INCOME TAXES

12 Months Ended

Dec. 31, 2019

The components of pretax income (loss) from continuing operations for the years ended December 31, 2019, 2018 and 2017 were as follows (in thousands):



	Year Ended December 31,
	2019			2018			2017
United States	$	6,758		$	23,349		$	30,095
International	(20,289		)	(22,318		)	6,050
Income (loss) before provision (benefit) for income taxes	$	(13,531	)	$	1,031		$	36,145

The provision (benefit) for income taxes for the years ended December 31, 2019, 2018 and 2017 was allocated between continuing operations and discontinued operations as follows (in thousands):



	Year Ended December 31,
	2019		2018			2017
Continuing Operations	$	761	$	(957	)	$	7,544
Discontinued Operations	—		—			—
Total	$	761	$	(957	)	$	7,544

The provision (benefit) for income taxes from continuing operations for the years ended December 31, 2019, 2018 and 2017 consisted of the following components (in thousands):



	Year Ended December 31,
	2019			2018			2017
Current taxes:
U.S. federal	$	(5,901	)	$	768		$	(120	)
State	929			57			191
International	7,218			3,218			6,870
Total current taxes	2,246			4,043			6,941
Deferred taxes:
U.S. federal	32			(319		)	(1,335		)
State	(9		)	—			50
International	(1,508		)	(4,681		)	1,888
Total deferred taxes	(1,485		)	(5,000		)	603
Provision (benefit) for income taxes	$	761		$	(957	)	$	7,544

The items accounting for differences between the income tax provision (benefit) from continuing operations computed at the U.S. federal statutory rate and the provision (benefit) for income taxes for the years ended December 31, 2019, 2018 and 2017 were as follows (in thousands):



	Year Ended December 31,
	2019			2018 ⁽³⁾			2017
U.S. federal income tax provision (benefit) at statutory rate	$	(2,842	)	$	216		$	12,651
Foreign income and losses taxed at different rates ⁽¹⁾	5,529			2,113			4,524
State income taxes, net of federal benefits, and state tax credits	5,297			720			(4,980		)
Change in valuation allowances	(10,074		)	(7,727		)	(36,057		)
Effect of income tax rate changes on deferred items ⁽²⁾	(3,443		)	1,544			20,466
Tax effects of intercompany transactions	—			607			3,332
Adjustments related to uncertain tax positions	(12,418		)	18			1,824
Non-deductible stock-based compensation expense	6,355			3,239			5,002
Tax shortfalls on stock-based compensation awards	2,042			(335		)	4,290
Federal research and development credits	3,447			(8,331		)	(7,862		)
Forgiveness of intercompany liabilities	67			(1,340		)	(2,494		)
Ordinary stock loss	—			(11,815		)	—
Net operating loss expiration	12,537			—			—
Non-deductible or non-taxable items	(5,736		)	20,134			6,848
Provision (benefit) for income taxes	$	761		$	(957	)	$	7,544

(1)

Tax rates in foreign jurisdictions were generally lower than the U.S. federal statutory rate through December 31, 2019. This results in an adverse impact to the provision (benefit) for income taxes in this rate reconciliation for the years ended December 31, 2019, 2018 and 2017 prior to the impact of valuation allowances, due to the net pretax losses from continuing operations in certain foreign jurisdictions with lower tax rates.

(2)

The effect of income tax rate changes on deferred items for the year ended December 31, 2017 is primarily related to the U.S. tax reform legislation that was signed into law on December 22, 2017, which included a reduction of the U.S. Federal income tax rate to 21 percent. That rate reduction did not impact our provision for income taxes for the year ended December 31, 2017 due to the valuation allowance against our U.S. net deferred tax assets.

(3)

During the year ended December 31, 2019, we updated our net operating losses to remove deferred tax assets that could never be utilized due to IRC Section 382 limitations. The amount of State income taxes, net of federal benefits, and state tax credits, Change in valuation allowances and Non-deductible or non-taxable items for the year ended December 31, 2018 have been updated from $2.0 million, $3.8 million and $7.3 million previously reported to reflect that change.

The deferred income tax assets and liabilities consisted of the following components as of December 31, 2019 and 2018 (in thousands):



	December 31,
	2019			2018
Deferred tax assets:
Accrued expenses and other liabilities	$	35,565		$	25,694
Operating lease obligation	22,557			—
Stock-based compensation	7,657			5,167
Net operating loss and tax credit carryforwards ⁽¹⁾	157,202			194,773
Intangible assets, net	21,002			16,482
Investments	23,012			5,916
Unrealized foreign currency exchange losses	3,765			1,882
Other	1,017			1,021
Total deferred tax assets	271,777			250,935
Less: Valuation allowances⁽¹⁾	(206,394		)	(216,468		)
Deferred tax assets, net of valuation allowance	65,383			34,467
Deferred tax liabilities:
Prepaid expenses and other assets	(16,343		)	(12,737		)
Property, equipment and software, net	(11,994		)	(12,576		)
Right-of-use asset	(20,172		)	—
Convertible senior notes	(1,883		)	(2,457		)
Deferred revenue	(14,064		)	(7,255		)
Total deferred tax liabilities	(64,456		)	(35,025		)
Net deferred tax asset (liability)	$	927		$	(558	)


(1)	During the year ended December 31, 2019, we updated our net operating losses to remove deferred tax assets that could never be utilized due to IRC Section 382 limitations. The amount of Net operating loss and tax credit carryforwards and Valuation allowances for the year ended December 31, 2018 have been updated from $206.3 million and $228.0 million previously reported to reflect that change.

