INCOME TAXES

12 Months Ended

Dec. 31, 2019

Components of the Company’s income tax provision are as follows:


	Year Ended December 31,
	2019		2018		2017
Current:
Federal	$	179	$	168	$	454
State and Local	59		50		30
Non-U.S.	181		233		207
Total current	419		451		691
Deferred:
Federal	(19)		(59)		156
State and Local	(3)		(2)		17
Non-U.S.	(16)		(38)		(85)
Total deferred	(38)		(99)		88
Total provision for income taxes	$	381	$	352	$	779

A reconciliation of the U.S. federal statutory tax rate to the Company’s effective tax rate on income before provision for income taxes is as follows:


	Year Ended December 31,
	2019			2018			2017
U.S. statutory tax rate	21.0		%	21.0		%	35.0		%
State and local taxes, net of federal tax benefit	2.2		%	2.2		%	1.9		%
Benefit of foreign operations	(0.1)		%	1.8		%	(9.9)		%


U.S. Tax Act impact	—		%	(2.8)		%	17.0		%
Other	(2.1)		%	(1.1)		%	(0.4)		%
Effective tax rate	21.0		%	21.1		%	43.6		%
Income tax paid	$	458		$	442		$	366

The source of income before provision for income taxes is as follows:


	Year Ended December 31,
	2019		2018		2017
U.S.	$	1,039	$	936	$	1,099
Non-U.S.	771		736		688
Income before provision for income taxes	$	1,810	$	1,672	$	1,787

The components of deferred tax assets and liabilities are as follows:


	December 31,
	2019		2018
Deferred tax assets:
Account receivable allowances	$	6	$	6
Accumulated depreciation and amortization	1		1
Stock-based compensation	46		46
Accrued compensation and benefits	89		75
Operating lease liabilities	136		—
Deferred rent	—		22
Deferred revenue	37		41
Net operating loss	13		16
Restructuring	4		5
Uncertain tax positions	94		81
Self-insured related reserves	8		8

Other	13		14
Total deferred tax assets	447		315
Deferred tax liabilities:
Accumulated depreciation and amortization of intangible assets and capitalized software	(389)		(395)
ROU Assets	(107)		—
Capital gains	(23)		(24)
Self-insured related income	(8)		(8)
Stock based compensation	(2)		(2)
New revenue accounting standard - ASC 606	(12)		(19)

Unrealized gain on net investment hedges - OCI	(22)		(10)
Other liabilities	(3)		(7)
Total deferred tax liabilities	(566)		(465)
Net deferred tax liabilities	(119)		(150)
Valuation allowance	(9)		(5)
Total net deferred tax liabilities	$	(128)	$	(155)

On December 22, 2017, the Tax Act was signed into law, which resulted in significant changes to U.S. corporate tax laws. The Tax Act includes a mandatory one-time deemed repatriation tax (“transition tax”) on previously untaxed accumulated earnings of foreign subsidiaries and beginning in 2018 reduces the statutory federal corporate income tax rate from 35% to 21%. Due to the complexities of the Tax Act, the SEC issued guidance requiring that companies provide a reasonable estimate of the impact of the Tax Act to the extent such reasonable estimate has been determined. Accordingly, as of December 31, 2017, the Company recorded a provisional estimate for the transition tax of $247 million. In September, 2018, the Company filed its 2017 federal income tax return and revised its determination of the transition tax to $236 million, a reduction of $11 million from the estimate at December 31, 2017. The reduction was primarily due to proposed regulations issued by the Internal Revenue Service and the finalization of earnings and profits calculations. A portion of the transition tax will be payable over eight years, starting in 2018, and will not accrue interest. The above revised determination of transition tax may be impacted by a number of additional considerations, including but not limited to the issuance of additional regulations.

As a result of the Tax Act, all previously net undistributed foreign earnings have now been subject to U.S. tax. The Company regularly evaluates which entities it will indefinitely reinvest earnings. The Company has provided deferred taxes for those entities whose earnings are not considered indefinitely reinvested.

The Company has recorded reductions in its income tax provision of approximately $44 million, or 242 BPS, for the full-year of 2019, and approximately $38 million, or 223 BPS, for the full-year of 2018, relating to Excess Tax Benefits on stock-based compensation.

The Company had valuation allowances of $9 million and $5 million at December 31, 2019 and 2018, respectively, related to foreign net operating losses for which realization is uncertain.

As of December 31, 2019, the Company had $477 million of UTPs of which $422 million represents the amount that, if recognized, would impact the effective tax rate in future periods. The increase in UTPs primarily resulted from the additional reserves established for non-U.S. tax exposures and an adjustment to the transition tax under U.S. tax reform. In 2018, the Company has recorded a deferred tax asset in the amount of $48 million for potential transition tax benefits if certain non-U.S. UTPs are not sustained. Due to additional UTPs recorded in 2019, the Company increased deferred assets to $50 million.

A reconciliation of the beginning and ending amount of UTPs is as follows:


	Year Ended December 31,
	2019		2018		2017
Balance as of January 1	$	495	$	389	$	200
Additions for tax positions related to the current year	35		80		86
Additions for tax positions of prior years	22		89		120
Reductions for tax positions of prior years	(2)		(13)		(4)
Settlements with taxing authorities	(1)		(2)		(2)
Lapse of statute of limitations	(44)		(48)		(11)
Reclassification to indemnification liability related to MAKS divestiture	(28)		—		—
Balance as of December 31	$	477	$	495	$	389

The Company classifies interest related to UTPs in interest expense in its consolidated statements of operations. Penalties are recognized in other non-operating expenses. During the years ended December 31, 2019 and 2018, the Company incurred a net interest expense of $28 million and $15 million respectively, related to UTPs. As of December 31, 2019 and 2018, the amount of accrued interest recorded in the Company’s consolidated balance sheets related to UTPs was $82 million and $70 million, respectively.

Moody’s Corporation and subsidiaries are subject to U.S. federal income tax as well as income tax in various state, local and foreign jurisdictions. The Company’s U.S. federal income tax returns for 2013 and 2015 through 2017 remain open to examination. The Company’s New York State tax returns for 2011 through 2014 are currently under examination and the Company’s New York City tax return for 2014 is currently under examination. The Company’s U.K. tax return for 2012 is currently under examination and its returns for 2013 through 2017 remain open to examination.

For current ongoing audits related to open tax years, the Company estimates that it is possible that the balance of UTPs could decrease in the next twelve months as a result of the effective settlement of these audits, which might involve the payment of additional taxes, the adjustment of certain deferred taxes and/or the recognition of tax benefits. It is also possible that new issues might be raised by tax authorities which might necessitate increases to the balance of UTPs. As the Company is unable to predict the timing of conclusion of these audits, the Company is unable to estimate the amount of changes to the balance of UTPs at this time.