INCOME TAXES

The Company is required to estimate its income taxes in each of the jurisdictions in which it operates as part of the

process of preparing its consolidated financial statements. The Company maintains certain strategic management

and operational activities in overseas subsidiaries and its foreign earnings are taxed at rates that are generally lower than in the

United States.

On December 22, 2017, President Donald Trump signed the Tax Cuts and Jobs Act (the “2017 Tax Act”) into law effective January 1, 2018. The 2017 Tax Act significantly revised the U.S. tax code by, in part but not limited to: reducing the U.S. corporate maximum tax rate from 35% to 21%, imposing a mandatory one-time transition tax on certain un-repatriated earnings of foreign subsidiaries, modifying executive compensation deduction limitations, and repealing the deduction for domestic production activities. Under Accounting Standards Codification 740, Income Taxes, the Company must recognize the effects of tax law changes in the period in which the new legislation is enacted.

The SEC staff acknowledged the challenges companies face incorporating the effects of the 2017 Tax Act by their financial reporting deadlines. In response, on December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed in reasonable detail to complete accounting for certain income tax effects of the 2017 Tax Act. During the period ended December 31, 2018, the Company completed the accounting for the tax effects of all of the provisions of the 2017 Tax Act within the required measurement period and as a result recorded adjustments to the previous provisional amounts. Adjustments recorded during the period ended December 31, 2018 include in part a tax benefit of $26.3 million attributable to a tax benefit of $21.9 million related to the finalization of the one-time transition tax on deemed repatriation of foreign income and a tax benefit of $4.4 million related to the finalization of the remeasurement of the U.S. deferred tax assets and liabilities due to the maximum U.S. federal corporate rate reduction from 35% to 21%.

The United States and foreign components of income before income taxes are as follows:



	2018		2017		2016
	(In thousands)
United States	$	174,519	$	78,897	$	59,344
Foreign	454,936		471,449		468,426
Total	$	629,455	$	550,346	$	527,770

The components of the provision for income taxes are as follows:



	2018			2017			2016
	(In thousands)
Current:
Federal	$	(19,461	)	$	374,602		$	18,832
Foreign	70,146			56,526			52,978
State	16,259			3,075			7,759
Total current	66,944			434,203			79,569
Deferred:
Federal	1,899			52,842			(7,688		)
Foreign	(14,804		)	(5,468		)	(3,139		)
State	(251		)	46,784			(10,827		)
Total deferred	(13,156		)	94,158			(21,654		)
Total provision	$	53,788		$	528,361		$	57,915

The following table presents the breakdown of net deferred tax assets:



	December 31,
	2018			2017
	(In thousands)
Deferred tax assets	$	136,998		$	152,362
Deferred tax liabilities	(15,075		)	(237		)
Total net deferred tax assets	$	121,923		$	152,125

The significant components of the Company’s deferred tax assets and liabilities consisted of the following:



	December 31,
	2018			2017
	(In thousands)
Deferred tax assets:
Accruals and reserves	$	27,022		$	30,317
Deferred revenue	62,085			65,016
Tax credits	81,720			80,772
Net operating losses	54,747			36,674
Stock based compensation	30,936			21,714
Depreciation and amortization	—			4,939
Valuation allowance	(85,400		)	(76,789		)
Total deferred tax assets	171,110			162,643
Deferred tax liabilities:
Acquired technology	(15,681		)	(2,882		)
Depreciation and amortization	(5,044		)	—
Prepaid expenses	(23,213		)	(7,414		)
Other	(5,249		)	(222		)
Total deferred tax liabilities	(49,187		)	(10,518		)
Total net deferred tax assets	$	121,923		$	152,125

The authoritative guidance requires a valuation allowance to reduce the deferred tax assets reported if it is not more likely than not that some portion or all of the deferred tax assets will be realized. At December 31, 2018, the Company determined an $85.4 million valuation allowance was necessary, which relates to deferred tax assets for net operating losses and tax credits that may not be realized.

At December 31, 2018, the Company retained $172.3 million of remaining net operating loss carry forwards in the United States from acquisitions. The utilization of these net operating loss carry forwards are limited in any one year pursuant to Internal Revenue Code Section 382 and may begin to expire in 2019. At December 31, 2018, the Company held $111.3 million of remaining net operating loss carry forwards in foreign jurisdictions that begin to expire in 2022. At December 31, 2018, the Company held $116.6 million of federal and state research and development tax credit carry forwards in the United States, a portion of which may begin to expire in 2019.

A reconciliation of the Company’s effective tax rate to the statutory federal rate is as follows:



	Year Ended December 31,
	2018		2017		2016
Federal statutory taxes	21.0	%	35.0	%	35.0	%
State income taxes, net of federal tax benefit	0.7		2.1		0.8
Foreign operations	(5.4	)	(20.0	)	(21.6	)
Permanent differences	2.0		2.6		3.2
The 2017 Tax Act - tax rate impact on deferred taxes	(0.7	)	11.8		—
The 2017 Tax Act - transition tax	(3.5	)	66.3		—
Change in valuation allowance reserve	0.4		8.8		—
Change in deferred tax liability related to acquired intangibles	(0.1	)	0.3		(0.8	)
Tax credits	(5.8	)	(7.6	)	(7.9	)
Stock-based compensation	(1.9	)	(3.6	)	0.3
Change in accruals for uncertain tax positions	1.8		0.3		2.2
Other	—		—		(0.2	)
	8.5	%	96.0	%	11.0	%

The Company’s effective tax rate generally differs from the U.S. federal statutory rate primarily due to lower tax rates on earnings generated by the Company’s foreign operations that are taxed primarily in Switzerland.

