NOTE 9: INCOME TAXES

The following table presents a summary of our domestic and foreign income before income taxes:

	Year Ended December 31,
	2014		2013		2012
	(in millions)
Domestic	$	146	$	129	$	133
Foreign		176		155		149
Total	$	322	$	284	$	282

The following table presents a summary of the components of our provision for income taxes:

	Year Ended December 31,
	2014			2013			2012
	(in millions)
Current income tax expense:
Federal	$	93		$	48		$	56
State		14			9			6
Foreign		6			17			30
Current income tax expense		113			74			92
Deferred income tax (benefit) expense:
Federal		(12	)		6			(3	)
State		(1	)		1			—
Foreign		(4	)		(2	)		(2	)
Deferred income tax (benefit) expense:		(17	)		5			(5	)
Provision for income taxes	$	96		$	79		$	87

As of December 31, 2014, our current income tax receivable and income tax payable balances represent amounts that we will receive and pay, respectively, to the Internal Revenue Service and other tax authorities.

Our deferred tax assets and deferred tax liabilities as of December 31, 2014 and 2013 are as follows:

	December 31,
	2014			2013
	(in millions)
Deferred tax assets:
Stock-based compensation	$	43		$	30
Net operating loss carryforwards		34			18
Provision for accrued expenses		13			7
Deferred rent		5			—
Build-to-suit lease		26			—
Foreign advertising spend		9			—
Other		5			4
Total deferred tax assets	$	135		$	59
Less: valuation allowance		(19	)		(13	)
Net deferred tax assets	$	116		$	46
Deferred tax liabilities:
Intangible assets	$	(88	)	$	(32	)
Property and equipment		(25	)		(18	)
Prepaid expenses		(4	)		(2	)
Lease financing obligation		(26	)		—
Other		(1	)		(2	)
Total deferred tax liabilities	$	(144	)	$	(54	)
Net deferred tax liability	$	(28	)	$	(8	)

At December 31, 2014, we had federal, state and foreign net operating loss carryforwards (“NOLs”) of approximately $42 million, $36 million and $84 million. If not utilized, the federal and state NOLs will expire at various times between 2020 and 2034 and the foreign NOLs will expire at various times between 2015 and 2034.

At December 31, 2014, we had a valuation allowance of $19 million primarily related to foreign net operating loss carryforwards for which it is more likely than not that the tax benefit will not be realized. This amount represented an overall increase of $6 million over the amount recorded as of December 31, 2013. The increase is primarily due to additional foreign advertising spend, offset by expiring foreign net operating losses. Except for certain deferred tax assets, we expect to realize all of our deferred tax assets based on a strong history of earnings in the US and other jurisdictions, as well as future reversals of taxable temporary differences.

We have not provided for deferred U.S. income taxes on undistributed earnings of our foreign subsidiaries that we intend to reinvest permanently outside the United States; the total amount of such earnings as of December 31, 2014 was $630 million. Should we distribute or be treated under certain U.S. tax rules as having distributed earnings of foreign subsidiaries in the form of dividends or otherwise, we may be subject to U.S. income taxes. Due to complexities in tax laws and various assumptions that would have to be made, it is not practicable at this time to estimate the amount of unrecognized deferred U.S. taxes on these earnings.

A reconciliation of the provision for income taxes to the amounts computed by applying the statutory federal income tax rate to income before income taxes is as follows:

	Year Ended December 31,
	2014			2013			2012
	(in millions)
Income tax expense at the federal statutory rate of 35%	$	113		$	100		$	99
Foreign rate differential		(49	)		(41	)		(25	)
State income taxes, net of effect of federal tax benefit		13			8			5
Unrecognized tax benefits and related interest		14			9			5
Non-deductible transaction costs		1			—			—
Change in valuation allowance		5			2			2
Other, net		(1	)		1			1
Provision for income taxes	$	96		$	79		$	87

During 2011, the Singapore Economic Development Board accepted our application to receive a tax incentive under the International Headquarters Award. This incentive provides for a reduced tax rate on qualifying income of 5% as compared to Singapore’s statutory tax rate of 17% and is conditional upon our meeting certain employment and investment thresholds. This agreement is set to expire on June 30, 2016, with the ability to extend for another five years. This benefit resulted in a decrease to the 2014 tax provision of $6 million or an incremental $0.04 to Diluted EPS for 2014.

By virtue of previously filed consolidated income tax returns filed with Expedia, we are currently under an IRS audit for the 2009 and 2010 tax years, and have various ongoing state income tax audits. We are separately under audit for the 2012 tax year. As of December 31, 2014, no material assessments have resulted from these audits. These audits include questioning of the timing and the amount of income and deductions and the allocation of income among various tax jurisdictions. Annual tax provisions include amounts considered sufficient to pay assessments that may result from the examination of prior year returns. We are no longer subject to tax examinations by tax authorities for years prior to 2007.

A reconciliation of the beginning and ending amount of gross unrecognized tax benefits (excluding interest and penalties) is as follows:

	December 31,
	2014		2013			2012
	(in millions)
Balance, beginning of year	$	36	$	24		$	13
Increases to tax positions related to the current year		13		12			12
Increases to tax positions related to the prior year		18		4			—
Reductions due to lapsed statute of limitations		—		—			—
Decreases to tax positions related to the prior year		—		(4	)		—
Settlements during current year		—		—			(1	)
Balance, end of year	$	67	$	36		$	24

As of December 31, 2014, we had $67 million of unrecognized tax benefits, net of interest, which is classified as long-term and included in other long-term liabilities. Of this amount, approximately $65 million would affect the effective tax rate if recognized, while $2 million would affect goodwill. We recognize interest and penalties related to unrecognized tax benefits in income tax expense. As of December 31, 2014 and 2013, total gross interest accrued was $4 million and $2 million, respectively. We estimate that approximately $1 million will be paid within the next year related to audits.