We have incurred significant losses in recent periods and had an accumulated deficit of $1,032.9 million as of December 31, 2019. As a result, we maintained valuation allowances against our domestic deferred tax assets and substantially all of our foreign deferred tax assets as of December 31, 2019 and 2018 to reduce their carrying values to amounts that are realizable either through future reversals of existing taxable temporary differences or through taxable income in carryback years for the applicable jurisdictions.

We had $48.1 million of federal net operating loss carryforwards as of December 31, 2019 which will begin expiring in 2027. We had $214.7 million of state net operating loss carryforwards as of December 31, 2019, which began expiring in the current period. As of December 31, 2019, we had $343.0 million of foreign net operating loss carryforwards, a significant portion of which carry forward for an indefinite period.

We are subject to taxation in the United States, state jurisdictions and foreign jurisdictions. Significant judgment is required in determining the worldwide provision for income taxes and recording the related income tax assets and liabilities. We recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not criterion, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority.

The following table summarizes activity related to our gross unrecognized tax benefits, excluding interest and penalties, for the years ended December 31, 2019, 2018 and 2017 (in thousands):



	Year Ended December 31,
	2019			2018			2017
Beginning Balance	$	87,637		$	87,359		$	80,081
Increases related to prior year tax positions	3,754			1,500			960
Decreases related to prior year tax positions	(28,767		)	(21		)	(1,196		)
Increases related to current year tax positions	6,086			7,533			9,571
Decreases based on settlements with taxing authorities	—			—			—
Decreases due to lapse of statute limitations	(3,875		)	(9,447		)	(3,777		)
Foreign currency translation	(474		)	713			1,720
Ending Balance	$	64,361		$	87,637		$	87,359

The total amount of unrecognized tax benefits as of December 31, 2019, 2018 and 2017 that, if recognized, would affect the effective tax rate are $25.1 million, $33.3 million and $37.6 million.

We recognized $1.4 million, $1.6 million and $0.2 million of interest and penalties within Provision (benefit) for income taxes on our consolidated statements of operations for the years ended December 31, 2019, 2018 and 2017. Total accrued interest and penalties as of December 31, 2019 and 2018 were $4.9 million and $5.4 million, and are included within Other non-current liabilities in our consolidated balance sheets.

We are currently under IRS audit for the 2015, 2016 and 2017 tax years. Additionally, we are currently under audit by several foreign jurisdictions. It is likely that the examination phase of some of those audits will conclude in the next 12 months. There are many factors, including factors outside of our control, which influence the progress and completion of those audits. We recognized income tax benefits of $12.3 million, $7.9 million and $3.0 million for the years ended December 31, 2019, 2018 and 2017, as a result of new information that impacted our estimates of the amounts that are more-likely-than not of being realized upon settlement of the related tax positions and due to expirations of the applicable statutes of limitations. We are subject to claims for tax assessments by foreign jurisdictions, including a proposed assessment for $113.3 million, inclusive of estimated incremental interest from the original assessment. We believe that the assessment, which primarily relates to transfer pricing on transactions occurring in 2011, is without merit and we intend to vigorously defend ourselves in that matter. In addition to any potential increases in our liabilities for uncertain tax positions from the ultimate resolution of that assessment, we believe that it is reasonably possible that reductions of up to $20.4 million in unrecognized tax benefits may occur within the 12 months following December 31, 2019 upon closing of income tax audits or the expiration of applicable statutes of limitations.

In general, it is our practice and intention to reinvest the earnings of our non-U.S. subsidiaries in those operations. Additionally, while we did not incur the deemed repatriation tax, an actual repatriation from our non-U.S. subsidiaries could be subject to foreign and U.S. state income taxes. Aside from limited exceptions for which the related deferred tax liabilities recognized as of December 31, 2019 and 2018 are immaterial, we do not intend to distribute earnings of foreign subsidiaries for which we have an excess of the financial reporting basis over the tax basis of our investments and therefore have not recorded any deferred taxes related to such amounts. The actual tax cost resulting from a distribution would depend on income tax laws and circumstances at the time of distribution. Determination of the amount of unrecognized deferred tax liability related to the excess of the financial reporting basis over the tax basis of our foreign subsidiaries is not practical due to the complexities associated with the calculation.

Groupon uses a cost-sharing arrangement under which controlled members agree to share the costs and risks of developing intangible properties in accordance with their reasonably anticipated share of benefits from the intangibles. On July 24, 2018, the Ninth Circuit Court of Appeals issued an opinion in Altera Corp. v. Commissioner requiring related parties in an intercompany cost-sharing arrangement to share expenses related to stock-based compensation. This opinion reversed an earlier decision of the United States Tax Court. On August 7, 2018, the Ninth Circuit Court of Appeals withdrew its July 24, 2018 opinion. On June 7, 2019, the United States Court of Appeals for the Ninth Circuit reversed the Tax Court decision and ruled that stock-based compensation must be included in the shared pool of expenses. The ruling, which was outside the Circuit Court of Appeals for Groupon, did not have a material impact on our provision for income taxes for the year ended December 31, 2019.