INCOME TAXES

12 Months Ended

Dec. 31, 2017

NOTE 15 INCOME TAXES

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

			Year Ended December 31,
			2017		2016		2015
Current:
	Federal		$	453.8	$	292.9	$	278.2
	State and Local			30.0		39.5		40.1
	Non-U.S.			207.0		102.9		93.6
		Total current		690.8		435.3		411.9
Deferred:
	Federal			155.5		(125.8)		14.7
	State and Local			17.5		(20.3)		7.6
	Non-U.S.			(84.7)		(7.0)		(4.2)
		Total deferred		88.3		(153.1)		18.1
Total provision for income taxes			$	779.1	$	282.2	$	430.0

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,
	2017		2016	2015
U.S. statutory tax rate		35.0%	35.0%		35.0%
State and local taxes, net of federal tax benefit		1.9	2.2		3.0
Benefit of foreign operations		(9.9)	(13.3)		(5.8)
Settlement charge		-	27.4		-
Legacy tax items		-	(0.1)		(0.2)
U.S. Tax Act Impact		17.0	-		-
Other		(0.4)	(0.6)		(0.8)
Effective tax rate		43.6%	50.6%		31.2%
Income tax paid	$	366.4	355.7		397.4

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

	Year Ended December 31,
	2017		2016		2015
United States	$	1,098.5	$	37.2	$	913.9
International		688.3		520.8		465.7
Income before provision for income taxes	$	1,786.8	$	558.0	$	1,379.6

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

		December 31,
		2017		2016
Deferred tax assets:
	Account receivable allowances	$	6.0	$	6.0
	Accumulated depreciation and amortization		1.2		1.3
	Stock-based compensation		39.6		54.4
	Accrued compensation and benefits		79.2		119.3
	Deferred rent and construction allowance		21.2		30.1
	Deferred revenue		41.9		46.2
	Foreign net operating loss ⁽¹⁾		13.3		3.7
	Settlement Charge		-		163.2
	Legal and professional fees		1.2		4.2
	Restructuring		0.2		2.2
	Uncertain tax positions		28.6		37.3
	Self-insured related reserves		7.5		15.1
	Capitalized cost		4.3		-
	Other		19.0		4.5
Total deferred tax assets		$	263.2	$	487.5
Deferred tax liabilities:
	Accumulated depreciation and amortization of intangible assets and capitalized software	$	(408.8)	$	(189.8)
	Foreign earnings to be repatriated		-		(7.5)
	Capital gains		(25.6)		(24.1)
	Self-insured related income		(7.5)		(15.1)
	Stock based compensation		(3.3)		(2.9)
	Unrealized gain on net investment hedges - OCI		-		(21.0)
	Other liabilities		(3.0)		(12.1)
Total deferred tax liabilities			(448.2)		(272.5)
Net deferred tax (liabilities) asset			(185.0)		215.0
Valuation allowance			(12.8)		(3.2)
Total net deferred tax (liabilities) assets		$	(197.8)	$	211.8
⁽¹⁾ Amounts are primarily set to expire beginning in 2018, if unused.

On December 22, 2017, the Tax Cut and Jobs 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, the Company recorded a provisional estimate for the transition tax of $247.3 million, a portion of which will be payable over eight years, starting in 2018, and will not accrue interest. Additionally, the Company recorded a provisional estimate decreasing net deferred tax assets by $56.2 million resulting from the future reduction in the federal corporate income tax rate. Separately, a statutory tax rate reduction in Belgium resulted in a $57.9 million decrease of deferred tax liabilities pertaining to Bureau van Dijk’s acquired intangible assets.

The above provisional estimates may be impacted by a number of additional considerations, including but not limited to the issuance of regulations and our ongoing analysis of the new law.

As a result of the Tax Act, all previously undistributed foreign earnings have now been subject to U.S. tax. However, the Company intends to continue to indefinitely reinvest these earnings outside the U.S and accordingly the Company has not provided non-U.S. deferred income taxes on these indefinitely reinvested earnings. It is not practicable to determine the amount of non-U.S. deferred taxes that might be required to be provided if such earnings were distributed in the future, due to complexities in the tax laws and in the hypothetical calculations that would have to be made.

On March 30, 2016, the FASB issued Accounting Standards Update (ASU) 2016-09, Improvements to Employee Share Based Payment Accounting as more fully discussed in Note 1 to the condensed consolidated financial statements. The new guidance requires all tax effects related to share based payments to be recorded through the income statement. The Company has adopted the new guidance as of the first quarter of 2017 and the adoption resulted in a reduction in its income tax provision of approximately $40 million, or 220BPS, for the full year of 2017.

In the first quarter of 2017, the Company adopted Accounting Standards Update 2016-16, “Accounting for Income Taxes: Intra-Entity Asset Transfers of Assets Other than Inventory.” Under previous guidance, the tax effects of intra-entity asset transfers (intercompany sales) were deferred until the transferred asset was sold to a third party or otherwise recovered through use. The new guidance eliminates the exception for all intra-entity sales of assets other than inventory. Upon adoption, a cumulative-effect adjustment is recorded in retained earnings as of the beginning of the period of adoption. The net impact upon adoption is a reduction to retained earnings of $4.6 million. The Company does not expect any material impact on its future operations as a result of the adoption of this guidance.

The Company had valuation allowances of $12.8 million and $3.2 million at December 31, 2017 and 2016, respectively, related to foreign net operating losses for which realization is uncertain.

As of December 31, 2017 the Company had $389.1 million of UTPs of which $353.0 million represents the amount that, if recognized, would impact the effective tax rate in future periods. The increase in UTPs results primarily from the acquisition of Bureau van Dijk.

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

	Year Ended December 31,
	2017		2016		2015
Balance as of January 1	$	199.8	$	203.4	$	220.3
Additions for tax positions related to the current year		86.3		21.9		24.1
Additions for tax positions of prior years		120.2		12.4		14.0
Reductions for tax positions of prior years		(4.1)		(27.6)		(41.6)
Settlements with taxing authorities		(2.2)		(8.3)		(7.8)
Lapse of statute of limitations		(10.9)		(2.0)		(5.6)
Balance as of December 31	$	389.1	$	199.8	$	203.4

The Company classifies interest related to UTPs in interest expense in its consolidated statements of operations. Penalties, if incurred, would be recognized in other non-operating expenses. During the years ended December 31, 2017 and 2016, the Company incurred a net interest expense of $15.3 million and $7.8 million respectively, related to UTPs. An additional $5.6 million of accrued interest was recorded in connection with the Company’s acquisition of Bureau van Dijk. As of December 31, 2017 and 2016, the amount of accrued interest recorded in the Company’s consolidated balance sheets related to UTPs was $54.7 million and $34.1 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 the years 2011 and 2012 are under examination and its 2013 to 2016 returns remain open to examination. The Company’s New York State income tax returns for 2011 to 2016 are under examination. The Company’s New York City tax return for 2014 is under examination and 2015 to 2016 remain open to examination. The Company’s U.K. tax return for 2012 is under examination. Tax filings in the U.K. remain open to examination for 2013 through 2016.

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.