17.

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:

	Years ended August 31,
(in thousands)	2018			2017			2016
U.S. operations	$	199,654		$	218,650		$	353,434
Non-U.S. operations		152,184			125,662			107,559
Income before income taxes	$	351,838		$	344,312		$	460,993

U.S. operations	$	65,778		$	65,403		$	106,671
Non-U.S. operations		18,975			20,650			15,507
Total provision for income taxes	$	84,753		$	86,053		$	122,178
Effective tax rate		24.1	%		25.0	%		26.5	%

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

	Years ended August 31,
(in thousands)	2018			2017			2016
Current
U.S. federal	$	58,835		$	58,057		$	97,703
U.S. state and local		5,159			5,659			4,917
Non-U.S.		22,669			17,458			15,030
Total current taxes	$	86,663		$	81,174		$	117,650

Deferred
U.S. federal	$	2,079		$	4,320		$	3,915
U.S. state and local		(295	)		(77	)		136
Non-U.S.		(3,694	)		636			477
Total deferred taxes	$	(1,910	)	$	4,879		$	4,528
Total provision for income taxes	$	84,753		$	86,053		$	122,178

The provision for income taxes differs from the amount of income tax determined by applying the U.S. statutory federal income tax rate to income before income taxes as a result of the following factors:

	Years ended August 31,
(expressed as a percentage of income before income taxes)	2018			2017				2016
Tax at U.S. Federal statutory tax rate		25.7	%		35.0	%			35.0	%
Increase (decrease) in taxes resulting from:
State and local taxes, net of U.S. federal income tax benefit		2.9			1.8				1.5
Foreign income at other than U.S. rates		(3.2	)		(7.0	)	(3)		(5.0	)	(4)
Domestic production activities deduction		(1.6	)		(2.1	)			(1.5	)
Income tax benefits from R&D tax credits		(3.7	)		(3.3	)			(3.6	)
Income tax benefits from foreign tax credits		—			(0.3	)			(0.2	)
Share-Based Payments ( 1 )		(2.7	)		—				—
One-time transition tax from TCJA ( 2 )		6.6			—				—
Other, net		0.1			0.9				0.3
Effective tax rate		24.1	%		25.0	%			26.5	%	(5)

(

)

During the

first

quarter of fiscal

2018,

FactSet adopted

accounting standard

that requires

all excess tax benefits or deficiencies related to share-based payments

to be

reported within the consolidated statement of income

that were pr

eviously reported within equity

. The adoption of this standard resulted in the recognition of

$9.5

million of excess tax benefits to FactSet’s provision for income taxes during fiscal

2018.

(

)

The enactment of the TCJA resulted in a

one

-time transition tax expense of $

3.2

million during the

second

quarter of fiscal

2018.

(

)

Includes

basis

point benefit as a result of

FactSet’s

global realignment. Effective

September 1, 2016,

FactSet realigned certain aspects of its global operations from FactSet Research Systems Inc., its U.S. parent company, to FactSet UK Limited, a U.K. operating company, to better position the Company to serve its growing client base outside the U.S. This realignm

ent allows the Company to further implement strategic corporate objectives and helps achieve operational and financial efficiencies, while complementing FactSet’s increasing global grow

th and reach.

(

)

Includes a portion of the gain from the sale of the Market Metrics business that was

not

taxable in the UK

(

)

The fiscal

2016

effective tax rate of

26.5%

includes income tax benefits of

$10.5

million primarily from the permanent reenactment of the U.S. Federal R&D Tax Credit (“R&

D tax credit”) in

December 2015

, finalizing

the fiscal

2015

tax returns and other discrete items.

The reenactment of the R&D tax credit was retroactive to

January 1, 2015

and eliminates the yearly uncertainty surrounding the extension of the credit

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. On

December 22, 2017,

the U.S. government enacted comprehensive tax legislation through the TCJA. The TCJA significantly revises the U.S. corporate income tax including, lowering the statutory U.S. corporate income tax rate from

35%

21%,

effective

January 1, 2018,

implementing a modified territorial tax system and imposing a mandatory

one

-time transition tax on accumulated earnings and profits (“E&P”) of foreign subsidiaries that were previously deferred from U.S. income taxes. While the company has

not

finalized the accounting for the tax effects of the enactment of the TCJA, FactSet has made a reasonable estimate of the effects on the existing U.S. deferred tax balances and the

one

-time transition tax. The Company will continue to refine its calculations as additional analyses are completed. In addition, the estimates

may

also be affected by changes in interpretations at the federal and state levels, and any additional regulatory guidance that

may

be issued.

