Income Taxes

Income before income taxes and the income tax provision consisted of the following for the years ended December 31, 2017, 2016 and 2015 (in millions):



	Year Ended December 31,
	2017			2016			2015
Income before income taxes
Domestic	$	1,299		$	1,043		$	824
Foreign	1,218			986			829
	$	2,517		$	2,029		$	1,653
Income tax provision
Current tax expense:
Federal	$	266		$	258		$	250
State	92			5			46
Foreign	268			203			170
	$	626		$	466		$	466
Deferred tax expense (benefit):
Federal	$	(674	)	$	65		$	(7	)
State	33			76			(40		)
Foreign	(10		)	(27		)	(61		)
	$	(651	)	$	114		$	(108	)
Total income tax expense (benefit)	$	(25	)	$	580		$	358

A reconciliation of the statutory U.S. federal income tax rate to our effective income tax rate for the years ended December 31, 2017, 2016 and 2015 is as follows:



	Year Ended December 31,
	2017		2016		2015
Statutory federal income tax rate	35	%	35	%	35	%
State and local income taxes, net of federal benefit	3		3		2
Foreign tax rate differential	(7	)	(7	)	(7	)
Deferred tax benefit due to tax law changes	(30	)	(2	)	(4	)
Uncertain tax positions	—		—		(3	)
Other	(2	)	—		(1	)
Total provision for income taxes	(1	)%	29	%	22	%

The effective tax rates for the years ended December 31, 2017, 2016 and 2015 are lower than the federal statutory rate primarily due to favorable U.S. and U.K. tax law changes and favorable foreign income tax rate differentials, partially offset by state income taxes. Favorable foreign income tax rate differentials result primarily from lower income tax rates in the U.K. and various other lower tax jurisdictions as compared to the historical income tax rates in the U.S.

On December 22, 2017, the TCJA was signed into law (Note 2). The TCJA reduced the U.S. corporate income tax rate from 35% to 21% effective January 1, 2018. We are required to revalue our U.S. deferred tax assets and liabilities at the new federal corporate income tax rate as of the date of enactment of the TCJA and to include the rate change effect in the tax provision for the period ended December 31, 2017. As a result, we recognized a $764 million deferred tax benefit based on a reasonable estimate of the deferred tax assets and liabilities as of December 22, 2017. This significantly reduced the effective tax rate for the period ended December 31, 2017 in comparison to the effective tax rates for the last two comparable periods.

During the fourth quarter of 2015, the U.K. reduced the corporate income tax rate from 20% to 19% effective April 1, 2017 and to 18% effective April 1, 2020. During the third quarter of 2016, the U.K. further reduced their corporate income tax rate from 18% to 17% effective April 1, 2020. The reduction in the future U.S. and U.K. corporate income tax rates resulted in deferred tax benefits. The impact of the deferred tax benefits for the U.S. and U.K. corporate income tax rate reductions for the years ended December 31, 2017, 2016 and 2015 collectively lowered the effective tax rates by 30%, 2% and 4%, respectively, and resulted in deferred tax benefits of $764 million, $34 million and $60 million, respectively.

The decrease in the effective tax rate for the year ended December 31, 2017, from the comparable period in 2016, is primarily due to the deferred tax benefit associated with the TCJA and tax benefits associated with a divestiture in the second quarter of 2017, partially offset by the deferred tax benefit from the U.K. corporate income tax reduction in the third quarter of 2016, additional tax expense from an Illinois corporate income tax rate increase enacted in the third quarter of 2017, and an income tax expense increase due to a relatively higher U.S. mix of income in 2017. The increase in the effective tax rate for the year ended December 31, 2016, from the comparable period in 2015, is primarily due to the tax impact of foreign versus U.S. based pre-tax income, lower deferred tax benefits associated with the future U.K. income tax rate reductions, and greater favorable settlements with various taxing authorities in 2015, partially offset by a tax benefit from the early adoption of ASU 2016-09 in 2016.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. As a result of the enactment of TCJA on December 22, 2017, we revalued the U.S. deferred tax assets and liabilities at the new federal corporate income tax rate of 21%, for the period ended December 31, 2017. Therefore, the ending balance of the net deferred tax liability for that period is significantly lower compared to the prior periods’ balances. The following table summarizes the significant components of our deferred tax liabilities and assets as of December 31, 2017 and 2016 (in millions):



	December 31,
	2017			2016
Deferred tax assets:
Deferred and stock-based compensation	$	105		$	166
Pension	16			89
Liability reserve	37			52
Tax credits	12			64
Loss carryforward	147			127
Deferred revenue	39			38
Other	42			47
Total	398			583
Valuation allowance	(126		)	(122		)
Total deferred tax assets, net of valuation allowance	$	272		$	461
Deferred tax liabilities:
Property and equipment	$	(99	)	$	(113	)
Acquired intangibles	(2,453		)	(3,302		)
Total deferred tax liabilities	$	(2,552	)	$	(3,415	)
Net deferred tax liabilities	$	(2,280	)	$	(2,954	)
Reported as:
Net non-current deferred tax assets	$	3		$	4
Net non-current deferred tax liabilities	(2,283		)	(2,958		)
Net deferred tax liabilities	$	(2,280	)	$	(2,954	)

A reconciliation of the beginning and ending amount of deferred income tax valuation allowance is as follows for the years ended December 31, 2017, 2016 and 2015 (in millions):



	Year Ended December 31,
	2017			2016		2015
Beginning balance of deferred income tax valuation allowance	$	122		$	72	$	75
Increases charged to income tax expense	—			28		1
Charges against goodwill	15			22		1
Decreases	(11		)	—		(5		)
Ending balance of deferred income tax valuation allowance	$	126		$	122	$	72

