INCOME TAXES

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



	2017			2016		2015
U.S.	$	(135,757	)	$	182,178	$	165,848
Non-U.S.	7,940			106,253		106,363
(Loss) income before income taxes	$	(127,817	)	$	288,431	$	272,211

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



	2017			2016			2015
Current tax expense:
U.S. federal	$	48,339		$	58,616		$	48,801
State and local	434			11,292			10,300
Foreign	38,602			27,536			23,225
Total current	87,375			97,444			82,326
Deferred tax (benefit) expense:
U.S. federal	(176,046		)	(61		)	(884		)
State and local	(14,363		)	(349		)	(702		)
Foreign	(25,898		)	(1,626		)	1,550
Total deferred	(216,307		)	(2,036		)	(36		)
Total current and deferred	(128,932		)	95,408			82,290
Benefit (expense) relating to interest rate swaps used to increase (decrease) equity	(2,477		)	(1,113		)	893
Benefit from stock transactions with employees used to increase equity	46			52			13,960
Benefit (expense) relating to defined-benefit pension adjustments used to increase (decrease) equity	267			502			(567		)
Total tax (benefit) expense	$	(131,096	)	$	94,849		$	96,576

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



	December 31,
	2017			2016
Accrued liabilities	$	80,557		$	62,439
Loss and credit carryforwards	59,502			7,766
Assets relating to equity compensation	24,874			25,569
Other assets	30,236			6,652
Gross deferred tax assets	195,169			102,426
Property, equipment, and leasehold improvements	(962		)	(11,796		)
Intangible assets	(372,542		)	(43,548		)
Prepaid expenses	(35,126		)	(32,971		)
Other liabilities	(6,584		)	(7,925		)
Gross deferred tax liabilities	(415,214		)	(96,240		)
Valuation allowance	(3,192		)	(1,431		)
Net deferred tax (liabilities) assets	$	(223,237	)	$	4,755

Net deferred tax assets and net deferred tax liabilities were $30.5 million and $253.7 million as of December 31, 2017, respectively, and $27.3 million and $22.5 million as of December 31, 2016, respectively. These amounts are primarily 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, 2017.

The valuation allowances of $3.2 million as of December 31, 2017 and $1.4 million as of 2016, primarily relate to net operating losses which are not likely to be realized.

As of December 31, 2017, the Company had state and local tax net operating loss carryforwards of $91.5 million, of which $0.9 million expire within one to five years and $19.9 million expire within six to fifteen years and $70.7 million expire within sixteen to twenty years. The Company also had state tax credits of $2.0 million, a majority of which will expire in five to six years. As of December 31, 2017, the Company had non-U.S. net operating loss carryforwards of $16.0 million, of which $0.5 million expire over the next 20 years and $15.5 million can be carried forward indefinitely. In addition, the Company also had foreign tax credit carryforwards of $59.0 million, all 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.

As of December 31, 2017, the Company recorded deferred tax assets for federal and state unrealized capital losses of $62.9 million resulting from held-for-sale accounting for the CEB Talent Assessment business.

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:



	2017		2016		2015
Statutory tax rate	35.0	%	35.0	%	35.0	%
State income taxes, net of federal benefit	3.6		2.4		3.5
Effect of non-U.S. operations	5.9		(6.1	)	(6.9	)
Record (release) reserve for tax contingencies	(2.8	)	3.2		1.7
Law changes	41.8		—		(0.2	)
Excess tax benefits from stock based compensation	11.0		(3.8	)	—
Nondeductible acquisition costs	(7.9	)	2.6		0.8
Nondeductible meals and entertainment costs	(3.5	)	1.1		1.1
Capital loss	13.1		—		—
Record (release) valuation allowance	3.0		(0.2	)	0.5
Other items, net	3.4		(1.3	)	—
Effective tax rate	102.6	%	32.9	%	35.5	%

