that $18.7 million related to deferred tax assets in certain foreign jurisdictions are realizable since the foreign entities have cumulative income and expected future income. The valuation allowance on our net deferred tax assets increased by $754.1 million, decreased by $106.9 million, and increased by $607.0 million during the years ended December 31, 2018, 2017, and 2016, respectively. There have been no material releases of the valuation allowance. The 2018 change in the valuation allowance is primarily attributable to an increase in domestic net operating loss carryforwards primarily due to stock-based compensation expense, and an increase of approximately $590 million in deferred tax assets that are not realizable related to our foreign restructuring completed during 2018 giving rise to foreign amortizable assets. The 2017 change in valuation allowance was primarily attributable to remeasuring the U.S. net deferred tax assets at the applicable tax rate of 21% in accordance with the Tax Act, offset by increases in deferred tax assets primarily related to net operating losses. The 2016 change in valuation allowance was primarily attributable to an increase in net operating loss carryforwards and our early adoption of ASU 2016-09, “Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting,” upon which previously unrecognized U.S. excess tax effects have been recorded as additional net operating loss carryforwards within our deferred tax asset. To the extent sufficient positive evidence becomes available, we may release a portion, or all, of our valuation allowance in one or more future periods. A release of the valuation allowance, if any, would result in the recognition of certain deferred tax assets and a material income tax benefit for the period in which such release is recorded.

A reconciliation of the beginning and ending balance of total unrecognized tax benefits is as follows (in thousands):



	Year Ended December 31,
	2018			2017		2016
Balance, beginning period	$	27,648		$	18,440	$	11,737
Tax positions taken in prior period:
Gross increases	3,721			398		1,122
Gross decreases	(2,896		)	—		(50		)
Tax positions taken in current period:
Gross increases	5,796			8,810		5,673
Gross decreases	—			—		—
Lapse of statute of limitations	(1,078		)	—		(42		)
Settlements	(5,600		)	—		—
Balance, end of period	$	27,591		$	27,648	$	18,440

As of December 31, 2018, we had gross unrecognized tax benefits of approximately $27.6 million, of which $4.7 million would impact the effective tax rate, if recognized. We recognize accrued interest and penalties related to unrecognized tax benefits as income tax expense. Accrued interest and penalties included in our liability related to unrecognized tax benefits were $0.3 million and $0.5 million at December 31, 2018 and 2017, respectively. The amount of unrecognized tax benefits could be reduced upon expiration of the applicable statutes of limitations. The potential reduction in unrecognized tax benefits during the next 12 months is not expected to be material. Interest and penalties accrued on these uncertain tax positions are recognized as income tax expense and will be released upon the expiration of the statutes of limitations. These amounts are also not material for any periods presented.

We are subject to taxation in the United States and foreign jurisdictions. As of December 31, 2018, our tax years 2004 to 2017 remain subject to examination in most jurisdictions.

There are differing interpretations of tax laws and regulations, and as a result, disputes may arise with tax authorities involving issues of the timing and amount of deductions and allocations of income among various tax jurisdictions. We periodically evaluate our exposures associated with our tax filing positions. We believe that adequate amounts have been reserved for any adjustments that may ultimately result from these examinations, and we do not anticipate a significant impact to our gross unrecognized tax benefits within the next 12 months related to these years. Although the timing of the resolution, settlement, and closure of any audit is highly uncertain, it is reasonably possible that the balance of gross unrecognized tax benefits could significantly change in the next 12 months. However, given the number of years that remain subject to examination, we are unable to estimate the full range of possible adjustments to the balance of gross unrecognized tax benefits.