12 — Income Taxes

Income before taxes consisted of the following:



	Year Ended July 31,
(In thousands)	2018		2017		2016
U.S.	$	501,961	$	385,526	$	339,013
International	60,550		54,574		56,852
Total income before taxes	$	562,511	$	440,100	$	395,865

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



	Year Ended July 31,
(In thousands)	2018			2017			2016
Federal:
Current	$	109,804		$	12,752		$	103,127
Deferred	17,094			20,094			7,019
	126,898			32,846			110,146
State:
Current	9,100			1,659			5,347
Deferred	(111		)	499			151
	8,989			2,158			5,498
International:
Current	8,820			11,468			10,855
Deferred	(203		)	(633		)	(994		)
	8,617			10,835			9,861
Income tax expense	$	144,504		$	45,839		$	125,505

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)	2018		2017		2016
Federal statutory rate	26.9	%	35.0	%	35.0	%
State income taxes, net of federal income tax benefit	1.3	%	1.3	%	0.9	%
International rate differential	(0.8	)%	(1.8	)%	(1.8	)%
Compensation and fringe benefits ⁽¹⁾	(3.5	)%	(24.3	)%	(3.6	)%
Provisional transition tax	2.2	%	—	%	—	%
Deferred tax remeasurement	(0.8	)%	—	%	—	%
Other differences	0.4	%	0.2	%	1.2	%
Effective tax rate	25.7	%	10.4	%	31.7	%

(1)

Included in the compensation and fringe benefits rate reconciliation is the impact of the Company’s adoption 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)	2018			2017
Deferred tax assets:
Allowance for doubtful accounts	$	1,068		$	1,177
Accrued compensation and benefits	17,704			26,621
State taxes	580			215
Accrued other	1,930			2,684
Deferred revenue	929			(371		)
Property and equipment	—			9,405
Losses carried forward	3,065			3,688
Federal tax benefit	6,441			10,542
Total gross deferred tax assets	31,717			53,961
Less: Valuation allowance	(4,592		)	(6,455		)
Net deferred tax assets	27,125			47,506
Deferred tax liabilities:
Vehicle pooling costs	(6,523		)	(9,590		)
Property and equipment	(14,147		)	—
Prepaid insurance	(708		)	(1,333		)
Intangibles and goodwill	(25,010		)	(38,580		)
Total gross deferred tax liabilities	(46,388		)	(49,503		)
Net deferred tax liabilities	$	(19,263	)	$	(1,997	)

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



	July 31,
(In thousands)	2018			2017
U.S. current liabilities	$	—		$	(92	)
U.S. non-current (liabilities) assets	(16,018		)	1,054
International non-current liabilities	(3,245		)	(2,959		)
Net deferred tax liabilities	$	(19,263	)	$	(1,997	)

As of July 31, 2018 and 2017, the Company had foreign operating losses and a U.S. federal tax credit carryforward of $3.8 million and $5.5 million, respectively. The foreign operating losses, subject to certain limitations, usually can be carried forward from a minimum of eight years to indefinitely. If not used, those foreign operating losses would start to expire after 2023. The U.S. federal related tax credit, if not used, would start to expire after 2026.

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, 2018 and 2017 was $4.6 million and $6.5 million, respectively. The valuation allowance for deferred tax assets primarily related to operating losses in certain international jurisdictions and certain tax credits that are unlikely to be realized.

As of July 31, 2018 and 2017, if recognized, the portion of liabilities for unrecognized tax benefits that would favorably affect the Company’s effective tax rate was $16.0 million and $13.0 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)	2018			2017			2016
Beginning balance	$	19,269		$	20,715		$	17,428
Increases related to current year tax position	5,169			2,807			4,311
Prior year tax positions:
Prior year increase	554			2,694			1,120
Prior year decrease	(2,079		)	(3,605		)	—
Cash settlement	(519		)	(1,123		)	(412		)
Lapse of statute of limitations	(1,072		)	(2,219		)	(1,732		)
Ending balance	$	21,322		$	19,269		$	20,715

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, 2018, 2017 and 2016, the Company had accrued interest and penalties related to unrecognized tax benefits of $6.0 million, $5.3 million and $4.9 million, respectively.

The Company is currently under examination by certain taxing authorities in the U.S. for fiscal years 2013 to 2016. 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.

