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 made broad and complex changes to the U.S. tax code. The Act reduced the U.S. federal corporate income tax rate from 35% to 21%, effective January 1, 2018 and required companies to pay a one-time transition tax on the previously untaxed earnings of certain foreign subsidiaries. In addition, the Act made other changes, including, but 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. As of March 31, 2018, we recognized a tax benefit of $6,202 due to the re-measurement of the deferred tax liability relating to indefinite lived intangibles as a result of the reduced U.S. federal corporate income tax rate.

The SEC issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act ("SAB 118"), which provides guidance on accounting for the Act’s impact. SAB 118 provides a measurement period, which should not extend beyond one year from the Act enactment date, during which a company acting in good faith may complete the accounting for the impact of the Act under ASC 740. In accordance with SAB 118, the income tax effects of the Act must be reflected in the reporting period in which the accounting under ASC Topic 740 is complete. As of March 31, 2018, 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 transition tax of $26,649, offset by an increased benefit from domestic production deductions and other tax credits. As of March 31, 2019, we completed the accounting and recorded a decrease to income tax expense of $4,553 to adjust the provisional estimate related to the one-time transition tax on the previously untaxed earnings of certain foreign subsidiaries as a result of the Act. The impact of the Act differs from these estimates due to changes in interpretations and assumptions we have made, guidance that was issued, and actions taken as a result of the Act.

Components of income before income taxes are as follows:



	Fiscal Year Ended March 31,
	2019		2018		2017
Domestic	$	134,265	$	136,239	$	86,050
Foreign	98,520		386		(9,085		)
Income before income taxes	$	232,785	$	136,625	$	76,965

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



	Fiscal Year Ended March 31,
	2019			2018			2017
Current:
U.S. federal	$	8,240		$	(7,327	)	$	19,271
U.S. state and local	2,857			(1,266		)	2,521
Foreign	22,274			4,208			(13,012		)
Total current income taxes	33,371			(4,385		)	8,780
Deferred:
U.S. federal	(128,317		)	(13,530		)	969
U.S. state and local	(9,157		)	195			2,395
Foreign	3,051			(19,188		)	(2,482		)
Total deferred income taxes	(134,423		)	(32,523		)	882
(Benefit from) Provision for income taxes	$	(101,052	)	$	(36,908	)	$	9,662

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



	Fiscal Year Ended March 31,
	2019		2018		2017
U.S. federal statutory rate	21.0	%	31.6	%	35.0	%
State and local taxes, net of U.S. federal benefit	2.9	%	0.5	%	4.9	%
Foreign tax rate differential⁽¹⁾	(9.0	)%	(6.9	)%	(1.4	)%
Foreign earnings	5.1	%	1.2	%	5.5	%
Tax credits⁽²⁾	(15.0	)%	(16.5	)%	(45.8	)%
Excess tax benefits from stock-based compensation⁽³⁾	(5.7	)%	(38.9	)%	—
One-time transition tax⁽⁴⁾	(2.0	)%	19.5	%	—
Domestic production deduction	—	%	(2.8	)%	(2.5	)%
Valuation allowance—domestic⁽⁵⁾	(46.0	)%	(0.5	)%	10.1	%
Valuation allowance—foreign	—	%	(2.5	)%	0.1	%
Change in reserves	1.3	%	(11.0	)%	2.9	%
Other⁽⁶⁾	4.0	%	(0.7	)%	3.7	%
Effective tax rate	(43.4	)%	(27.0	)%	12.5	%

⁽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, 2019, 2018, and 2017 attributable to certain tax credits related to software development activities.

⁽³⁾ The accounting for stock 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 the true-up related to the provisional estimate recorded in the fiscal year ended March 31, 2018 in accordance with SAB 118 for the one-time transition tax on previously untaxed earnings of certain foreign subsidiaries.

⁽⁵⁾ The change in domestic valuation allowance includes a reduction in our valuation allowance on certain U.S. deferred tax assets as a result of a determination that it was more-likely-than-not that such deferred tax assets would be realized in the fiscal year ended March 31, 2019.

⁽⁶⁾ Includes the effects from the Act, excluding the SAB 118 true-up relating to the one-time transition tax, which were not material

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



	March 31,
	2019			2018
Deferred tax assets:
Accrued compensation expense	$	113,517		$	94,919
Equity-based compensation	82,720			78,293
Tax credit carryforward	72,408			64,175
Net operating loss carryforward	27,498			35,378
Deferred rent	5,965			5,729
Business reorganization	158			16,369
Deferred Revenue	—			42,426
Sales returns and allowances (including bad debt)	—			575
Other	411			1,145
Total deferred tax assets	302,677			339,009
Less: Valuation allowance	(49,413		)	(195,640		)
Net deferred tax assets	253,264			143,369
Deferred tax liabilities:
Capitalized software and depreciation	(101,168		)	(118,119		)
Intangible amortization	(22,486		)	(24,651		)
Deferred revenue	(17,100		)	—
Convertible debt	—			(13		)
Other	(4,690		)	(4,534		)
Total deferred tax liabilities	(145,444		)	(147,317		)
Net deferred tax asset / (liability) ⁽¹⁾	107,820			(3,948		)

(1) As of March 31, 2019, $134,732 is included in Deferred tax assets and $26,912 is included in Other long-term liabilities. As of March 31, 2018, $3,948 is included in Other long-term liabilities.

We recognized a tax benefit of $107,132 from a reduction in our valuation allowance on certain U.S. deferred tax assets as a result of a determination that it was more-likely-than-not that such deferred tax assets would be realized. Our determination took into account that successful launch of Red Dead Redemption 2 during the fiscal 2019 along with our recent positive trend of earnings.

The valuation allowance is primarily attributable to deferred tax assets for which no benefit is provided due to uncertainty with respect to their realization. In the previous year, 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, 2019, we had domestic net operating loss carryforwards totaling $47,520 of which $23,986 will expire in 2022 to 2027, $15,308 will expire from 2029 to 2032, and $8,226 will expire in 2038 to 2039. In addition, we had foreign net operating loss carryforwards of $20,563, of which $4,494 will expire from 2023 to 2028 and the remainder may be carried forward indefinitely.

At March 31, 2019, we had domestic credit carryforwards totaling $202,450, of which $115,008 expire in 2029 to 2039, and the remainder may be carried forward indefinitely.

The total amount of undistributed earnings of foreign subsidiaries was approximately $410,095 at March 31, 2019 and $314,800 at March 31, 2018. As of March 31, 2019, it is our 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, 2019, 2018 and 2017, we recognized an increase in interest and penalties of $232, $2,363 and $877, respectively. The gross amount of interest and penalties accrued as of March 31, 2019 and 2018 was $6,686 and $6,453, respectively.

As of March 31, 2019, we had gross unrecognized tax benefits, including interest and penalties, of $139,006, of which $23,937 would affect our effective tax rate if realized. For the fiscal year ended March 31, 2019, gross unrecognized tax benefits increased by $10,496.

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, 2014. 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, 2014. 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 $11,117 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 our 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,
	2019			2018			2017
Balance, beginning of period	$	122,056		$	116,085		$	52,799
Additions:
Current year tax positions	13,281			23,007			65,669
Prior year tax positions	288			7,406			5,086
Reduction of prior year tax positions	(1,700		)	(436		)	—
Lapse of statute of limitations	(1,605		)	(24,006		)	(7,469		)
Balance, end of period	$	132,320		$	122,056		$	116,085

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.