In December 2017, the U.S. government enacted the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act included significant changes to the U.S. corporate income tax system including: a federal corporate rate reduction from 35% to 21%; limitations on the deductibility of interest expense and executive compensation; creation of the base erosion anti-abuse tax (“BEAT”), a new minimum tax; and the transition of U.S. international taxation from a worldwide tax system to a modified territorial tax system. The change to a modified territorial tax system resulted in a one-time U.S. tax liability on those earnings which had not previously been repatriated to the U.S. (the “Transition Tax”), with future distributions not subject to U.S. federal income tax when repatriated.

During the year ended December 31, 2018, we completed our accounting for the income tax effects of the Tax Act. In the year ended December 31, 2018, we recognized $20 million of tax expense in addition to the $180 million of provisional tax expense recorded at December 31, 2017 for the enactment-date effects of the Tax Act, for a total of $200 million of net tax expense, which consists of $1.5 billion of net federal and state Transition Tax, the majority of which is payable in installments over eight years, $1.3 billion net benefit for the decrease in our deferred tax liability on unremitted foreign earnings, and $5 million net expense for remeasurement of our deferred tax assets/liabilities for the corporate rate reduction and changes in our valuation allowance.

In June 2019, the U.S. Court of Appeals for the Ninth Circuit reversed the July 2015 decision of the U.S. Tax Court in Altera Corp. v. Commissioner. In the June 2019 decision, the U.S. Court of Appeals held that a Treasury Regulation requiring stock-based compensation to be included in a qualified intercompany cost sharing arrangement was valid. We have reviewed this case and determined no adjustment is required to PayPal’s consolidated financial statements as a result of this ruling.

In connection with the distribution, eBay and PayPal entered into various agreements that govern the relationship between the parties going forward, including a tax matters agreement. The tax matters agreement was entered into on the distribution date. Under the tax matters agreement, eBay is generally responsible for all additional taxes (and will be entitled to all related refunds of taxes) imposed on eBay and its subsidiaries (including subsidiaries that were transferred to PayPal pursuant to the separation) arising after the distribution date with respect to the taxable periods (or portions thereof) ended on or prior to July 17, 2015, except for those taxes for which PayPal has reflected an unrecognized tax benefit in its financial statements on the distribution date.



	Year Ended December 31,
	2019			2018			2017
	(In millions)
Current:
Federal	$	132		$	180		$	1,522
State and local	47			32			36
Foreign	629			278			146
Total current portion of income tax expense	$	808		$	490		$	1,704
Deferred:
Federal	$	(107	)	$	(115	)	$	(1,304	)
State and local	(39		)	(35		)	(3		)
Foreign	(123		)	(21		)	8
Total deferred portion of income tax expense	(269		)	(171		)	(1,299		)
Income tax expense	$	539		$	319		$	405



	Year Ended December 31,
	2019		2018		2017
Federal statutory rate	21.0	%	21.0	%	35.0	%
State taxes, net of federal benefit	0.3	%	(0.1	)%	0.8	%
Foreign income taxed at different rates	(5.0	)%	(3.9	)%	(26.7	)%
Stock-based compensation expense	(3.9	)%	(4.1	)%	(0.8	)%
Tax credits	(2.4	)%	(2.1	)%	(1.4	)%
Change in valuation allowances	0.1	%	—	%	1.4	%
U.S. tax reform (the Tax Act)	—	%	0.9	%	8.2	%
Intra-group transfer of intellectual property	7.6	%	0.7	%	1.0	%
Other	0.3	%	1.0	%	0.9	%
Effective income tax rate	18.0	%	13.4	%	18.4	%

For the year ended December 31, 2019, the difference between the effective income tax rate and the U.S. federal statutory rate of 21% to income before income taxes is primarily the result of foreign income taxed at different rates and stock based compensation deductions, partially offset by tax expense related to the intra-group transfer of intellectual property. For the year ended December 31, 2018, the difference between the effective income tax rate and the federal statutory rate of 21% to income before income taxes is primarily the result of foreign income taxed at different rates and stock based compensation deductions. For the year ended December 31, 2017, the difference between the effective income tax rate and the federal statutory rate of 35% to income before income taxes is primarily the result of foreign income taxed at different rates, partially offset by the effects of the Tax Act discussed above.

