INCOME TAXES

On December 22, 2017, the U.S. enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (herein referred to as the "Act”). The Act makes broad and complex changes to the U.S. tax code that could materially affect us. The Act reduces the U.S. federal corporate income tax rate from 35% to 21%, effective January 1, 2018 and requires companies to pay a one-time transition tax on the previously untaxed earnings of certain foreign subsidiaries. In addition, the Act makes other changes that may affect us, beginning April 1, 2018. These changes include but are not limited to (1) a Base Erosion Anti-abuse Tax (BEAT), which is a new minimum tax, (2) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries, (3) a new provision that taxes global intangible low-taxed income (GILTI), (4) the repeal of the domestic production activity deduction, and (5) other base broadening provisions.

We recorded an estimated increase to income tax expense of $18,078 related to the one-time transition tax on the previously untaxed earnings of certain foreign subsidiaries as a result of the Act. The estimated increase was a result of a transition tax of $26,649, offset by an increased benefit from domestic production deductions and tax credits. In addition, as a result of the decrease in the U.S. federal corporate income tax rate from 35% to 21%, we recorded a decrease to net deferred tax assets of $47,677, and corresponding decrease to valuation allowance of $39,769 after taking into account a portion of the deferred tax liability from indefinite lived intangibles as a source of income against deferred tax assets, resulting in a tax benefit of $7,908. The re-measurement of the deferred tax liability relating to indefinite lived intangibles, due to the rate change, resulted in a tax benefit of $6,202.

We are currently evaluating the potential impact of the Act, and the amounts recorded represent provisional estimates for certain identified income tax effects for which the accounting is incomplete but a reasonable estimate can be determined, in accordance with Staff Accounting Bulletin No. 118 (SAB 118). Further analysis is required to review historical practices used to calculate the untaxed earnings of certain foreign subsidiaries and additional time to evaluate the complexities of the new tax law along with additional interpretative guidance that may be issued. The impact of the Act may differ from these estimates, possibly materially, due to changes in interpretations and assumptions we have made, guidance that may be issued, and actions we may take as a result of the Act. We expect to continue to analyze the Act and its impact and expect to record any adjustments to provisional estimates no later than the third quarter of fiscal 2019.

Components of income (loss) before income taxes are as follows:



	Fiscal Year Ended March 31,
	2018		2017			2016
Domestic	$	136,239	$	86,050		$	(94,174	)
Foreign	386		(9,085		)	55,824
Income (loss) before income taxes	$	136,625	$	76,965		$	(38,350	)

Provision (benefit from) for current and deferred income taxes consists of the following:



	Fiscal Year Ended March 31,
	2018			2017			2016
Current:
U.S. federal	$	(7,327	)	$	19,271		$	792
U.S. state and local	(1,266		)	2,521			938
Foreign	4,208			(13,012		)	(31,508		)
Total current income taxes	(4,385		)	8,780			(29,778		)
Deferred:
U.S. federal	(13,530		)	969			1,211
U.S. state and local	195			2,395			(231		)
Foreign	(19,188		)	(2,482		)	(1,250		)
Total deferred income taxes	(32,523		)	882			(270		)
Provision (benefit from) for income taxes	$	(36,908	)	$	9,662		$	(30,048	)

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



	Fiscal Year Ended March 31,
	2018		2017		2016
U.S. federal statutory rate	31.6	%	35.0	%	35.0	%
State and local taxes, net of U.S. federal benefit	0.5	%	4.9	%	1.6	%
Foreign tax rate differential⁽¹⁾	(6.9	)%	(1.4	)%	25.8	%
Foreign earnings	1.2	%	5.5	%	(3.7	)%
Tax credits ⁽²⁾	(16.5	)%	(45.8	)%	98.7	%
Excess tax benefits from stock-based compensation ⁽³⁾	(38.9	)%	—		—
One-time transition tax⁽⁴⁾	19.5	%	—		—
Domestic production deduction	(2.8	)%	(2.5	)%	—
Valuation allowance—domestic⁽⁵⁾	(0.5	)%	10.1	%	(77.8	)%
Valuation allowance—foreign	(2.5	)%	0.1	%	10.4	%
Change in reserves	(11.0	)%	2.9	%	(7.0	)%
Other	(0.7	)%	3.7	%	(4.6	)%
Effective tax rate	(27.0	)%	12.5	%	78.4	%

(1) The foreign rate differential in relation to foreign earnings, for all periods presented, are primarily driven by changes in the mix of our foreign earnings and the difference in the foreign versus U.S. income tax rate.

(2) Tax benefits were recorded for fiscal years ended March 31, 2018, 2017, and 2016 attributable to certain tax credits related to software development activities.

(3) The accounting for share-based compensation will increase or decrease our effective tax rate based upon the difference between our share-based compensation expense and the deductions taken on our tax return, which depends upon the stock price at the time of employee award vesting

(4) Represents provisional estimate in accordance with SAB 118, relating to one-time transition tax on previously untaxed earnings of certain foreign subsidiaries per the Act.

(5) The change in domestic valuation allowance includes tax benefits recognized as a result of the Act from indefinite lived intangibles.