The 2017 Tax Act subjects a U.S. shareholder to tax on global intangible low-taxed income (“GILTI”) earned by certain foreign subsidiaries. The FASB Staff Q&A, Topic 740, No. 5, Accounting for Global Intangible Low-Taxed Income provides that an entity may make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years, or provide for the tax expense related to GILTI in the year the tax is incurred as a period expense only. Additionally, the 2017 Tax Act provides for a tax benefit to U.S. taxpayers that sell goods or services to foreign customers under the new Foreign Derived Intangible Income Deduction ("FDII") rules. As of December 31, 2018, the Company concluded to provide for the GILTI tax expense and FDII benefit in the year the tax is incurred and as a result the Company included federal and state GILTI and FDII amounts of $12.8 million expense and $5.4 million benefit, respectively, related to current-year operations only in its estimated annual effective tax rate and has not provided additional GILTI on deferred items.

The Company's effective tax rate was approximately 8.5% and 96.0% for the years ended December 31, 2018 and 2017, respectively. The decrease in the effective tax rate when comparing the year ended December 31, 2018 to the year ended December 31, 2017 was primarily due to accounting for the estimated tax impact of the 2017 Tax Act and the separation of the GoTo Business. Specifically, results from 2017 include a $364.6 million provisional income tax charge for the transition tax on deemed repatriation of deferred foreign income, and a $64.8 million provisional income tax charge for the remeasurement of U.S. deferred tax assets and liabilities because of the maximum U.S. federal corporate rate reduction from 35% to 21%. The Company also recorded a $48.6 million income tax charge to establish a valuation allowance primarily due to a change in expectation of realizability of state R&D credits arising from the separation of the GoTo Business. During the year ended December 31, 2018, the Company recorded a tax benefit of $21.9 million related to the finalization of the one-time transition tax on deemed repatriation of foreign income and a tax benefit of $4.4 million related to the finalization of the remeasurement of U.S. deferred tax assets and liabilities because of the maximum U.S. federal corporate rate reduction from 35% to 21%.

The Company's effective tax rate was approximately 96.0% and 11.0% for the years ended December 31, 2017 and 2016, respectively. The increase in the effective tax rate when comparing the year ended December 31, 2017 to the year ended December 31, 2016 was primarily due to accounting for the estimated tax impact of the 2017 Tax Act and the separation of the GoTo Business. Specifically, the Company recorded a $364.6 million provisional income tax charge for the transition tax on deemed repatriation of deferred foreign income, and a $64.8 million provisional income tax charge for the remeasurement of U.S. deferred tax assets and liabilities because of the maximum U.S. federal corporate rate reduction from 35% to 21%. The Company also recorded a $48.6 million income tax charge to establish a valuation allowance primarily due to a change in expectation of realizability of state R&D credits arising from the separation of the GoTo Business. These charges were marginally offset by a $22.0 million tax benefit due to the adoption of an accounting standard update requiring recognition of income tax effects related to stock based compensation when the awards vest or settle.

A reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended December 31, 2018 and 2017 is as follows (in thousands):



Balance at December 31, 2016	$	69,801
Additions based on tax positions related to the current year	9,293
Additions for tax positions of prior years	7,656
Reductions related to audit settlements	(137		)
Reductions related to the expiration of statutes of limitations	(8,764		)
Balance at December 31, 2017	77,849
Additions based on tax positions related to the current year	10,168
Additions for tax positions of prior years	10,325
Reductions related to the expiration of statutes of limitations	(8,436		)
Balance at December 31, 2018	$	89,906

As of December 31, 2018, unrecognized tax benefits of $35.4 million were offset against long-term deferred tax assets. All amounts included in this balance affect the annual effective tax rate. The Company recognizes interest accrued related to uncertain tax positions and penalties in income tax expense. For the year ended December 31, 2018, the Company accrued $3.9 million for the payment of interest.

On July 24, 2018, the U.S. Ninth Circuit Court of Appeals overturned the U.S. Tax Court’s unanimous decision in Altera v. Commissioner, where the Tax Court held the Treasury regulation requiring participants in a qualified cost sharing arrangement share stock-based compensation costs to be invalid. On August 7, 2018, the U.S. Ninth Circuit Court of Appeals, on its own motion, withdrew its July 24, 2018 opinion to allow time for the reconstituted panel to confer. Given the increased uncertainty as to the Ninth Circuit's eventual ruling and the impact it will have on the Internal Revenue Service’s ability to challenge the technical merits of the Company's position, the Company accrued amounts for this uncertain tax position as of the year ended December 31, 2018.

The Company and one or more of its subsidiaries are subject to U.S. federal income taxes in the United States, as well as income taxes of multiple state and foreign jurisdictions. The Company is not currently under examination by the United States Internal Revenue Service. With few exceptions, the Company is generally not subject to examination for state and local income tax, or in non-U.S. jurisdictions by tax authorities for years prior to 2015.

The Company's U.S. liquidity needs are currently satisfied using cash flows generated from its U.S. operations, borrowings, or both. The Company also utilizes a variety of tax planning strategies in an effort to ensure that its worldwide cash is available in locations in which it is needed. Prior to 2017, the Company did not recognize a deferred tax liability related to undistributed foreign earnings of its subsidiaries because such earnings were considered to be indefinitely reinvested in its foreign operations, or were remitted substantially free of U.S. tax. Under the 2017 Tax Act, all foreign earnings are subject to U.S. taxation. As a result, the Company expects to repatriate a substantial portion of its foreign earnings over time, to the extent that the foreign earnings are not restricted by local laws or result in significant incremental costs associated with repatriating the foreign earnings.