15. INCOME TAXES

Income tax expense is based on taxable income determined in accordance with current enacted laws and tax rates. Deferred income taxes are recorded for the temporary differences between the financial statement and tax bases of assets and liabilities using currently enacted tax rates.

Provision for Income Taxes

The provision for income taxes is as follows:

(in thousands) Three months ended November 30,	2015			2014
U.S. operations	$	70,898		$	65,958
Non-U.S. operations		16,503			14,732
Income before income taxes	$	87,401		$	80,690

U.S. operations	$	24,072		$	25,660
Non-U.S. operations		3,364			(830	)
Total provision for income taxes	$	27,436		$	24,830
Effective tax rate		31.4	%		30.8	%

FactSet’s effective tax rate is based on recurring factors and nonrecurring events, including the taxation of foreign income. The Company’s effective tax rate will vary based on, among other things, changes in levels of foreign income, as well as discrete and other nonrecurring events that may not be predictable. The effective tax rate was lower than the U.S. statutory rate of 35.0% in both periods presented above primarily due to foreign income, which is subject to lower statutory tax rates than in the U.S., benefits from foreign tax credits and deductions due to U.S. production activities partially offset by additional state and local income taxes.

The components of the provision for income taxes consist of the following:

(in thousands) Three months ended November 30,	2015		2014
Current
U.S. federal	$	20,813	$	22,704
U.S. state and local		1,206		1,325
Non-U.S.		3,029		1,208
Total current taxes	$	25,048		25,237
Deferred
U.S. federal	$	1,938	$	1,602
U.S. state and local		115		29
Non-U.S.		335		(2,038	)
Total deferred taxes	$	2,388	$	(407	)
Total provision for income taxes	$	27,436	$	24,830

Deferred Tax Assets and Liabilities

The significant components of deferred tax assets that are recorded in the Consolidated Balance Sheets were as follows:

(in thousands)		November 30, 2015			August 31, 2015
Current
Receivable reserve	$	519		$	541
Deferred rent		913			794
Other		1,092			770
Net current deferred tax assets	$	2,524		$	2,105
Non-current
Depreciation on property, equipment and leasehold improvements	$	10,345		$	10,880
Deferred rent		5,438			5,108
Stock-based compensation		16,469			17,562
Purchased intangible assets, including acquired technology		(24,838	)		(17,533	)
Other		4,215			4,582
Net non-current deferred tax assets	$	11,629		$	20,599
Total deferred tax assets	$	14,153		$	22,704

The significant components of deferred tax liabilities that are recorded in the Consolidated Balance Sheets were as follows:

(in thousands)	November 30, 2015			August 31, 2015
Current
Other	$	507		$	562
Net current deferred tax liabilities	$	507		$	562
Non-current
Purchased intangible assets, including acquired technology	$	1,728		$	1,886
Stock-based compensation		(60	)		—
Other		(185	)		(189	)
Net non-current deferred tax liabilities	$	1,483		$	1,697
Total deferred tax liabilities	$	1,990		$	2,259

A provision has not been made for additional U.S. Federal taxes as all undistributed earnings of foreign subsidiaries are considered to be invested indefinitely or will be repatriated free of additional tax. The amount of such undistributed earnings of these foreign subsidiaries included in consolidated retained earnings was immaterial at November 30, 2015 and August 31, 2015. As such, the unrecognized deferred tax liability on those undistributed earnings was immaterial. These earnings could become subject to additional tax if they are remitted as dividends, loaned to FactSet, or upon sale of the subsidiary’s stock.

Unrecognized Tax Positions

Applicable accounting guidance prescribes a comprehensive model for the financial statement recognition, measurement, classification and disclosure of uncertain tax positions that a company has taken or expects to take on a tax return. A company can recognize the financial effect of an income tax position only if it is more likely than not (greater than 50%) that the tax position will prevail upon tax examination, based solely on the technical merits of the tax position. Otherwise, no benefit or expense can be recognized in the consolidated financial statements. The tax benefits recognized are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. Additionally, companies are required to accrue interest on all tax exposures for which reserves have been established consistent with jurisdictional tax laws.

As of November 30, 2015, the Company had gross unrecognized tax benefits totaling $7.1 million, including $1.5 million of accrued interest, recorded as non-current taxes payable in the Consolidated Balance Sheet. Approximately $0.2 million of these unrecognized tax benefits would have affected the current year effective tax rate if realized as of November 30, 2015. Unrecognized tax benefits represent tax positions taken on tax returns but not yet recognized in the consolidated financial statements. When applicable, the Company adjusts the previously recorded tax expense to reflect examination results when the position is ultimately settled. The Company regularly engages in discussions and negotiations with tax authorities regarding tax matters in various jurisdictions. It is reasonably possible that certain federal, foreign and state tax matters may be concluded in the next 12 months. However, FactSet has no reason to believe that such audits will result in the payment of additional taxes and/or penalties that could have a material adverse effect on the Company’s results of operations or financial position, beyond current estimates. Any changes in accounting estimates resulting from new developments with respect to uncertain tax positions will be recorded as appropriate. The Company does not currently anticipate that the total amounts of unrecognized tax benefits will significantly change within the next 12 months.

The following table summarizes the changes in the balance of gross unrecognized tax benefits during the first three months of fiscal 2016:

(in thousands)
Unrecognized income tax benefits at August 31, 2015	$	6,776
Additions based on tax positions related to the current year		165
Additions for tax positions of prior years		168
Unrecognized income tax benefits at November 30, 2015	$	7,109

In the normal course of business, the Company’s tax filings are subject to audit by federal, state and foreign tax authorities. At November 30, 2015, the Company remained subject to examination in the following major tax jurisdictions:

Major Tax Jurisdictions		Open Tax Years
U.S.
Federal	2013	through	2016
State (various)	2010	through	2016

Europe
France	2013	through	2016
United Kingdom	2012	through	2016