The Tax Cuts and Jobs Act (“the Act”) was enacted on December 22, 2017. Among other things, the Act reduces the U.S. federal corporation tax rate from 35% to 21%, requires companies to pay a one-time transition tax on accumulated deferred foreign income (“ADFI”) of foreign subsidiaries that were previously tax deferred and creates a new tax on global intangible low-taxed income (“GILTI”) attributable to foreign subsidiaries. As of December 31, 2017, we have not completed our accounting for the tax effects of enactment of the Act because all of the necessary information is not currently available, prepared or analyzed. As such, the amount we have recorded are provisional estimates and as permitted by SEC per Staff Accounting Bulletin No. 118, we will continue to assess the enactment of the Act and may record additional provisional amount or adjustments to provisional amounts during fiscal year 2018. We expect to complete the accounting for these impacts of tax reform by the fourth quarter of 2018 as we complete our analysis and receive additional guidance from the Internal Revenue Service pertaining to the Act.

We remeasured U.S. deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21% and recorded a provisional amount which reduced our income tax expense by $123.2 million. However, we are still finalizing purchase accounting for the acquisition of CEB, analyzing certain aspects of the Act and refining our deferred tax calculations, which could affect the measurement of these balances or give rise to new deferred tax amounts.

The tax on ADFI is based on our total post-1986 earnings and profits ("E&P") of our foreign subsidiaries that were previously deferred from US income taxes. We recorded a $63.6 million provisional amount for this one-time transition tax liability, resulting in an increase in income tax expense of $63.6 million. We have not yet completed our calculation of the tax on ADFI given pending regulatory guidance and the need to obtain, prepare and analyze various information relevant to calculation including, but not limited to, our post-1986 E&P, foreign taxes and amounts held in cash or other specified assets on various measurement dates.

As disclosed in Note 1 - Business and Significant Accounting Policies, the Company adopted FASB ASU No. 2016-09 in 2016. The effect of the adoption reduced the provision for income taxes by $12.9 million and $10.0 million for the years ended December 31, 2017 and 2016, respectively.

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, 2017 and December 31, 2016, the Company had unrecognized tax benefits of $60.3 million and $37.1 million, respectively. The increase is primarily attributable to pre-acquisition unrecognized tax benefits of CEB for positions taken with respect to intercompany transactions and state income tax positions. The unrecognized tax benefits as of December 31, 2017 related primarily to the exclusion of stock-based compensation expense from the Company’s cost sharing agreement, 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 $6.3 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, 2017 are potential benefits of $57.1 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, 2017 are potential benefits of $3.2 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):



	2017			2016
Beginning balance	$	37,099		$	25,911
Additions based on tax positions related to the current year	10,883			7,086
Additions for tax positions of prior years	24,299			6,443
Reductions for tax positions of prior years	(10,613		)	(496		)
Reductions for expiration of statutes	(1,368		)	(1,006		)
Settlements	(1,769		)	(544		)
Change in foreign currency exchange rates	1,738			(295		)
Ending balance	$	60,269		$	37,099

The Company accrues interest and penalties related to unrecognized tax benefits in its income tax provision. As of December 31, 2017 and 2016, the Company had $6.4 million and $4.3 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, 2017 and December 31, 2016 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 2014 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 2012.

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. While our current plans do not demonstrate a need to repatriate accumulated undistributed foreign earnings to fund our U.S. operations or otherwise satisfy the liquidity needs of our U.S. operations, the Company has not asserted its intention to indefinitely reinvest certain accumulated undistributed foreign earnings of CEB. As a result of tax planning, approximately $12.0 million of deferred tax liability previously recorded in purchase accounting for the estimated tax that could result from the remittance of these earnings was reversed in the current quarter and related goodwill reduced. The Company continues to assert its intention to reinvest all other accumulated undistributed foreign earnings in our non-U.S. operations, except in instances in which the repatriation of those earnings would result in minimal additional tax. Consequently, the Company has not recognized income tax expense that would result from the remittance of these earnings. The accumulated undistributed earnings of non-U.S. subsidiaries were approximately $194.0 million as of December 31, 2017. As a result of the ACT, the income tax that would be payable if such earnings were not indefinitely invested is estimated at this time to be minimal.