FactSet had approximately

$250.0

million in undistributed foreign E&P generated prior to

December 31, 2017,

which resulted in a

one

-time transition tax expense of

$23.2

million recorded during the

second

quarter of fiscal

2018,

payable over an

eight

-year period. This amount

may

change as the Company finalizes the calculation of foreign E&P previously deferred from U.S. federal taxation, as well as the analysis of available foreign tax credits. Due to the changes in taxation of undistributed foreign earnings under the TCJA, FactSet will continue to analyze foreign subsidiary earnings, as well as global working capital requirements, and

may

repatriate earnings when the amounts are remitted substantially free of additional tax.

Due to FactSet’s

August 31

fiscal year-end, the lower tax rate was phased in, resulting in a blended U.S. statutory federal rate of

25.7%

for the full fiscal

2018

year and a

21%

rate for subsequent years. The reduction in the statutory federal rate also required the remeasurement of the Company’s net U.S. deferred tax position, which resulted in a non-recurring tax charge of

$2.3

million. The provisional expense related to the

one

-time transition tax on the undistributed foreign earnings and the non-recurring tax charge from the remeasurement of deferred taxes were partially offset by the lower blended U.S. statutory rate and the recognition of excess tax benefits from the adoption of the employee share-based payment accounting standard.

Deferred Tax Assets and Liabilities

The significant components of deferred tax assets that recorded within the Consolidated Balance Sheet were as follows:

	At August 31,
(in thousands)	2018			2017
Deferred tax assets:
Receivable reserve	$	599		$	811
Depreciation on property, equipment and leasehold improvements		1,032			2,220
Deferred rent		7,711			11,615
Stock-based compensation		14,827			20,117
Purchased intangible assets, including acquired technology		(24,059	)		(32,742	)
Other		9,606			8,059
Total deferred tax assets	$	9,716		$	10,080

The significant components of deferred tax liabilities recorded within the Consolidated Balance Sheet were as follows:

	At August 31,
(in thousands)	2018			2017
Deferred tax liabilities:
Stock-based compensation	$	(946	)	$	(815	)
Purchased intangible assets, including acquired technology		22,429			26,231
Other		(293	)		1,858
Total deferred tax liabilities	$	21,190		$	27,274

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,

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

August 31, 2018,

the Company had gross unrecognized tax benefits totaling

$9.2

million, including

$1.1

million of accrued interest, recorded as

Non-current taxes payable

within the Consolidated Balance Sheet. 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

months. However, FactSet has

reason to believe that such audits will result in the payment of additional taxes and/or penalties that would 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

months.

The following table summarizes the changes in the balance of gross unrecognized tax benefits:

(in thousands)
Unrecognized income tax benefits at August 31, 2015	$	6,776
Additions based on tax positions related to the current year		1,779
Additions for tax positions of prior years		1,436
Statute of limitations lapse		(1,209	)
Unrecognized income tax benefits at August 31, 2016	$	8,782
Additions based on tax positions related to the current year		3,896
Additions for tax positions of prior years		628
Statute of limitations lapse		(1,822	)
Unrecognized income tax benefits at August 31, 2017	$	11,484
Additions based on tax positions related to the current year		2,954
Additions for tax positions of prior years		531
Statute of limitations lapse		(3,146	)
Reductions from settlements with Taxing Authorities		(2,600	)
Unrecognized income tax benefits at August 31, 2018	$	9,223

In the normal course of business, the Company’s tax filings are subject to audit by federal, state and foreign tax authorities. At

August 31, 2018,

the Company remained subject to examination in the following major tax jurisdictions for the tax years as indicated below:

Major Tax Jurisdictions	Open Tax Years
U.S.
Federal		2015	through	2018
State (various)		2015	through	2018

Europe
United Kingdom		2015	through	2018
France		2016	through	2018
Germany		2017	through	2018