We recognize valuation allowances on deferred tax assets if, based on the weight of the evidence, we believe that it is more likely than not that some or all of the deferred tax assets will not be realized. We recorded a valuation allowance for deferred tax assets of $126 million and $122 million as of December 31, 2017 and 2016, respectively. Increases charged to income tax expense primarily relate to deferred tax assets on foreign net operating and capital losses that we do not expect to be realizable in future periods. Increases charged against goodwill primarily relate to deferred tax assets arising on the 2017 acquisition of National Stock Exchange and the 2016 acquisition of a foreign branch that we do not expect to be realizable in future periods. Decreases for the year ended December 31, 2017 relate to the U.S. corporate income tax rate reduction from 35% to 21% and the net impact from divestitures of Trayport and IDMS. Decreases for the year ended December 31, 2015 relate to net operating loss carryforwards that we determined would be available to offset income in future periods.

As part of U.S. tax reform, the TCJA imposes a transition tax on certain accumulated foreign earnings aggregated across all non-U.S. subsidiaries, net of foreign deficits, as computed under U.S. tax principles. As we are in an aggregate net foreign deficit position for U.S. tax purposes, we are not liable for the transition tax.

Our non-U.S. subsidiaries had $4.5 billion in cumulative undistributed earnings as of December 31, 2017. This amount represents the post-income tax earnings under U.S. GAAP principles. The earnings from our non-U.S. subsidiaries are considered to be indefinitely reinvested. Accordingly, no provision for U.S. federal and state income taxes has been made in the accompanying consolidated financial statements. Further, a determination of the unrecognized deferred tax liability is not practicable.

Any future distribution by way of dividend of these non-U.S. earnings may subject us to both U.S. federal and state income taxes, as adjusted for non-U.S. tax credits, and withholding taxes payable to various non-U.S. countries. Such dividends may not be subject to U.S. federal tax under the TCJA and we will continue to monitor both federal and state interpretations, guidance and regulations concerning U.S. tax reform. We will continue to evaluate our indefinite reinvestment assertion in light of any further developments.

SAB 118 has provided guidance for companies that have not completed their accounting for the income tax effects of the TCJA in the period of enactment, allowing for a measurement period of up to one year after the enactment date to finalize the recording of the related tax impacts. As of December 31, 2017, we have not completed our accounting for the tax effects of the enactment of the TCJA, however, we have made a reasonable estimate of the effects on our deferred tax balances and in relation to the transition tax. In other cases, we have not been able to make a reasonable estimate and will continue to analyze the TCJA in order to finalize any related impacts within the measurement period. The FASB Staff also provided additional guidance to address the accounting for the effects of the provisions related to the taxation of GILTI, noting that companies should make an accounting policy election to recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or to include the tax expense in the year it is incurred. We have not completed our analysis of the effects of the GILTI provisions and will further consider the accounting policy election within the measurement period as provided for under SAB 118 (Note 2).

As of December 31, 2017 and 2016, we have gross U.S. federal net operating loss carryforwards of $89 million and $59 million, respectively, and gross state and local net operating loss carryforwards of $353 million and $293 million, respectively. The increases for U.S federal and state and local net operating loss carryforwards is primarily due to acquisitions during 2017. The majority of the new additions are not expected to be realizable in future periods and have related valuation allowance. The remaining carryforwards are available to offset future taxable income until they begin to expire in 2019. In addition, as of December 31, 2017 and 2016, we have gross foreign net operating loss carryforwards of $253 million and $116 million, respectively. The majority of gross foreign net operating losses are not expected to be realizable in future periods and have related valuation allowances.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows for the years ended December 31, 2017, 2016 and 2015 (in millions):



	Year Ended December 31,
	2017			2016			2015
Beginning balance of unrecognized tax benefits	$	112		$	107		$	145
Additions related to acquisitions	—			22			7
Additions based on tax positions taken in current year	10			9			9
Additions based on tax positions taken in prior years	9			—			34
Reductions based on tax positions taken in prior years	—			(1		)	(51		)
Reductions resulting from statute of limitation lapses	(8		)	(3		)	(12		)
Reductions related to settlements with taxing authorities	(8		)	(22		)	(25		)
Ending balance of unrecognized tax benefits	$	115		$	112		$	107

As of December 31, 2017 and 2016, the balance of unrecognized tax benefits which would, if recognized, affect our effective tax rate was $77 million and $76 million, respectively. It is reasonably possible, as a result of settlements of ongoing audits or statute of limitations expirations, unrecognized tax benefits could increase as much as $10 million and decrease as much as $39 million within the next twelve months. Of the $115 million in unrecognized tax benefits as of December 31, 2017, $69 million is recorded as other non-current liabilities and $47 million is recorded as other current liabilities in the accompanying consolidated balance sheet.

We recognize interest accrued on income tax uncertainties and accrued penalties as a component of income tax expense. For the years ended December 31, 2017, 2016 and 2015, we recognized $1 million, $1 million and $12 million, respectively, of income tax benefit for interest and penalties. Accrued interest and penalties were $35 million as of both December 31, 2017 and 2016. Of the $35 million in accrued interest and penalties as of December 31, 2017, $25 million is recorded as other non-current liabilities and $10 million is recorded as other current liabilities in the accompanying consolidated balance sheet.

We or one of our subsidiaries files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. The following table summarizes open tax years by major jurisdiction:



Jurisdiction	Open Tax Years
U.S. Federal	2014 - 2017
U.S. States	2007 - 2017
U.K.	2015 - 2017
Netherlands	2012 - 2017

Although the outcome of tax audits is always uncertain, we believe that adequate amounts of tax, including interest and penalties, have been provided for any adjustments expected to result from open tax years.