The effects of temporary differences that gave rise to our deferred tax assets and liabilities were as follows:



	March 31,
	2018			2017
Deferred tax assets:
Accrued compensation expense	$	94,919		$	131,305
Equity-based compensation	78,293			25,048
Deferred revenue	42,426			41,977
Net operating loss carryforward	35,378			20,131
Tax credit carryforward	64,175			52,639
Business reorganization	16,369			24,103
Sales returns and allowances (including bad debt)	575			3,942
Deferred rent	5,729			8,865
Other	1,145			4,045
Total deferred tax assets	339,009			312,055
Less: Valuation allowance	(195,640		)	(184,085		)
Net deferred tax assets	143,369			127,970
Deferred tax liabilities:
Capitalized software and depreciation	(118,119		)	(120,715		)
Convertible debt	(13		)	(5,219		)
Intangible amortization	(24,651		)	(38,068		)
Other	(4,534		)	—
Total deferred tax liabilities	(147,317		)	(164,002		)
Net deferred tax liability⁽¹⁾	(3,948		)	(36,032		)

(1) As of March 31, 2018 and 2017, $3,948 and $36,032, respectively, is included in Other long-term liabilities.

The valuation allowance is primarily attributable to deferred tax assets for which no benefit is provided due to uncertainty with respect to their realization. The net deferred tax liability is primarily the result of deferred tax liabilities related to indefinite lived intangibles, which cannot be used to offset deferred tax assets, as well as deferred tax liabilities related to intangibles as a result of the acquisition of Social Point.

At March 31, 2018, we had domestic net operating loss carryforwards totaling $50,136 of which $1,676 will expire in 2022, $21,700 will expire from 2023 to 2027, $22,400 will expire from 2028 to 2037, and $4,321 will expire in 2038. In addition, we had foreign net operating loss carryforwards of $209,238, of which $192,485 will expire from 2020 to 2022, $118 will expire in 2025 to 2026, and the remainder may be carried forward indefinitely.

At March 31, 2018, we had domestic credit carryforwards totaling $183,982, of which $104,474 expire in 2029 to 2038, and the remainder may be carried forward indefinitely.

The total amount of undistributed earnings of foreign subsidiaries was approximately $314,800 at March 31, 2018 and $162,800 at March 31, 2017. We recorded provisional amounts relating to the one-time transition tax on previously untaxed earnings of certain foreign subsidiaries as per the Act. We are reviewing whether the Act will affect our existing intention to reinvest indefinitely undistributed earnings of our foreign subsidiaries. Accordingly, no provision has been made for foreign withholding taxes or U.S. income taxes which may become payable if undistributed earnings of foreign subsidiaries are repatriated. It is not practicable to estimate the tax liability that would arise if these earnings were remitted.

We are regularly audited by domestic and foreign taxing authorities. Audits may result in tax assessments in excess of amounts claimed and the payment of additional taxes. We believe that our tax return positions comply with applicable tax law and that we have adequately provided for reasonably foreseeable assessments of additional taxes. Additionally, we believe that any assessments in excess of the amounts provided for will not have a material adverse effect on the Consolidated Financial Statements. It is possible that settlement of audits or the expiration of the statute of limitations may have an impact on our effective tax rate in future periods.

We recognize interest and penalties related to uncertain tax positions in the provision for income taxes in our Consolidated Statements of Operations. For the fiscal years ended March 31, 2018, 2017 and 2016, we recognized an increase in interest and penalties of $2,363, $877 and $1,098, respectively. The gross amount of interest and penalties accrued as of March 31, 2018 and 2017 was $6,453 and $4,090, respectively.

As of March 31, 2018 and 2017, we had gross unrecognized tax benefits, including interest and penalties, of $128,510 and $120,198, respectively, of which $22,805 and $36,940, respectively, would affect our effective tax rate if realized.

We are no longer subject to audit for U.S. federal income tax returns for periods prior to our fiscal year ended March 31, 2016 and state income tax returns for periods prior to the fiscal year ended March 31, 2013. With few exceptions, we are no longer subject to income tax examinations in non-U.S. jurisdictions for years prior to our fiscal year ended March 31, 2012. U.S. federal taxing authorities have completed examinations of our income tax returns through the fiscal year ended March 31, 2015.

The timing of the resolution of income tax examinations is highly uncertain, and the amounts ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ materially from the amounts accrued for each year. Although potential resolution of uncertain tax positions involve multiple tax periods and jurisdictions, it is reasonably possible that a reduction of $8,400 of unrecognized tax benefits may occur within the next 12 months, some of which, depending on the nature of the settlement or expiration of statutes of limitations, may affect the Company’s income tax provision and therefore benefit the resulting effective tax rate. The actual amount could vary significantly depending on the ultimate timing and nature of any settlements.

The aggregate changes to the liability for gross uncertain tax positions, excluding interest and penalties, were as follows:



	Fiscal Year Ended March 31,
	2018			2017			2016
Balance, beginning of period	$	116,085		$	52,799		$	40,591
Additions:
Current year tax positions	23,007			65,669			12,208
Prior year tax positions	7,406			5,086			—
Reduction of prior year tax positions	(436		)	—			—
Lapse of statute of limitations	(24,006		)	(7,469		)	—
Balance, end of period	$	122,056		$	116,085		$	52,799

We believe that we have provided for any reasonably foreseeable outcomes related to our tax audits and that any settlement will not have a material adverse effect on our consolidated financial statements. However, there can be no assurances as to the possible outcomes.