INCOME TAXES

12 Months Ended

Dec. 31, 2020

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


	Year Ended December 31,
	2020		2019		2018
Current:
Federal	$	213	$	179	$	168
State and Local	68		59		50
Non-U.S.	215		181		233
Total current	496		419		451
Deferred:
Federal	6		(19)		(59)
State and Local	—		(3)		(2)
Non-U.S.	(50)		(16)		(38)
Total deferred	(44)		(38)		(99)
Total provision for income taxes	$	452	$	381	$	352

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,
	2020			2019			2018
U.S. statutory tax rate	21.0		%	21.0		%	21.0		%
State and local taxes, net of federal tax benefit	2.3		%	2.2		%	2.2		%
Benefit of foreign operations	(1.5)		%	(0.1)		%	1.8		%


U.S. Tax Act impact	—		%	—		%	(2.8)		%
Other	(1.5)		%	(2.1)		%	(1.1)		%
Effective tax rate	20.3		%	21.0		%	21.1		%
Income tax paid	$	514		$	458		$	442

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


	Year Ended December 31,
	2020		2019		2018
U.S.	$	1,349	$	1,039	$	936
Non-U.S.	880		771		736
Income before provision for income taxes	$	2,229	$	1,810	$	1,672

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


	December 31,
	2020		2019
Deferred tax assets:
Account receivable allowances	$	9	$	6
Accumulated depreciation and amortization	2		1
Stock-based compensation	42		46
Accrued compensation and benefits	99		89
Capitalized costs	39		—
Operating lease liabilities	122		136
Deferred revenue	30		37
Net operating loss	17		13
Restructuring	3		4
Uncertain tax positions	98		94
Self-insured related reserves	10		8
Loss on net investment hedges - OCI	93		—
Other	10		13
Total deferred tax assets	574		447
Deferred tax liabilities:
Accumulated depreciation and amortization of intangible assets and capitalized software	(468)		(389)
ROU Assets	(90)		(107)
Capital Gains	(23)		(23)
Self-insured related income	(10)		(8)
Stock-based compensation	—		(2)
Revenue Accounting Standard - ASC 606	(10)		(12)
Deferred tax on unremitted foreign earnings	(16)		—
Gain on net investment hedges - OCI	(8)		(22)
Other	(4)		(3)
Total deferred tax liabilities	(629)		(566)
Net deferred tax liabilities	(55)		(119)
Valuation allowance	(15)		(9)
Total net deferred tax liabilities	$	(70)	$	(128)

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 $60 million, or 269 BPS, for the full-year of 2020, and approximately $44 million, or 242 BPS, for the full-year of 2019, relating to Excess Tax Benefits on stock-based compensation.

The Company had valuation allowances of $15 million and $9 million at December 31, 2020 and 2019, respectively, related to foreign net operating losses for which realization is uncertain.

As of December 31, 2020, the Company had $483 million of UTPs of which $432 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 addition, the Company has recorded a deferred tax asset in the amount of $50 million for potential transition tax benefits if certain non-U.S. UTPs are not sustained.

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


	Year Ended December 31,
	2020		2019		2018
Balance as of January 1	$	477	$	495	$	389
Additions for tax positions related to the current year	37		35		80
Additions for tax positions of prior years	17		22		89
Reductions for tax positions of prior years	(2)		(2)		(13)
Settlements with taxing authorities	(5)		(1)		(2)
Lapse of statute of limitations	(41)		(44)		(48)
Reclassification to indemnification liability related to MAKS divestiture	—		(28)		—
Balance as of December 31	$	483	$	477	$	495

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, 2020 and 2019, the Company incurred a net interest expense of $31 million and $28 million respectively, related to UTPs. As of December 31, 2020 and 2019, the amount of accrued interest recorded in the Company’s consolidated balance sheets related to UTPs was $113 million and $82 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 return for 2019 remains open to examination and 2017 and 2018 are currently under examination. The Company’s New York City tax returns for 2014 through 2017 are currently under examination. The Company’s U.K. tax return for 2012 is currently under examination and its returns for 2013 through 2019 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.

- Definition

The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.

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