INCOME TAXES

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



	2018		2017			2016
U.S.	$	34,159	$	(135,757	)	$	182,178
Non-U.S.	146,962		7,940			106,253
Income (loss) before income taxes	$	181,121	$	(127,817	)	$	288,431

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



	2018			2017			2016
Current tax expense:
U.S. federal	$	2,817		$	48,339		$	58,616
State and local	6,969			434			11,292
Foreign	45,042			38,602			27,536
Total current	54,828			87,375			97,444
Deferred tax (benefit) expense:
U.S. federal	12,462			(176,046		)	(61		)
State and local	1,258			(14,363		)	(349		)
Foreign	(13,795		)	(25,898		)	(1,626		)
Total deferred	(75		)	(216,307		)	(2,036		)
Total current and deferred	54,753			(128,932		)	95,408
Benefit (expense) relating to interest rate swaps used to increase (decrease) equity	3,840			(2,477		)	(1,113		)
Benefit from stock transactions with employees used to increase equity	58			46			52
Benefit relating to defined-benefit pension adjustments used to increase equity	14			267			502
Total tax expense (benefit)	$	58,665		$	(131,096	)	$	94,849

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



	December 31,
	2018			2017
Accrued liabilities	$	96,292		$	80,557
Loss and credit carryforwards	14,830			59,502
Assets relating to equity compensation	19,653			24,874
Other assets	14,092			30,236
Gross deferred tax assets	144,867			195,169
Property, equipment, and leasehold improvements	(3,421		)	(962		)
Intangible assets	(214,580		)	(372,542		)
Prepaid expenses	(41,926		)	(35,126		)
Other liabilities	(61,068		)	(6,584		)
Gross deferred tax liabilities	(320,995		)	(415,214		)
Valuation allowance	(4,066		)	(3,192		)
Net deferred tax liabilities	$	(180,194	)	$	(223,237	)

Net deferred tax assets and net deferred tax liabilities were $34.5 million and $214.7 million as of December 31, 2018, respectively, and $30.5 million and $253.7 million as of December 31, 2017, respectively. These amounts 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, 2018.

The valuation allowances of $4.1 million as of December 31, 2018 and $3.2 million as of December 31, 2017, primarily relate to net operating losses which are not likely to be realized.

As of December 31, 2018, the Company had state and local tax net operating loss carryforwards of $35.2 million, of which $0.1 million expires within one to five years and $3.5 million expires within six to fifteen years and $31.6 million expires within sixteen to twenty years. The Company also had state tax credits of $2.2 million, a majority of which will expire in five to six years. As of December 31, 2018, the Company had non-U.S. net operating loss carryforwards of $5.0 million, of which $0.1 million expires over the next 20 years and $4.9 million can be carried forward indefinitely. These amounts have been reduced for associated unrecognized tax benefits, consistent with ASU No. 2013-11, "Income Taxes—Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists."

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:



	2018		2017		2016
Statutory tax rate	21.0	%	35.0	%	35.0	%
State income taxes, net of federal benefit	—		3.6		2.3
Effect of non-U.S. operations	(10.6	)	5.9		(6.1	)
Change in the reserve for tax contingencies	15.7		(2.8	)	3.2
Law changes	(1.3	)	41.8		—
Stock-based compensation expense	(5.3	)	11.0		(3.8	)
Nondeductible acquisition costs	0.9		(7.9	)	2.6
Nondeductible meals and entertainment costs	2.7		(3.5	)	1.1
Gains/Losses on divested operations and held-for-sale assets	12.2		13.1		—
Limitation on executive compensation	2.7		(0.1	)	—
Foreign-derived intangible income	(2.0	)	—		—
Change in the valuation allowance	0.5		3.0		(0.2	)
Goodwill	(3.8	)	—		—
Other items, net	(0.3	)	3.5		(1.2	)
Effective tax rate	32.4	%	102.6	%	32.9	%

The U.S. 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, 2018, we have completed our accounting for the tax effects of enactment of 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%. We reduced our income tax expense by $13.8 and $123.2 million in 2018 and 2017, respectively for this item.

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 U.S. income taxes. We increased income tax expense by $8.4 million and $63.6 million in 2018 and 2017, respectively, for this one-time transition tax liability. Significant foreign tax credit and net operating loss carryovers will be utilized to reduce the transition tax liability. The Company has elected to pay the remaining cash tax liability of approximately $10.0 million over 8 years as permitted by the Act.

The Act also created a new tax on GILTI attributable to foreign subsidiaries. Companies have the option to account for the GILTI tax as a period cost in the period incurred, or to recognize deferred taxes for temporary differences including outside basis differences expected to reverse as a result of the GILTI provisions. The Company has elected to account for the GILTI tax as a period cost in the period incurred.

Various provisions of the Act are highly complex and remains unclear in certain respects. Additional guidance in the form of notices and proposed regulations have been issued, and further guidance is expected to be issued. Changes could be made to the proposed regulations, future legislation could be enacted, and more regulations and notices could be issued. We will continue to monitor and will reflect impacts in future financial statements as appropriate. In addition, many state and local tax jurisdictions are still determining how they will interpret the Act. Final state and local governments’ legislation or guidance relating to the Act may impact our financial results.

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 related to open statute years associated with this matter. 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, 2018 and 2017, the Company had unrecognized tax benefits of $90.3 million and $60.3 million, respectively. The increase is primarily attributable to positions taken with respect to intercompany transactions, taxable E&P, and state income tax positions. The unrecognized tax benefits as of December 31, 2018 related primarily to the exclusion of stock-based compensation expense from the Company’s cost sharing agreement, calculation of taxable E&P and related foreign tax credits, the ability to realize certain refund claims, and intercompany transactions. It is reasonably possible that unrecognized tax benefits will be decreased by $20.0 million within the next 12 months due to anticipated closure of audits, the expiration of certain statutes of limitation and closure of tax controversies.

Included in the balance of unrecognized tax benefits at December 31, 2018 are potential benefits of $86.2 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, 2018 are potential benefits of $4.1 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):



	2018			2017
Beginning balance	$	60,269		$	37,099
Additions based on tax positions related to the current year	27,371			10,883
Additions for tax positions of prior years	14,691			24,299
Reductions for tax positions of prior years	(3,939		)	(10,613		)
Reductions for expiration of statutes	(6,293		)	(1,368		)
Settlements	(472		)	(1,769		)
Change in foreign currency exchange rates	(1,278		)	1,738
Ending balance	$	90,349		$	60,269

The Company accrues interest and penalties related to unrecognized tax benefits in its income tax provision. As of December 31, 2018 and 2017, the Company had $6.7 million and $6.4 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 the years ended December 31, 2018 and 2017 was $0.7 million and $0.9 million, respectively.

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 U.S. states, the United Kingdom, Canada, Japan, France and Ireland, the Company's statutes vary and are open as far back as 2011.

Under U.S. GAAP, 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. The Company continues to assert its intention to reinvest all 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 $171.0 million as of December 31, 2018. 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.