Income Taxes

12 Months Ended

Dec. 31, 2019

7. Income Taxes

On December 22, 2017, the TCJA was signed into law. The TCJA contains significant changes to the U.S. corporate income tax system, including a reduction of the federal corporate income tax rate from 35% to 21%, a limitation of the tax deduction for interest expense to 30% of adjusted taxable income (as defined in the TCJA), base erosion and anti-avoidance tax (“BEAT”), foreign-derived intangible income (“FDII”) and global intangible low-taxed income (“GILTI”), one-time taxation of offshore earnings at reduced rates in connection with the transition of U.S. international taxation from a worldwide tax system to a territorial tax system (“transition tax”), and elimination of U.S. tax on dividends from foreign subsidiaries (subject to certain important exceptions).

At December 31, 2017, we recorded a provisional net discrete tax cost associated with the TCJA of $47 million. The provisional amounts recorded in 2017 related primarily to the transition tax and were partially offset by the remeasurement of deferred taxes. Upon further analysis of certain aspects of the TCJA and subsequently published administrative guidance, and refinement of our calculations, during the year ended December 31, 2018, we reduced the provisional amount by $27 million.

The Tax Receivable Agreement ("TRA") provides for future payments to Pre-IPO Existing Stockholders (as defined below) for cash savings for U.S. federal income tax realized as a result of the utilization of Pre-IPO Tax Assets (as defined below). These cash savings would be realized at the enacted statutory tax rate effective in the year of utilization. Primarily as a result of the reduction in the U.S. corporate income tax rate, we recorded a $58 million provisional reduction to the liability at December 31, 2017. In 2018, we finalized the 2017 U.S. federal income tax return and utilized additional Pre-IPO Tax Assets in the return, primarily as a result of electing to utilize our NOLs against our one-time transition tax income. As a result of the change in estimated NOL utilization at the higher corporate income tax rate in 2017 we recorded an increase to our liability of $5 million related to the TRA, which is reflected in our 2018 income from continuing operations before taxes. During 2019, we decreased the TRA liability by $3 million as a result of certain audit and transfer pricing adjustments recorded during the period, which is reflected in our 2019 income from continuing operations before taxes.

The components of pretax income from continuing operations, generally based on the jurisdiction of the legal entity, were as follows:


	Year Ended December 31,
	2019		2018		2017
Components of pre-tax income:
Domestic	$	30,960	$	190,291	$	199,685
Foreign	168,678		208,122		177,928
	$	199,638	$	398,413	$	377,613

The provision for income taxes relating to continuing operations consists of the following:


	Year Ended December 31,
	2019		2018		2017
Current portion:
Federal	$	4,488	$	(49,518)	$	50,829
State and Local	3,781		4,168		2,388
Non U.S.	49,982		59,743		26,060
Total current	58,251		14,393		79,277
Deferred portion:
Federal	(14,215)		55,502		47,372
State and Local	(1,692)		(4,812)		(6,178)
Non U.S.	(7,018)		(7,591)		7,566
Total deferred	(22,925)		43,099		48,760
Total provision for income taxes	$	35,326	$	57,492	$	128,037

The provision for income taxes relating to continuing operations differs from amounts computed at the statutory federal income tax rate as follows:


	Year Ended December 31,
	2019		2018		2017
Income tax provision at statutory federal income tax rate	$	41,924	$	83,667	$	132,165
State income taxes, net of federal benefit	2,223		(42)		(1,727)
Impact of non U.S. taxing jurisdictions, net	14,078		5,591		(13,492)

Impact of U.S. TCJA⁽¹⁾	—		(26,730)		46,563
Employee stock based compensation	8,380		3,884		(2,849)
Research tax credit	(28,593)		(9,818)		(8,777)
Tax receivable agreement (TRA)⁽²⁾	(536)		1,019		(20,861)
Other, net	(2,150)		(79)		(2,985)
Total provision for income taxes	$	35,326	$	57,492	$	128,037

___________________________

(1)In 2018, amount includes SAB 118 adjustments for deferred taxes and foreign tax effects. In 2017, amount includes $48 million of transition tax expense, and the remainder is the net benefit on cumulative deferred taxes.

