12 — Income Taxes

Income before taxes consisted of the following:



	Year Ended July 31,
(In thousands)	2016		2015		2014
U.S.	$	339,013	$	286,169	$	230,966
International	56,852		45,900		39,069
Total income before taxes	$	395,865	$	332,069	$	270,035

Income tax expense (benefit) from continuing operations consisted of the following:



	Year Ended July 31,
(In thousands)	2016			2015			2014
Federal:
Current	$	103,127		$	95,468		$	90,207
Deferred	7,019			5,841			(9,589		)
	110,146			101,309			80,618
State:
Current	5,347			1,160			1,912
Deferred	151			(86		)	(279		)
	5,498			1,074			1,633
International:
Current	10,855			11,062			10,077
Deferred	(994		)	(1,159		)	(980		)
	9,861			9,903			9,097
Income tax expense	$	125,505		$	112,286		$	91,348

A reconciliation of the expected U.S. statutory tax rate to the actual effective income tax rate is as follows:



	Year Ended July 31,
(In thousands)	2016		2015		2014
Federal statutory rate	35.0	%	35.0	%	35.0	%
State income taxes, net of federal income tax benefit	0.9		1.1		1.1
International rate differential	(1.8	)	(1.9	)	(2.1	)
Compensation and fringe benefits ⁽¹⁾	(3.6	)	0.1		0.1
Other differences	1.2		(0.5	)	(0.3	)
Effective tax rate	31.7	%	33.8	%	33.8	%

(1)

Included in the compensation and fringe benefits rate reconciliation is the impact of the Company's early adoption, during the fourth quarter of fiscal 2016 on a modified retrospective basis, of ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting. Under this standard, all excess tax benefits and tax deficiencies related to exercises of stock options are recognized as income tax expense or benefit in the income statement as discrete items in the reporting period in which they occur.

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets (liabilities) are presented below:



	July 31,
(In thousands)	2016			2015
Deferred tax assets:
Allowance for doubtful accounts	$	1,396		$	992
Accrued compensation and benefits	43,594			40,391
State taxes	638			577
Accrued other	3,018			3,967
Deferred revenue	(545		)	798
Property and equipment	14,170			16,957
Losses carried forward	3,312			4,362
Federal tax benefit	10,757			7,832
Total gross deferred tax assets	76,340			75,876
Less valuation allowance	(5,420		)	(2,650		)
Net deferred tax assets	70,920			73,226
Deferred tax liabilities:
Vehicle pooling costs	(8,871		)	(7,749		)
Prepaid insurance	(1,142		)	(890		)
Intangibles and goodwill	(39,773		)	(37,673		)
Total gross deferred tax liabilities	(49,786		)	(46,312		)
Net deferred tax assets	$	21,134		$	26,914

The above net deferred tax assets and liabilities have been reflected in the accompanying consolidated balance sheets as follows:



	July 31,
(In thousands)	2016			2015
U.S. current assets	$	1,444		$	3,396
U.S. non-current assets	23,506			28,856
International non-current liabilities	(3,816		)	(5,338		)
Net deferred tax assets	$	21,134		$	26,914

The Company’s ability to realize deferred tax assets is dependent on its ability to generate future taxable income. Accordingly, the Company has established a valuation allowance in taxable jurisdictions where the utilization of the tax assets is uncertain. Additional timing differences or future tax losses may occur which could warrant a need for establishing additional valuation allowances against certain deferred tax assets. The valuation allowance for the years ended July 31, 2016 and 2015 was $5.4 million and $2.7 million, respectively.

As of July 31, 2016 and 2015, if recognized, the portion of liabilities for unrecognized tax benefits that would favorably affect the Company’s effective tax rate was $20.7 million and $17.4 million, respectively. It is possible that the amount of unrecognized tax benefits will change in the next twelve months, due to tax legislation updates or future audit outcomes; however an estimate of the range of the possible change cannot be made at this time.

The following table summarizes the activities related to the Company’s unrecognized tax benefits:



	July 31,
(In thousands)	2016			2015			2014
Beginning balance	$	17,428		$	18,419		$	17,178
Increases related to current year tax position	4,311			3,441			1,805
Prior year tax positions:
Prior year increase	1,120			599			2,997
Prior year decrease	—			—			(523		)
Cash settlement	(412		)	(225		)	—
Lapse of statute of limitations	(1,732		)	(4,806		)	(3,038		)
Ending balance	$	20,715		$	17,428		$	18,419

It is the Company’s continuing practice to recognize interest and penalties related to income tax matters in income tax expense. As of July 31, 2016, 2015 and 2014, the Company had accrued interest and penalties related to unrecognized tax benefits of $4.9 million, $3.8 million and $5.4 million, respectively.

The Company is currently under examination by certain taxing authorities in the U.S. for fiscal years 2011 to 2014. At this time, the Company does not believe that the outcome of any examination will have a material impact on the Company’s consolidated results of operations and financial position.

During the year ended July 31, 2016, the Company early adopted ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting, which impacts the accounting for share-based payments, including income tax consequences, classification of awards and the classification on the consolidated statements of cash flows. As a result of the adoption, the Company recognized excess tax benefits of $14.7 million as a reduction to tax expense in the consolidated statements of income, as though ASU 2016-09 had been in effect since the beginning of fiscal 2016, instead of reflected in stockholders' equity.

In the years ended July 31, 2015 and 2014, the Company recognized a tax benefit of $3.0 million and $2.3 million, respectively, upon the exercise of certain stock options, which was reflected in stockholders’ equity.

The Company has not provided for U.S. federal income and foreign withholding taxes on its $146.0 million international subsidiaries’ undistributed earnings as of July 31, 2016, because the Company intends to reinvest such earnings indefinitely in its international operations. Specifically, the earnings will be dedicated to the following areas outside the U.S. (i) funding operating and capital spending needs in existing foreign markets; (ii) funding merger and acquisition deals both in existing and new international markets; and (iii) other investments to help expand the Company's footprint in international emerging markets. The Company does not anticipate the need for any international cash in the U.S. operations. It is not practical to determine the income tax liability that might be incurred if these earnings were to be distributed in the form of dividends or otherwise. If distributed, however, foreign tax credits may become available under current law to reduce or eliminate the resultant U.S. income tax liability.