The Company’s effective income tax rates were 25.7%, 10.4%, and 31.7% for fiscal 2018, 2017 and 2016, respectively. The tax rates in the prior years were impacted primarily from the result of recognizing excess tax benefits from the exercise of employee stock options of $21.3 million, $107.6 million and $14.7 million, for the years ended July 31, 2018, 2017 and 2016, respectively. The effective tax rate was computed based on a reduced blended U.S. federal corporate tax rate of 26.9% for the fiscal year ending July 31, 2018, and included the effects of the Tax Cuts and Jobs Act.

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (“Tax Reform” or “Tax Act”). Tax Reform makes broad and complex changes to the U.S. tax code, including, but not limited to (i) reducing the U.S. federal corporate tax rate from 35.0% to 21.0%; (ii) requiring companies to pay a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries (“Transition Tax”); (iii) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries; (iv) creating a new provision designed to tax global intangible low-taxed income (“GILTI”) which allows for the possibility of using foreign tax credits (“FTCs”) and a deduction of up to 50.0% to offset the income tax liability (subject to some limitations); (v) allowing for full expensing of qualified property through bonus depreciation; and (vi) creating limitations on the deductibility of certain executive compensation.

The SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance on accounting for the tax effects of Tax Reform. SAB 118 provides a measurement period that should not extend beyond one year from enactment for companies to complete the accounting under ASC 740, Income Taxes. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of Tax Reform for which the accounting under ASC 740 is complete in the financial statements. To the extent that a company’s accounting for certain income tax effects of Tax Reform is incomplete, but a reasonable estimate is able to be made, the company must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the tax laws that were in effect immediately before the enactment of Tax Reform.

The Company has not completed its accounting for the tax effects of the enactment of the Tax Act. Specifically, the amount recorded for the Transition Tax is a provisional amount based on the Company’s estimates. The Company expects to complete the accounting for these impacts of the Tax Act in the fiscal quarter ending January 31, 2019 as it finalizes its cumulative earnings and profits of its foreign subsidiaries and receives additional guidance from the IRS pertaining to the Tax Act. The impacts of additional guidance and changes in estimates related to the effects of the Tax Act, if any, will be recorded in the period the additional guidance or information is available. The Company recognized a provisional net tax charge of $10.6 million during the three months ended January 31, 2018. Subsequently it was raised to $12.4 million in the three months ended July 31, 2018, as more IRS guidance was released with respect to the calculation of the Transition Tax.

The Company re-measured deferred tax assets and liabilities based on the U.S. statutory income tax rate. In the three months ended January 31, 2018, a $0.6 million tax benefit was initially recorded. The tax benefit was further increased to $4.3 million in the three months ended July 31, 2018.

The Tax Act contains Global Intangible Low-Taxed Income (“GILTI”) rules, which first impact the Company in fiscal year 2019. Under the GILTI rules certain income earned by the Company's foreign subsidiaries is subject to current U.S. taxation. The Company is continuing to evaluate this provision of the Act and the application of ASC 740. Under U.S. GAAP, the Company is permitted to make an accounting policy election to either treat future U.S. tax generated by the GILTI rules as a current-period expense when incurred or to factor such amounts into the Company's measurement of its deferred taxes. The Company has not recorded any amounts related to potential GILTI tax in its financial statements and will make an accounting policy election after it completes its evaluation of the GILTI rules and the application of ASC 740.

The Tax Act eliminated any additional federal tax upon repatriation of outside basis difference primarily resulted from undistributed foreign earnings; however, those undistributed earnings may still be subject to foreign withholding taxes if they are repatriated. As of July 31, 2018, the Company's foreign subsidiaries have accumulated undistributed earnings of $160.0 million. No deferred tax liability has been recognized for the repatriation of these earnings or any residual outside basis difference as the Company intends to permanently reinvest them.

During the year ended July 31, 2018, the Company repatriated $93.9 million of earnings that will be considered previously taxed, from the U.K. to the U.S. and concluded that there were no material additional taxes incurred.

During the year ended July 31, 2016, the Company adopted ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting, which impacted the accounting for share-based payments, including income tax consequences, classification of awards and the classification on the consolidated statements of cash flows. As of July 31, 2018, 2017 and 2016 the Company recognized excess tax benefits of $21.3 million, $107.6 million and $14.7 million, respectively, as a reduction to tax expense in the consolidated statements of income.