(2)Amount includes adjustments to the TRA, which are not taxable.

The components of our deferred tax assets and liabilities are as follows:


	As of December 31,
	2019		2018
Deferred tax assets:
Accrued expenses	$	7,547	$	8,638
Employee benefits other than pension	23,272		34,147
Lease liabilities	9,415		—
Deferred revenue	30,715		22,351
Pension obligations	27,407		26,821
Tax loss carryforwards	54,556		70,340
Incentive consideration	6,722		9,456
Tax credit carryforwards	16,136		31,467
Suspended loss	14,635		14,474
Other	5,916		8,008
Total deferred tax assets	196,321		225,702
Deferred tax liabilities:
Right of use assets	(9,261)		—
Depreciation and amortization	(7,059)		(13,298)
Software developed for internal use	(66,918)		(103,631)
Intangible assets	(120,528)		(122,921)
Unrealized gains and losses	(18,778)		(21,840)
Non U.S. operations	(13,789)		(9,355)
Investment in partnership	(7,306)		(6,794)
Total deferred tax liabilities	(243,639)		(277,839)
Valuation allowance	(38,272)		(59,294)
Net deferred tax (liability)	$	(85,590)	$	(111,431)

In the first quarter of 2018, we adopted ASC 606, which replaced ASC 605, using the modified retrospective approach. As a result of the adoption of ASC 606, we recorded a cumulative effect adjustment as of January 1, 2018 to decrease our opening retained deficit as of January 1, 2018 by approximately $102 million with a corresponding increase to deferred tax liabilities of $24 million to recognize the increase to income taxes payable in the future related to revenue recognition.

As a result of the enactment of the TCJA, we recorded a one-time transition tax on the undistributed earnings of our foreign subsidiaries. We do not consider undistributed foreign earnings to be indefinitely reinvested as of December 31, 2019, with certain limited exceptions and have recorded corresponding deferred taxes. We consider the undistributed capital investments in our foreign subsidiaries to be indefinitely reinvested as of December 31, 2019, and have not provided deferred taxes on any outside basis differences. Determination of the amount of unrecognized deferred tax liability, if any, related to indefinitely reinvested capital investments is not practicable.

As of December 31, 2019, we have U.S. federal net operating loss carryforwards ("NOLs") of approximately $32 million, primarily related to the acquisition of Radixx, which will expire between 2022 and 2039. As a result of the acquisition of Radixx and other prior business combinations, all of the U.S. federal NOLs are subject to the annual limit on the ability of a corporation to use certain tax attributes (as defined in Section 382 of the Code). However, we expect that Section 382 will not limit our ability to fully realize the tax benefits. We have state NOLs of $7 million which will expire between 2020 and 2038 and state research tax credit carryforwards of $18 million which will expire between 2023 and 2039. We have $165 million of NOL carryforwards related to certain non-U.S. taxing jurisdictions that are primarily from countries with indefinite carryforward periods.

We regularly review our deferred tax assets for realizability and a valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon future taxable income during the periods in which those temporary differences become deductible. In assessing the need for a valuation allowance for our deferred tax assets, we considered all available positive and negative evidence, including our ability to carry back NOLs to prior periods, the reversal of deferred tax liabilities, tax planning strategies and projected future taxable income. We maintained a state NOL valuation allowance of $5 million and $4 million as of December 31, 2019 and 2018, respectively. For non-U.S. deferred tax assets of lastminute.com and other subsidiaries, we maintained a valuation allowance of $33 million and $55 million as of December 31, 2019 and 2018, respectively. We reassess these assumptions regularly which could cause an increase or decrease to the valuation allowance. This assessment could result in an increase or decrease in the effective tax rate which could materially impact our results of operations.

