Note 19—Income Taxes

The Company’s income before taxes by fiscal year consisted of the following:



	2016		2015		2014
	(in millions)
U.S.	$	5,839	$	7,214	$	6,140
Non-U.S.	2,173		1,781		1,584
Total income before taxes	$	8,012	$	8,995	$	7,724

U.S. income before taxes included $2.5 billion, $2.4 billion and $2.3 billion of the Company's U.S. entities' income from operations outside of the U.S. for fiscal 2016, 2015 and 2014, respectively.

Income tax provision by fiscal year consisted of the following:



	2016			2015		2014
	(in millions)
Current:
U.S. federal	$	2,250		$	1,991	$	2,353
State and local	181			168		237
Non-U.S.	368			300		274
Total current taxes	2,799			2,459		2,864
Deferred:
U.S. federal	(508		)	181		(576		)
State and local	(63		)	1		(31		)
Non-U.S.	(207		)	26		29
Total deferred taxes	(778		)	208		(578		)
Total income tax provision	$	2,021		$	2,667	$	2,286

The tax effect of temporary differences that give rise to significant portions of deferred tax assets and liabilities at September 30, 2016 and 2015, are presented below:



	2016			2015
	(in millions)
Deferred Tax Assets:
Accrued compensation and benefits	$	277		$	141
Comprehensive (income) loss	106			51
Accrued litigation obligation	373			391
Client incentives	266			191
Net operating loss carryforwards	32			50
Federal benefit of state taxes	195			203
Federal benefit of foreign taxes	1,214			—
Other	280			185
Valuation allowance	(31		)	(40		)
Deferred tax assets	2,712			1,172
Deferred Tax Liabilities:
Property, equipment and technology, net	(278		)	(315		)
Intangible assets	(7,013		)	(3,964		)
Foreign taxes	(106		)	(153		)
Other	(101		)	—
Deferred tax liabilities	(7,498		)	(4,432		)
Net deferred tax liabilities	$	(4,786	)	$	(3,260	)

The increase in the net deferred tax liabilities primarily reflect the deferred tax impacts of the intangible assets acquired in the Visa Europe acquisition. At September 30, 2016 and 2015, net deferred tax assets of $22 million and $13 million, respectively, are reflected in other assets on the consolidated balance sheets.

In November 2015, the FASB issued Accounting Standards Update 2015-17, which simplifies the presentation of deferred income taxes by requiring that deferred tax assets and liabilities be presented as non-current. The standard impacts presentation only. The Company elected to early adopt the standard on a retrospective basis effective October 1, 2015, and all deferred tax assets and liabilities are classified as non-current on the Company’s consolidated balance sheets. All prior period amounts have been reclassified to conform with the current period presentation.

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that all or some portion of the deferred tax assets will not be realized. The ultimate realization of the deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences are deductible. The fiscal 2016 and 2015 valuation allowances relate primarily to foreign net operating losses from subsidiaries acquired in recent years.

As of September 30, 2016, the Company had $17 million federal, $21 million state and $117 million foreign net operating loss carryforwards. The federal and state net operating loss carryforwards will expire in fiscal 2028 through 2035. The foreign net operating loss may be carried forward indefinitely. The Company expects to fully utilize the federal and state net operating loss carryforwards in future years.

As of September 30, 2016, the Company had $15 million of federal foreign tax credit carryforwards, which will expire in fiscal 2026. The Company expects to realize the benefit of the credit carryforwards in future years.

The income tax provision differs from the amount of income tax determined by applying the applicable U.S. federal statutory rate of 35% to pretax income, as a result of the following:



	For the Years Ended September 30,
	2016					2015					2014
	Dollars			Percent		Dollars			Percent		Dollars			Percent
	(in millions, except percentages)
U.S. federal income tax at statutory rate	$	2,804		35	%	$	3,148		35	%	$	2,704		35	%
State income taxes, net of federal benefit	135			2	%	194			2	%	129			2	%
Non-U.S. tax effect, net of federal benefit	(553		)	(7	)%	(327		)	(4	)%	(278		)	(4	)%
Prior years U.S. domestic production activities deduction	—			—	%	—			—	%	(191		)	(2	)%
Remeasurement of deferred tax liability	(88		)	(1	)%	—			—	%	—			—	%
Reversal of prior years tax reserves related to the resolution of uncertain tax positions	—			—	%	(239		)	(2	)%	—			—	%
Revaluation of Visa Europe put option	(89		)	(1	)%	—			—	%	—			—	%
Other, net	(188		)	(3	)%	(109		)	(1	)%	(78		)	(1	)%
Income tax provision	$	2,021		25	%	$	2,667		30	%	$	2,286		30	%

The effective income tax rate was 25% in fiscal 2016 and 30% in fiscal 2015. The effective tax rate in fiscal 2016 differs from the effective tax rate in fiscal 2015 primarily due to:


•	the effect of one-time items related to the Visa Europe acquisition, the most significant of which was the $1.9 billion U.S. loss related to the effective settlement of the Framework Agreement between Visa and Visa Europe. These one-time items impacted the geographic mix of global income, resulting in a reduced effective tax rate;


•	an$88 million one-time tax benefit due to the remeasurement of deferred tax liabilities as a result of the reduction in the U.K. tax rate enacted in fiscal 2016;


•	the non-taxable $255 million revaluation of the Visa Europe put option recorded in fiscal 2016; and


•	the absence of a $296 million tax benefit recognized in fiscal 2015 resulting from the resolution of uncertain tax positions with taxing authorities. Included in the $296 million was a one-time $239 million tax benefit that related to prior fiscal years.

