INCOME TAXES

The following is a summary of the components of the Company's income before income taxes for the years ended December 31 (in thousands):



	2016		2015		2014
U.S.	$	182,178	$	165,848	$	188,963
Non-U.S.	106,253		106,363		85,720
Income before income taxes	$	288,431	$	272,211	$	274,683

The expense for income taxes on the above income consists of the following components (in thousands):



	2016			2015			2014
Current tax expense:
U.S. federal	$	58,616		$	48,801		$	49,281
State and local	11,292			10,300			5,135
Foreign	27,536			23,225			16,653
Total current	97,444			82,326			71,069
Deferred tax (benefit) expense:
U.S. federal	(61		)	(884		)	(6,670		)
State and local	(349		)	(702		)	6,477
Foreign	(1,626		)	1,550			779
Total deferred	(2,036		)	(36		)	586
Total current and deferred	95,408			82,290			71,655
Benefit (expense) relating to interest rate swaps used to increase (decrease) equity	(1,113		)	893			(1,442		)
Benefit from stock transactions with employees used to increase equity	52			13,960			18,704
Benefit (expense) relating to defined-benefit pension adjustments used to increase (decrease) equity	502			(567		)	2,000
Total tax expense	$	94,849		$	96,576		$	90,917

Long-term deferred tax assets and liabilities are comprised of the following (in thousands):



	December 31,
	2016			2015
Accrued liabilities	$	62,439		$	67,888
Loss and credit carryforwards	7,766			8,522
Assets relating to equity compensation	25,569			22,686
Other assets	6,652			6,712
Gross deferred tax assets	102,426			105,808
Property, equipment, and leasehold improvements	(11,796		)	(9,904		)
Intangible assets	(43,548		)	(55,275		)
Prepaid expenses	(32,971		)	(28,535		)
Other liabilities	(7,925		)	(7,244		)
Gross deferred tax liabilities	(96,240		)	(100,958		)
Valuation allowance	(1,431		)	(1,828		)
Net deferred tax assets	$	4,755		$	3,022

Net deferred tax assets and net deferred tax liabilities were $27.3 million and $22.5 million as of December 31, 2016, respectively, and $26.4 million and $23.4 million as of December 31, 2015, respectively, and are reported in Other assets and Other liabilities in the Consolidated Balance Sheets. Management has concluded it is more likely than not that the reversal of deferred tax liabilities and results of future operations will generate sufficient taxable income to realize the deferred tax assets, net of the valuation allowance at December 31, 2016.

The valuation allowances of $1.4 million as of December 31, 2016 and $1.8 million as of 2015, primarily relate to net operating losses which are not likely to be realized.

As of December 31, 2016, the Company had state and local tax net operating loss carryforwards of $2.4 million, of which $0.1 million expire within one to five years and $2.3 million expire within six to fifteen years. The Company also had state tax credits of $1.9 million, a majority of which will expire in five to six years years. As of December 31, 2016, the Company had non-U.S. net operating loss carryforwards of $19.5 million, of which $0.9 million expire over the next 20 years and $18.6 million can be carried forward indefinitely. In addition, the Company also had foreign tax credit carryforwards of $0.6 million, the majority of which will expire at the end of 2027. These amounts have been reduced for associated unrecognized tax benefits, consistent with FASB ASU No. 2013-11.

The differences between the U.S. federal statutory income tax rate and the Company’s effective tax rate on income before income taxes for the years ended December 31 follow:



	2016		2015		2014
Statutory tax rate	35.0	%	35.0	%	35.0	%
State income taxes, net of federal benefit	2.4		3.3		3.1
Effect of non-U.S. operations	(5.9	)	(6.5	)	(6.3	)
Record (release) reserve for tax contingencies	3.2		1.7		1.8
Excess tax benefits from stock based compensation	(3.8	)	—		—
Nondeductible acquisition costs	2.6		0.8		0.1
Record (release) valuation allowance	(0.2	)	0.5		—
Other items, net	(0.4	)	0.7		(0.6	)
Effective tax rate	32.9	%	35.5	%	33.1	%

As disclosed in Note 1 — Business and Significant Accounting Policies, the Company adopted FASB ASU No. 2016-09 in the third quarter of 2016. The effect of the adoption reduced the provision for income taxes by $10.0 million for the twelve months ended December 31, 2016.