It is our policy to recognize penalties and interest accrued related to income taxes as a component of the provision for income taxes from continuing operations. During the years ended December 31, 2019, 2018 and 2017, we recognized a benefit of $7 million, expense of $1 million and expense of $1 million, respectively. As of December 31, 2019 and 2018, we had a liability, including interest and penalty, of $81 million and $93 million, respectively, for unrecognized tax benefits, including cumulative accrued interest and penalties of approximately $16 million and $23 million, respectively.

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


	Year Ended December 31,
	2019		2018		2017
Balance at beginning of year	$	70,327	$	74,388	$	49,331
Additions for tax positions taken in the current year	5,149		4,450		5,279
Additions for tax positions of prior years	12,679		2,612		21,669
Additions for tax positions from acquisitions	1,294		—		—
Reductions for tax positions of prior years	(19,611)		(5,831)		—
Reductions for tax positions of expired statute of limitations	(1,192)		(3,143)		(1,891)
Settlements	(4,001)		(2,149)		—
Balance at end of year	$	64,645	$	70,327	$	74,388

We present unrecognized tax benefits as a reduction to deferred tax assets for NOLs, similar tax loss or a tax credit carryforward that is available to settle additional income taxes that would result from the disallowance of a tax position, presuming disallowance at the reporting date. The amount of unrecognized tax benefits that were offset against deferred tax assets was $48 million, $55 million and $53 million as of December 31, 2019, 2018, and 2017 respectively.

As of December 31, 2019, 2018, and 2017, the amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate was $48 million, $51 million and $70 million, respectively. We believe that it is reasonably possible that $15 million in unrecognized tax benefits may be resolved in the next twelve months.

In the normal course of business, we are subject to examination by taxing authorities throughout the world. The following table summarizes, by major tax jurisdiction, our tax years that remain subject to examination by taxing authorities:


Tax Jurisdiction			Years Subject to Examination
United Kingdom			2013 - forward
Singapore			2015 - forward
Texas			2015 - forward
Uruguay			2014 - forward
U.S. Federal			2014 - forward

We currently have ongoing audits in India (2003-2016) and various other jurisdictions. We do not expect that the results of these examinations will have a material effect on our financial condition or results of operations. With few exceptions, we are no longer subject to income tax examinations by tax authorities for years prior to 2009.

Tax Receivable Agreement

Immediately prior to the closing of our initial public offering, we entered into the TRA that provides the stockholders and equity award holders that were our stockholders and equity award holders, respectively, immediately prior to the closing of our initial public offering (collectively, the "Pre-IPO Existing Stockholders") the right to receive future payments from us. The future payments will equal 85% of the amount of cash savings, if any, in U.S. federal income tax that we and our subsidiaries realize as a result of the utilization of certain tax assets attributable to periods prior to our initial public offerings, including NOLs, capital losses and the ability to realize tax amortization of certain intangible assets (collectively, the "Pre-IPO Tax Assets"). Primarily due to the enactment of the Tax Cuts and Jobs Act (the "TCJA"), which reduced the U.S. corporate income tax rate, we recorded a total net reduction in the TRA liability of $55 million across the years ended December 31, 2018 and 2017. Additionally, there was another reduction of $3 million related to certain audit and transfer pricing adjustments recorded in 2019. The TRA payments accrue interest in accordance with the terms of the TRA subsequent to the tax year in which the tax benefits are realized through the date of the benefit payment. We made payments, including interest, of $72 million in January 2020, $30 million in April 2019, and $74 million, $60 million and $101 million in January 2019, 2018 and 2017, respectively. In December 2019, we exercised our right under the terms of the TRA to accelerate our remaining payments under the TRA and make an early termination payment of $1 million to the Pre-IPO Existing Shareholders, which was included in the January 2020 payment of $72 million described above. As a result, no future payments are required to be made to the Pre-IPO Existing Stockholders under the TRA.