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 the tax bases of assets and liabilities using currently enacted tax rates.

Provision for Income Taxes

The provision for income taxes is as follows:

	Three Months Ended May 31,						Nine Months Ended May 31,
(in thousands)	2019			2018			2019			2018
Income before income taxes	$	113,384		$	89,511		$	313,676		$	267,903
Provision for income taxes	$	21,119		$	14,765		$	52,413		$	69,641
Effective tax rate		18.6	%		16.5	%		16.7	%		26.0	%

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. FactSet’s effective tax rate is lower than the applicable U.S. corporate income tax rate for the

three

and

nine

months ended

May

31,

2019

mainly due to R&D tax benefits and tax benefits associated with share-based payments.

The provision for income taxes increased for the

three

months ended

May 31, 2019,

compared to the same period a year ago. The provision for the

three

months ended

May

31,

2019

included a net

$4.5

million income tax expense from finalizing prior years’ tax returns and other discrete items.

The provision for income taxes decreased for the

nine

months ended

May 31, 2019

mainly due to the enactment of the Tax Cuts and Jobs Act ("TCJA"). The TCJA imposed a

one

-time transition tax expense, which resulted in a

$23.2

million impact to the income tax provision for the

nine

months ended

May 31, 2018,

without a comparable impact for

nine

months ended

May 31, 2019.

This transition tax impact was revised, resulting in a net benefit of

$3.4

million for the

nine

months ended

May 31, 2019.

The TCJA also lowered the statutory U.S. corporate income tax rate from

35%

21%,

effective

January 1, 2018.

Due to the timing of FactSet’s year end, the lower tax rate was fully applicable for the

nine

months ended

May

31,

2019,

while being phased in during the same period a year ago. The

first

nine

months of fiscal

2018

included a remeasurement of the net U.S. deferred tax position resulting in a non-recurring tax charge of

$2.2

million due to the reduction in the statutory federal rate, without a comparable impact during the

nine

months ended

May

31,

2019.

The decrease in the income tax provision was partially offset by a net

$4.5

million income tax expense for the

nine

months ended

May 31, 2019

related to finalizing prior years’ tax returns and other discrete items.

FactSet has finalized the accounting for the tax effects of the TCJA with respect to the

one

-time transition tax during the

second

quarter of fiscal

2019.

The tax effects of the TCJA

may

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

may

be issued.

Deferred Tax Assets and Liabilities

The significant components of Deferred tax assets recorded within the consolidated balance sheets were as follows:

(in thousands)	May 31, 2019			August 31, 2018
Deferred tax assets:
Receivable reserve	$	757		$	599
Depreciation on property, equipment and leasehold improvements		4,000			1,032
Deferred rent		7,576			7,711
Stock-based compensation		12,938			14,827
Purchased intangible assets, including acquired technology		(26,370	)		(24,059	)
Other		7,096			9,606
Total deferred tax assets	$	5,997		$	9,716

The significant components of Deferred tax liabilities recorded within the consolidated balance sheets were as follows:

(in thousands)	May 31, 2019			August 31, 2018
Deferred tax liabilities:
Stock-based compensation	$	(1,020	)	$	(946	)
Purchased intangible assets, including acquired technology		19,096			22,429
Other		930			(293	)
Total deferred tax liabilities	$	19,006		$	21,190

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

May

31,

2019,

the Company had gross unrecognized tax benefits totaling

$10.1

million recorded as non-current Taxes payable within the consolidated balance sheet. This amount includes

$1.0

million of accrued interest. 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 during the

first

nine

months of fiscal

2019:

(in thousands)
Unrecognized income tax benefits at August 31, 2018	$	9,223
Additions based on tax positions related to the current year		490
Additions for tax positions of prior years		388
Unrecognized income tax benefits at May 31, 2019	$	10,101

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

May

31,

2019,

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	2016	through	2018
State (various)	2016	through	2018
Europe
United Kingdom	2017	through	2018
France	2016	through	2018
Germany	2016	through	2018