14. Income Taxes

Nielsen provides for income taxes utilizing the asset and liability method of accounting for income taxes. Under this method, deferred income taxes are recorded to reflect the tax consequences in future years of differences between the tax basis of assets and liabilities and their financial reporting amounts at each balance sheet date, based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. If it is determined that it is more likely than not that future tax benefits associated with a deferred tax asset will not be realized, a valuation allowance is provided. The effect on deferred tax assets and liabilities of a change in the tax rates is recognized in the consolidated statements of operations as an adjustment to income tax expense in the period that includes the enactment date.

The Company records a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. Such tax positions are, based solely on their technical merits, more likely than not to be sustained upon examination by taxing authorities and reflect the largest amount of benefit, determined on a cumulative probability basis that is more likely than not to be realized upon settlement with the applicable taxing authority with full knowledge of all relevant information. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits in income tax expense.

The components of income from continuing operations before income taxes and equity in net income of affiliates, were:

	Year Ended December 31,
(IN MILLIONS)	2016			2015		2014
UK (2016-2015), Dutch (2014)	$	(3	)	$	16	$	17
Non-UK (2016-2015), Non-Dutch (2014)		819			945		604
Income from continuing operations before income taxes and equity in net income of affiliates	$	816		$	961	$	621

The above amounts for UK and non-UK or Dutch and non-Dutch activities were determined based on the location of the taxing authorities.

The provision for income taxes attributable to the income from continuing operations before income taxes and equity in net income of affiliates consisted of:

	Year Ended December 31,
(IN MILLIONS)	2016		2015			2014
Current:
UK (2016-2015), Dutch (2014)	$	—	$	(6	)	$	4
Non-UK (2016-2015), Non-Dutch (2014).		221		176			127
		221		170			131
Deferred:
UK (2016-2015), Dutch (2014)		1		(1	)		1
Non-UK (2016-2015), Non-Dutch (2014)		87		214			104
		88		213			105
Total	$	309	$	383		$	236

The Company’s provision for income taxes for the years ended December 31, 2016, 2015 and 2014 was different from the amount computed by applying the statutory UK or Dutch federal income tax rates to the underlying income from continuing operations before income taxes and equity in net income of affiliates as a result of the following:

		Year Ended December 31,
(IN MILLIONS)	2016			2015			2014
Income from continuing operations before income taxes and equity in net income of affiliates	$	816		$	961		$	621
UK (2016-2015), Dutch (2014) statutory tax rate		20.00	%		20.25	%		25.0	%
Provision for income taxes at the UK (2016-2015), Dutch (2014) statutory rate	$	163		$	195		$	155
Tax impact on distributions from foreign subsidiaries		24			(5	)		4
Effect of operations in non-UK and non-Dutch jurisdictions		71			74			19
Tax impact of global licensing arrangements		74			80			84
U.S. state and local taxation		30			40			21
Withholding and other taxation		39			37			38
Effect of global financing activities		(71	)		(82	)		(84	)
Changes in estimates for uncertain tax positions		(9	)		8			(1	)
Changes in valuation allowances		(29	)		17			(21	)
Effect of change in deferred tax rates		1			3			2
Stock-based compensation		(19	)		—			—
Other, net		35			16			19
Total provision for income taxes	$	309		$	383		$	236
Effective tax rate		37.9	%		39.8	%		38.0	%

The components of current and non-current deferred income tax assets/(liabilities) were:

(IN MILLIONS)	December 31, 2016			December 31, 2015
Deferred tax assets (on balance):
Net operating loss carryforwards	$	179		$	181
Interest expense limitation		654			734
Employee benefits		91			72
Tax credit carryforwards		130			142
Stock-based payments		32			41
Accrued expenses		57			39
Other assets		29			55
		1,172			1,264
Valuation allowances		(112	)		(144	)
Deferred tax assets, net of valuation allowances		1,060			1,120
Deferred tax liabilities (on balance):
Intangible assets		(1,591	)		(1,640	)
Fixed asset depreciation		(42	)		(49	)
Computer software		(301	)		(280	)
Deferred revenues/costs		—			(10	)
Financial instruments		(14	)		(6	)
Unrealized gain on investments		(73	)		(73	)
Other liabilities		(87	)		(58	)
		(2,108	)		(2,116	)
Net deferred tax liability	$	(1,048	)	$	(996	)

Realization of deferred tax assets is based, in part, on Nielsen’s judgment and various factors including reversal of deferred tax liabilities, Nielsen’s ability to generate future taxable income in jurisdictions where such assets have arisen and potential tax planning strategies. Valuation allowances are recorded in order to reduce the deferred tax assets to the amount expected to be realized in the future.

At December 31, 2016 and 2015 the Company had net operating loss carryforwards of approximately $788 million and $807 million, respectively, which began to expire in 2017. In addition, the Company had tax credit carryforwards of approximately $130 million and $157 million at December 31, 2016 and 2015, respectively, which began to expire in 2017.

In certain jurisdictions, the Company has operating losses and other tax attributes that, due to the uncertainty of achieving sufficient profits to utilize these operating loss carryforwards and tax credit carryforwards, the Company currently believes it is more likely than not that a portion of these losses will not be realized. Therefore, the Company has a valuation allowance of approximately $99 million and $124 million at December 31, 2016 and 2015, respectively, related to these net operating loss carryforwards and tax credit carryforwards. In addition, the Company has valuation allowances of $13 million and $20 million at December 31, 2016 and 2015, respectively, on deferred tax assets related to other temporary differences, which the Company currently believes will not be realized.

As a consequence of the significant restructuring of the ownership of the Nielsen non-U.S. subsidiaries in 2007 and 2008 the Company has determined that as of December 31, 2016 no income taxes are required to be provided for on the approximately $3.0 billion, which is the excess of the book value of its investment in non-U.S. subsidiaries over the corresponding tax basis. Certain of these differences can be eliminated in a tax neutral manner at a future date.

At December 31, 2016 and 2015, the Company had gross uncertain tax positions of $432 million and $461 million, respectively. The Company has also accrued interest and penalties associated with these unrecognized tax benefits as of December 31, 2016 and 2015 of $33 million and $34 million, respectively. Estimated interest and penalties related to the underpayment of income taxes is classified as a component of benefit (provision) for income taxes in the Consolidated Statement of Operations. It is reasonably possible that a reduction in a range of $12 million to $20 million of uncertain tax positions may occur within the next twelve months as a result of projected resolutions of worldwide tax disputes and expirations of statute of limitations in various jurisdictions.

A reconciliation of the beginning and ending amount of gross uncertain tax positions is as follows:

(IN MILLIONS)	December 31, 2016			December 31, 2015			December 31, 2014
Balance as of the beginning of period	$	461		$	452		$	475
Additions for current year tax positions		15			24			14
Additions for tax positions of prior years		7			14			12
Reductions for lapses of statute of limitations		(6	)		(15	)		(12	)
Reductions for tax positions of prior years		(45	)		(14	)		(37	)
Balance as of the end of the period	$	432		$	461		$	452

If the balance of the Company’s uncertain tax positions is sustained by the taxing authorities in the Company’s favor, the reversal of the entire balance would reduce the Company’s effective tax rate in future periods.

The Company files numerous consolidated and separate income tax returns in the U.S. Federal jurisdiction and in many state and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. Federal income tax examinations for 2006 and prior periods. In addition, the Company has subsidiaries in various states, provinces and countries that are currently under audit for years ranging from 1998 through 2015.