Note 17 - Income Taxes

12 Months Ended

Aug. 31, 2019

Notes to Financial Statements

Income Tax Disclosure [Text Block]

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)	2019			2018			2017
U.S. operations	$	288,860		$	199,654		$	218,650
Non-U.S. operations		133,105			152,184			125,662
Income before income taxes	$	421,965		$	351,838		$	344,312
U.S. operations	$	55,824		$	65,778		$	65,403
Non-U.S. operations		13,351			18,975			20,650
Total provision for income taxes	$	69,175		$	84,753		$	86,053
Effective tax rate		16.4	%		24.1	%		25.0	%

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

	Years ended August 31,
(in thousands)	2019			2018			2017
Current
U.S. federal	$	35,688		$	58,835		$	58,057
U.S. state and local		18,389			5,159			5,659
Non-U.S.		17,376			22,669			17,458
Total current taxes	$	71,453		$	86,663		$	81,174
Deferred
U.S. federal	$	1,813		$	2,079		$	4,320
U.S. state and local		(217	)		(295	)		(77	)
Non-U.S.		(3,874	)		(3,694	)		636
Total deferred taxes	$	(2,278	)	$	(1,910	)	$	4,879
Total provision for income taxes	$	69,175		$	84,753		$	86,053

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)	2019			2018				2017
Tax at U.S. Federal statutory tax rate		21.0	%		25.7	%			35.0	%
Increase (decrease) in taxes resulting from:
State and local taxes, net of U.S. federal income tax benefit		4.0			2.9				1.8
Foreign income at other than U.S. rates		(1.4	)		(3.2	)			(7.0	)	(3)
Foreign derived intangible income deduction		(1.7	)		—				—
Domestic production activities deduction		—			(1.6	)			(2.1	)
Income tax benefits from R&D tax credits		(3.5	)		(3.7	)			(3.3	)
Income tax benefits from foreign tax credits		—			—				(0.3	)
Share-based payments(1)		(3.2	)		(2.7	)			—
One-time transition tax from TCJA		(0.4	)		6.6		(2)		—
Other, net		1.6			0.1				0.9
Effective tax rate		16.4	%		24.1	%			25.0	%

⁽¹⁾  During the first quarter of fiscal 2018, FactSet adopted an 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 previously 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.

⁽²⁾  The enactment of the TCJA resulted in a one-time transition tax expense of $23.2 million during the second quarter of fiscal 2018.

⁽³⁾  Includes a 200 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 realignment allows the Company to further implement strategic corporate objectives and helps achieve operational and financial efficiencies, while complementing FactSet’s increasing global growth and reach.

The fiscal 2019 provision for income taxes was $69.2 million, a decrease of 18.4% from the same period a year ago. The decrease was primarily attributable to the enactment of the TCJA. The TCJA imposed a one-time transition tax expense, which resulted in a $23.2 million impact to the income tax provision for fiscal 2018, without a comparable impact in fiscal 2019. This transition tax impact was revised during fiscal 2019, resulting in a net benefit of $3.4 million upon finalizing the accounting for the tax effects of the TCJA. The TCJA also lowered the statutory U.S corporate income tax rate from 35% to 21%, effective January 1, 2018, which was fully applicable for fiscal 2019 compared to the lower tax rate being phased in for the prior year comparable period. The reduction in the U.S. corporate income tax rate required a remeasurement of FactSet's net U.S. deferred tax position, which resulted in a non-recurring tax charge of $2.2 million during fiscal 2018. The decrease in the income tax provision was partially offset by a $3.3 million income tax expense from finalizing prior years’ tax returns and other discrete items for fiscal 2019.

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.

Deferred Tax Assets and Liabilities

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

	At August 31,
(in thousands)	2019			2018
Deferred tax assets:
Receivable reserve	$	1,517		$	599
Depreciation on property, equipment and leasehold improvements		2,858			1,032
Deferred rent		9,454			7,711
Stock-based compensation		13,755			14,827
Purchased intangible assets, including acquired technology		(27,116	)		(24,059	)
Other		7,103			9,606
Total deferred tax assets	$	7,571		$	9,716

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

	At August 31,
(in thousands	2019			2018
Deferred tax liabilities:
Stock-based compensation	$	(1,067	)	$	(946	)
Purchased intangible assets, including acquired technology		17,188			22,429
Other		270			(293	)
Total deferred tax liabilities	$	16,391		$	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. FactSet recognizes the financial effect of an income tax position only if it is more likely than not (greater than 50%) that the tax position will be sustained based on its 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 50% likelihood of being realized upon effective settlement with a taxing authority. Additionally, FactSet accrues interest on all tax exposures for which reserves have been established consistent with jurisdictional tax laws.

The determination of liabilities related to unrecognized tax benefits, including associated interest and penalties, requires significant estimates. There can be no assurance that the Company will accurately predict the audit outcomes, however, FactSet has no 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. For this reason and due to ongoing audits by multiple tax authorities, FactSet will regularly engage in discussions and negotiations with tax authorities regarding tax matters in various jurisdictions. The Company adjusts these reserves in light of changing facts and circumstances, such as the closing of a tax audit or the refinement of an estimate. To the extent that the final outcome of these matters is different than the amounts recorded, such differences will affect the provision for income taxes in the period in which such determination is made. The Company does not currently anticipate that the total amounts of unrecognized tax benefits will significantly change within the next 12 months.

FactSet classifies the liability for unrecognized tax benefits as Taxes Payable (non-current) and to the extent that the Company anticipates payment of cash within one year, the benefit will be classified as Taxes Payable (current). Additionally, the Company accrues interest on all tax exposures for which reserves have been established consistent with jurisdictional tax laws. This interest is classified as income tax expense in the financial statements. As of August 31, 2019, FactSet had gross unrecognized tax benefits totaling $10.9 million, including $1.1 million of accrued interest, recorded as Taxes Payable (non-current) within the Consolidated Balance Sheets.

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

(in thousands)
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
Additions based on tax positions related to the current year		3,133
Additions for tax positions of prior years		507
Statute of limitations lapse		(1,979	)
Reductions from settlements with Taxing Authorities		—
Unrecognized income tax benefits at August 31, 2019	$	10,884

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, 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	2017	through	2018
Germany	2016	through	2018