For 2016 and 2015, state income taxes, net of federal tax benefit, include approximately $(0.3) million and $1.6 million, respectively, of benefit/(expense) relating to economic development tax credits associated with the renovation of the Company’s Stamford headquarters facility.

In July 2015, the United States Tax Court (the “Court”) issued an opinion relating to the treatment of stock-based compensation expense in an inter-company cost-sharing arrangement. In its opinion, the Court held that affiliated companies may exclude stock-based compensation expense from their cost-sharing arrangement. The Internal Revenue Service is appealing the decision. Because of uncertainty related to the final resolution of this litigation and the recognition of potential benefits to the Company, the Company has not recorded any financial statement benefit associated with this decision. The Company will monitor developments related to this case and the potential impact of those developments on the Company’s consolidated financial statements

As of December 31, 2016 and December 31, 2015, the Company had unrecognized tax benefits of $37.1 million and $25.9 million, respectively. The increase is primarily attributable to positions taken with respect to the exclusion of stock-based compensation expense from the Company's cost-sharing arrangement and certain state refund claims. The unrecognized tax benefits as of December 31, 2016 related primarily to the utilization of certain tax attributes, state income tax positions, the ability to realize certain refund claims, and intercompany transactions. It is reasonably possible that unrecognized tax benefits will be decreased by $1.7 million within the next 12 months due to anticipated closure of audits and the expiration of certain statutes of limitation.

Included in the balance of unrecognized tax benefits at December 31, 2016 are potential benefits of $33.4 million that if recognized would reduce the effective tax rate on income from continuing operations. Also included in the balance of unrecognized tax benefits as of December 31, 2016 are potential benefits of $3.7 million that, if recognized, would result in adjustments to other tax accounts, primarily deferred taxes.

The following is a reconciliation of the beginning and ending amount of unrecognized tax benefits, excluding interest and penalties, for the years ended December 31 (in thousands):



	2016			2015
Beginning balance	$	25,911		$	20,645
Additions based on tax positions related to the current year	7,086			5,150
Additions for tax positions of prior years	6,443			7,839
Reductions for tax positions of prior years	(496		)	(3,880		)
Reductions for expiration of statutes	(1,006		)	(2,287		)
Settlements	(544		)	(960		)
Change in foreign currency exchange rates	(295		)	(596		)
Ending balance	$	37,099		$	25,911

The Company accrues interest and penalties related to unrecognized tax benefits in its income tax provision. As of December 31, 2016 and 2015, the Company had $4.3 million and $3.7 million, respectively, of accrued interest and penalties related to unrecognized tax benefits. These amounts are in addition to the unrecognized tax benefits disclosed above. The total amount of interest and penalties recognized in the income tax provision for both the years ended December 31, 2016 and December 31, 2015 was $0.9 million.

The number of years with open statutes of limitation varies depending on the tax jurisdiction. The Company’s statutes are open with respect to the U.S. federal jurisdiction for 2013 and forward, and India for 2003 and forward. For other major taxing jurisdictions including the U.S. states, the United Kingdom, Canada, Japan, France, and Ireland, the Company's statutes vary and are open as far back as 2009.

Under U.S. GAAP rules, no provision for income taxes that may result from the remittance of earnings held overseas is required if the Company has the ability and intent to indefinitely reinvest such funds overseas. Our current plans do not demonstrate a need to repatriate these undistributed earnings to fund our U.S. operations or otherwise satisfy the liquidity needs of our U.S operations. We intend to reinvest these earnings in our non-U.S. operations, except in instances in which the repatriation of these earnings would result in minimal additional tax. As a result, the Company has not recognized income tax expense that may result from the remittance of these earnings. The accumulated undistributed earnings of non-U.S. subsidiaries were approximately $340.0 million as of December 31, 2016. The income tax that would be payable if such earnings were not indefinitely invested is estimated at $69.0 million.