The effective income tax rates were 30% in fiscal 2015 and 2014. The following highlights the significant tax items recorded in each respective year:

•the aforementioned $296 million tax benefit recognized in fiscal 2015; and


•	a $264 million tax benefit recognized in fiscal 2014 related to a deduction for U.S. domestic production activities, of which $191 million was a one-time tax benefit related to prior fiscal years.

Current income taxes receivable were $232 million and $77 million at September 30, 2016 and 2015, respectively. Non-current income taxes receivable of $731 million and $627 million were included in other assets at September 30, 2016 and 2015, respectively. See Note 5—Prepaid Expenses and Other Assets. At September 30, 2016 and 2015, income taxes payable of $153 million and $75 million, respectively, were included in accrued income taxes as part of accrued liabilities, and accrued income taxes of $911 million and $752 million, respectively, were included in other long-term liabilities. See Note 8—Accrued and Other Liabilities.

Cumulative undistributed earnings of the Company’s international subsidiaries that are intended to be reinvested indefinitely outside the United States amounted to $8.3 billion at September 30, 2016. The amount of income taxes that would have resulted had such earnings been repatriated is not practicably determinable.

The Company’s largest operating hub outside the United States is located in Singapore. It operates under a tax incentive agreement which is effective through September 30, 2023, and is conditional upon meeting certain business operations and employment thresholds in Singapore. The tax incentive agreement decreased Singapore tax by $235 million, $192 million and $168 million, and the benefit of the tax incentive agreement on diluted earnings per share was $0.10, $0.08 and $0.07 in fiscal 2016, 2015 and 2014, respectively.

In accordance with Accounting Standards Codification 740—Income Taxes, the Company is required to inventory, evaluate and measure all uncertain tax positions taken or to be taken on tax returns, and to record liabilities for the amount of such positions that may not be sustained, or may only partially be sustained, upon examination by the relevant taxing authorities.

At September 30, 2016 and 2015, the Company’s total gross unrecognized tax benefits were $1.2 billion and $1.1 billion, respectively, exclusive of interest and penalties described below. Included in the $1.2 billion and $1.1 billion are $926 million and $859 million of unrecognized tax benefits, respectively, that if recognized, would reduce the effective tax rate in a future period.

A reconciliation of beginning and ending unrecognized tax benefits by fiscal year is as follows:



	2016			2015
	(in millions)
Beginning balance at October 1	$	1,051		$	1,303
Increases of unrecognized tax benefits related to prior years	153			44
Decreases of unrecognized tax benefits related to prior years	(180		)	(413		)
Increases of unrecognized tax benefits related to current year	138			120
Reductions related to lapsing statute of limitations	(2		)	(3		)
Ending balance at September 30	$	1,160		$	1,051

It is the Company’s policy to account for interest expense and penalties related to uncertain tax positions in non-operating expense in its consolidated statements of operations. The Company recognized $15 million and $10 million of interest expense in fiscal 2016 and 2014, respectively, and reversed $6 million of interest expense in fiscal 2015, related to uncertain tax positions. The Company accrued $3 million, $1 million and $2 million of penalties in fiscal 2016, 2015 and 2014, respectively, related to uncertain tax positions. At September 30, 2016 and 2015, the Company had accrued interest of $61 million and $33 million, respectively, and accrued penalties of $17 million and $6 million, respectively, related to uncertain tax positions in its other long-term liabilities. At September 30, 2016, accrued interest and penalties balances included amounts related to the Visa Europe acquisition.

The Company's fiscal 2009 through 2012 U.S. federal income tax returns are currently under Internal Revenue Service ("IRS") examination. The Company has filed a federal refund claim for fiscal year 2008, which is also currently under IRS examination. Except for the refund claim, the federal statutes of limitations have expired for fiscal years prior to 2009. The Company's fiscal 2006, 2007 and 2008 California tax returns are currently under examination. Except for certain outstanding refund claims, the California statutes of limitations have expired for fiscal years prior to 2006.

During fiscal 2013, the Canada Revenue Agency (CRA) completed its examination of the Company's fiscal 2003 through 2009 Canadian tax returns and proposed certain assessments. Based on the findings of its examination, the CRA also proposed certain assessments to the Company's fiscal 2010 through 2015 Canadian tax returns. The Company filed notices of objection against these assessments and, in fiscal 2015, completed the appeals process without reaching a settlement with the CRA. In April 2016, the Company petitioned the Tax Court of Canada to overturn the CRA's assessments. The Company continues to believe that its income tax provision adequately reflects its obligations to the CRA.

The Company is also subject to examinations by various state and foreign tax authorities. All material state and foreign tax matters have been concluded for years through fiscal 2002. The timing and outcome of the final resolutions of the federal, state and foreign tax examinations and refund claims are uncertain. As such, it is not reasonably possible to estimate the impact that the final outcomes could have on the Company's unrecognized tax benefits in the next 12 months.