Income Taxes

12 Months Ended

Dec. 31, 2020

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

The components of pretax income for the years ended December 31, 2020, 2019 and 2018 are as follows (in millions):

	Year Ended December 31,
	2020		2019		2018
United States	$	1,163	$	177	$	144
International	2,257		1,572		2,105
	$	3,420	$	1,749	$	2,249

The provision (benefit) for income taxes is comprised of the following (in millions):

	Year Ended December 31,
	2020		2019		2018
Current:
Federal	$	252	$	35	$	34
State and local	87		23		22
Foreign	131		180		169
	$	470	$	238	$	225
Deferred:
Federal	$	(73)	$	(149)	$	(458)
State and local	(8)		(44)		(10)
Foreign	489		188		364
	408		(5)		(104)
	$	878	$	233	$	121

The following is a reconciliation of the difference between the actual provision for income taxes and the provision computed by applying the federal statutory rate of 21% to income before income taxes (in millions):

	Year Ended December 31,
	2020		2019		2018
Provision at statutory rate	$	718	$	367	$	472
Foreign income taxed at different rates	21		16		(30)
Other taxes on foreign operations	19		(33)		24
Stock-based compensation	(1)		(1)		5
State taxes, net of federal benefit	80		(24)		8
Research and other tax credits	(28)		(29)		(26)
Impact of tax rate change	43		(21)		108
U.S. tax reform	—		—		(429)
Effective settlement of audits	—		(69)		—
Other	26		27		(11)
	$	878	$	233	$	121

Deferred tax assets and liabilities are recognized for the future tax consequences of differences between the carrying amounts of assets and liabilities and their respective tax bases using enacted tax rates in effect for the year in which the differences are expected to be reversed. Significant deferred tax assets and liabilities consist of the following (in millions):

	As of December 31,
	2020		2019
Deferred tax assets:
Net operating loss, capital loss and credits	$	174	$	124
Accruals and allowances	427		220
Stock-based compensation	10		14
Amortizable tax basis in intangibles	3,470		3,916
Net deferred tax assets	4,081		4,274
Valuation allowance	(149)		(96)
	$	3,932	$	4,178
Deferred tax liabilities:
Unremitted foreign earnings	$	(2,177)	$	(2,328)
Acquisition-related intangibles	(36)		(31)
Depreciation and amortization	(237)		(131)
Net unrealized gain on investments	(306)		(63)
	(2,756)		(2,553)
	$	1,176	$	1,625

As of December 31, 2020, our federal, state and foreign net operating loss carryforwards for income tax purposes were approximately $10 million, $52 million and $315 million, respectively. The federal and state net operating loss carryforwards are subject to various limitations under Section 382 of the Internal Revenue Code and applicable state tax laws. If not utilized, the federal and state net operating loss carryforwards will begin to expire in 2021 and 2023, respectively. The carryforward periods on our foreign net operating loss carryforwards are as follows: $5 million do not expire and $310 million are subject to valuation allowance and begin to expire in 2021. As of December 31, 2020, state tax credit carryforwards for income tax purposes were approximately $161 million. Most of the state tax credits carry forward indefinitely.

As of December 31, 2020 and 2019, we maintained a valuation allowance with respect to certain of our deferred tax assets relating primarily to operating losses in certain non-U.S. jurisdictions and certain state tax credits that we believe are not likely to be realized.

We recognized the tax consequences of all foreign unremitted earnings and management has no specific plans to indefinitely reinvest the unremitted earnings of our foreign subsidiaries as of the balance sheet date. Accordingly, as of December 31, 2020 and 2019, $791 million and $884 million, respectively, of our liability for deemed repatriation of foreign earnings was included in other liabilities on our consolidated balance sheet. We have not provided for deferred taxes on outside basis differences in our investments in our foreign subsidiaries that are unrelated to unremitted earnings. With the exception of our Classifieds entities recognized in discontinued operations, these basis differences will be indefinitely reinvested. A determination of the unrecognized deferred taxes related to these other components of our outside basis difference is not practicable. In connection with the intent to sell the Classifieds business as discussed in “Note 1 – The Company and Summary of Significant Accounting Policies”, we assessed the outside basis differences relating to Classifieds and determined that no material deferred taxes need to be provided on the difference as of December 31, 2020.

The following table reflects changes in unrecognized tax benefits for the years ended December 31, 2020, 2019 and 2018 (in millions):

	2020		2019		2018
Gross amounts of unrecognized tax benefits as of the beginning of the period	$	387	$	544	$	487
Increases related to prior period tax positions	30		37		62
Decreases related to prior period tax positions	(15)		(114)		(10)
Increases related to current period tax positions	39		28		23
Settlements	(21)		(108)		(18)
Gross amounts of unrecognized tax benefits as of the end of the period	$	420	$	387	$	544

Included within our gross amounts of unrecognized tax benefits of $420 million as of December 31, 2020 is $50 million of unrecognized tax benefits indemnified by PayPal. If total unrecognized tax benefits were realized in a future period, it would result in a tax benefit of $295 million. Of this amount, approximately $47 million of unrecognized tax benefit is indemnified by PayPal and a corresponding receivable would be reduced upon a future realization. As of December 31, 2020, our liabilities for unrecognized tax benefits were included in other liabilities on our consolidated balance sheet.

We recognize interest and/or penalties related to uncertain tax positions in income tax expense. In 2020, a $10 million benefit was included in tax expense for interest and penalties. The amount of interest and penalties accrued as of December 31, 2020 and 2019 was approximately $39 million and $46 million, respectively.

We are subject to both direct and indirect taxation in the U.S. and various states and foreign jurisdictions. We are under examination by certain tax authorities for the 2010 to 2019 tax years. We believe that adequate amounts have been reserved for any adjustments that may ultimately result from these or other examinations. The material jurisdictions where we are subject to potential examination by tax authorities for tax years after 2009 include, among others, the U.S. (Federal and California), Germany, Korea, Israel, Switzerland and the United Kingdom.

Although the timing of the resolution and/or closure of audits is highly uncertain, it is reasonably possible that the balance of gross unrecognized tax benefits could significantly change in the next 12 months. However, given the number of years remaining subject to examination and the number of matters being examined, we are unable to estimate the full range of possible adjustments to the balance of gross unrecognized tax benefits.

On July 27, 2015, in Altera Corp. v. Commissioner, the U.S. Tax Court issued an opinion invalidating the regulations relating to the treatment of stock-based compensation expense in an intercompany cost-sharing arrangement. On June 22, 2020, the U.S. Supreme Court declined to issue a writ of certiorari, thus leaving the Ninth Circuit’s ruling intact. There is no impact to our consolidated financial statements.