Income Taxes

Our Indian subsidiaries, collectively referred to as Cognizant India, are primarily export-oriented and are eligible for certain income tax holiday benefits granted by the government of India for export activities conducted within Special Economic Zones, or SEZs, for periods of up to 15 years. Our Indian profits ineligible for SEZ benefits are subject to corporate income tax at the rate of 34.6%. In addition, all Indian profits, including those generated within SEZs, are subject to the Minimum Alternative Tax, or MAT, at the rate of 21.3%. Any MAT paid is creditable against future Indian corporate income tax, subject to limitations.

Our effective income tax rates were as follows:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016
Effective income tax rate	24.9	%	27.6	%	21.7	%	36.7	%

In the first quarter of 2017, we recognized income tax benefits previously unrecognized in our consolidated financial statements related to several uncertain tax positions totaling $72 million. The recognition of these benefits in the first quarter of 2017 was based on management’s reassessment regarding whether certain unrecognized tax benefits met the more-likely-than-not threshold in light of the lapse in the statute of limitations as to a portion of such benefits.

In May 2016, our principal operating subsidiary in India repurchased shares from its shareholders, which are non-Indian Cognizant entities, valued at $2.8 billion ("India Cash Remittance"). This transaction was undertaken pursuant to a plan approved by the High Court of Madras and simplified the shareholding structure of our principal operating subsidiary in India. Pursuant to the transaction, our principal Indian operating subsidiary repurchased approximately $1.2 billion of the total $2.8 billion of shares from its U.S. shareholders, resulting in tax expense in the United States and India, while the remaining $1.6 billion was repurchased from its shareholder outside the United States. Net of taxes, the transaction resulted in a remittance of cash to the United States in the amount of $1.0 billion. As a result of this transaction, we incurred an incremental 2016 income tax expense of $238 million, including a discrete item recognized in the second quarter of 2016 of $143 million relating to the distribution of historic undistributed accumulated foreign earnings. Total incremental tax expense of $24 million and $214 million were recognized in the three and nine months ended September 30, 2016. This transaction is primarily responsible for the decrease in our effective income tax rate in 2017 compared to 2016.

The decrease in our effective income tax rate for the nine months ended 2017 as compared to the same period in 2016 is primarily due to the India Cash Remittance and the recognition of previously unrecognized income tax benefits, as described above. For the 2017 periods, the principal reasons for the difference between our effective income tax rates and the U.S. federal statutory rate are the effect of the Indian tax holiday, earnings taxed in countries that have lower rates than the United States, and, for the nine months ended September 30, 2017, the recognition in the first quarter of 2017 of previously unrecognized income tax benefits. For the three months ended September 30, 2016, the principal reasons for the difference between our effective income tax rates and the U.S. federal statutory rate are the effect of the Indian tax holiday and earnings taxed in countries that have lower rates than the United States, partially offset by the effect of the India Cash Remittance transaction. For the nine months ended September 30, 2016, the principal reasons for the difference between our effective income tax rates and the U.S. federal statutory rate are the effect of the India Cash Remittance transaction, partially offset by the effect of the Indian tax holiday and earnings taxed in countries that have lower rates than the United States.