Deferred tax assets and liabilities are recognized for the future tax consequences of differences between the carrying amounts of assets and liabilities and their respective tax basis using enacted tax rates in effect for the year in which the differences are expected to reverse. Significant deferred tax assets and liabilities consist of the following:



	As of December 31,
	2019			2018
	(In millions)
Deferred tax assets:
Net operating loss and credit carryforwards	$	182		$	196
Accruals and allowances	235			179
Lease liability	120			—
Partnership investment	8			9
Stock-based compensation	160			136
Net unrealized losses	5			8
Fixed assets and other intangibles	88			—
Total deferred tax assets	798			528
Valuation allowance	(184		)	(132		)
Net deferred tax assets	$	614		$	396
Deferred tax liabilities:
Unremitted foreign earnings	$	(17	)	$	(35	)
Fixed assets and other intangibles	—			(58		)
Acquired intangibles	(103		)	(167		)
Lease asset	(116		)	—
Net unrealized gains	(71		)	(21		)
Total deferred tax liabilities	(307		)	(281		)
Net deferred tax assets	$	307		$	115

The following table shows the deferred tax assets and liabilities within our consolidated balance sheets:



		As of December 31,
		2019			2018
	Balance Sheet Location	(In millions)
Total deferred tax assets (non-current)	Other assets	$	396		$	224
Total deferred tax liabilities (non-current)	Deferred tax liability and other long-term liabilities	(89		)	(109		)
Total net deferred tax assets		$	307		$	115

As of December 31, 2019, our federal, state, and foreign net operating loss carryforwards for income tax purposes were approximately $20 million, $403 million, and $273 million, respectively. The federal and state net operating loss carryforwards are subject to various limitations under Section 382 of the Code. If not utilized, the federal net operating loss carryforwards will begin to expire in 2022, and the state net operating loss carryforwards will begin to expire in 2020. Approximately $14 million of the foreign net operating loss carryforwards will begin to expire in 2021, $56 million will begin to expire in 2034, and $203 million has no expiration date and may be carried forward indefinitely. As of December 31, 2019, our federal and state tax credit carryforwards for income tax purposes were approximately $1 million and $205 million, respectively. The federal tax credits will begin to expire in 2028. Most of the state tax credits may be carried forward indefinitely.

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that all or some portion of the deferred tax assets will not be realized. We have elected the tax law ordering approach to assess the realizability of our net operating losses. During the years ended December 31, 2019, 2018, and 2017, we increased our valuation allowance by $52 million, $39 million, and $50 million, respectively. At December 31, 2019, 2018, and 2017, we maintained a valuation allowance with respect to certain of our deferred tax assets relating to operating losses in certain states and foreign jurisdictions and tax credits in certain states that we believe are not likely to be realized.

At December 31, 2019, none of our unremitted foreign earnings of approximately $6.6 billion are considered to be indefinitely reinvested. We have accrued $17 million of deferred U.S. state and foreign withholding taxes on the $6.6 billion of undistributed foreign earnings.

We benefit from tax rulings concluded in several different jurisdictions, most significantly Singapore and Luxembourg. These rulings result in significantly lower rates of taxation on certain classes of income and require various thresholds of investment and employment in those jurisdictions. We review our compliance on an annual basis to ensure we continue to meet our obligations under these tax rulings. These rulings resulted in tax savings of approximately $472 million, $465 million and $443 million in 2019, 2018, and 2017, respectively. The benefit of these tax rulings on our net income per share (diluted) was approximately $0.40, $0.39, and $0.36 in 2019, 2018, and 2017, respectively. In December 2019, a new tax ruling was concluded in Singapore. The new ruling takes effect after the current ruling expires at the end of 2020 and will be in effect from 2021 through 2030. In December 2019, the Luxembourg government passed legislation confirming that tax rulings granted before January 1, 2015 will no longer be binding after December 31, 2019.



	Year Ended December 31,
	2019			2018			2017
	(In millions)
Gross amounts of unrecognized tax benefits as of the beginning of the period	$	800		$	424		$	312
Increases related to prior period tax positions	97			120			61
Decreases related to prior period tax positions	(28		)	(6		)	(23		)
Increases related to current period tax positions	336			287			112
Settlements	(63		)	(20		)	(35		)
Statute of limitation expirations	(1		)	(5		)	(3		)
Gross amounts of unrecognized tax benefits as of the end of the period	$	1,141		$	800		$	424

In December 31, 2019, 2018, and 2017, we recognized net interest and penalties of $63 million, $57 million, and $13 million, respectively, related to uncertain tax positions in income tax expense. The amount of interest and penalties accrued as of December 31, 2019 and 2018 was approximately $171 million and $124 million, respectively.

We are subject to taxation in the U.S. and various state and foreign jurisdictions. We are currently under examination by certain tax authorities for the 2007 to 2018 tax years. The material jurisdictions in which we are subject to examination by tax authorities for tax years after 2006 primarily include the U.S. (Federal and California), France, Germany, India, Israel, and Singapore. During 2019, we settled various audits, including certain U.S. Federal and California audits. We believe that adequate amounts have been reserved for any adjustments that may ultimately result from our open examinations.

Although the timing of the resolution of these audits is uncertain, we do not expect the total amount of unrecognized tax benefits as of December 31, 2019 will materially change in the next 12 months. However, given the number of years remaining subject to examination and the number of matters being examined, we are unable to estimate the full range of possible adjustments to the balance of gross unrecognized tax benefits.