INCOME TAXES

International pre-tax income was $4.5 billion, $3.7 billion and $3.1 billion for the years ended December 31, 2017, 2016 and 2015, respectively. U.S. pre-tax loss was $121.6 million and $983.1 million for the years ended December 31, 2017 and 2016, respectively, and U.S. pre-tax income was $35.4 million for the year ended December 31, 2015.

Provision for Income Taxes

The income tax expense (benefit) for the year ended December 31, 2017 is as follows (in thousands):



	Current		Deferred			Total
International	$	755,836	$	(10,361	)	$	745,475
U.S. Federal	1,327,663		(57,350		)	1,270,313
U.S. State	6,523		35,246			41,769
Total	$	2,090,022	$	(32,465	)	$	2,057,557

The income tax expense (benefit) for the year ended December 31, 2016 is as follows (in thousands):



	Current			Deferred			Total
International	$	627,718		$	(14,359	)	$	613,359
U.S. Federal	63,613			(32,405		)	31,208
U.S. State	(1,175		)	(65,141		)	(66,316		)
Total	$	690,156		$	(111,905	)	$	578,251

The income tax expense (benefit) for the year ended December 31, 2015 is as follows (in thousands):



	Current		Deferred			Total
International	$	526,052	$	(17,789	)	$	508,263
U.S. Federal	88,237		(68,696		)	19,541
U.S. State	24,006		25,150			49,156
Total	$	638,295	$	(61,335	)	$	576,960

The U.S. pre-tax loss is lower for the year ended December 31, 2017 compared to the year ended December 31, 2016 primarily due to the impairment charge for goodwill related to OpenTable of $940.7 million (see Note 9) recognized in 2016. Income tax expense on the Company's U.S. pre-tax loss for the year ended December 31, 2017 includes the impact of the Tax Act as disclosed below.

The U.S. pre-tax loss for the year ended December 31, 2016 compared to the pre-tax income for the year December 31, 2015 is primarily due to the impairment charge for goodwill referenced above and higher interest expense in 2016. Income tax expense on the Company’s U.S. pre-tax loss for the year ended December 31, 2016 includes the impact of the non-deductible impairment charge of OpenTable goodwill, U.S. income tax on the Company’s international interest income, which increased during the year, and the tax benefits arising from U.S. state tax law changes resulting in a net decrease to deferred tax liabilities, mostly associated with acquired intangible assets.

U.S. Tax Reform

On December 22, 2017, the U.S. government enacted the Tax Act. The Tax Act makes significant changes to U.S. federal income tax law, including a reduction in the U.S. federal statutory tax rate from 35% to 21%, effective January 1, 2018. The Tax Act imposes a one-time deemed repatriation tax on accumulated unremitted international earnings, to be paid over eight years. The Company recorded provisional income tax expense of approximately $1.6 billion, which includes U.S. state income taxes and international withholding taxes, related to the mandatory deemed repatriation of estimated accumulated unremitted international earnings of approximately $16.5 billion. The Company also recorded a provisional net income tax benefit of approximately $217 million related to the remeasurement of the Company’s U.S. deferred tax assets and liabilities due to the reduction of the U.S. federal statutory tax rate from 35% to 21%. The Company currently expects to use approximately $204 million of deferred tax assets related to federal net operating loss carryforwards ("NOLs") and approximately $46 million of other tax credit carryforwards, and accordingly, has reduced the transition tax liability to approximately $1.3 billion, which is presented as "Long-term U.S. transition tax liability" in the Consolidated Balance Sheet as of December 31, 2017. The Company continues to evaluate whether and to what extent it will utilize its NOLs and other tax credits to reduce the transition tax liability. Under the Tax Act, the Company's international cash and investments as of December 31, 2017, amounting to $16.2 billion, as well as future cash generated by our international operations, generally can be repatriated without further U.S. federal income tax, but will be subject to U.S. state income taxes and international withholding taxes.

The Tax Act also introduced in 2018 a tax on 50% of global intangible low-taxed income (“GILTI”), which is income determined to be in excess of a specified routine rate of return, and also introduced a base erosion and anti-abuse tax (“BEAT”) aimed at preventing the erosion of the U.S. tax base. The Company continues to review the GILTI and BEAT provisions of the Tax Act for applicability to the Company and expects further guidance from U.S. Treasury Department, Internal Revenue Service, state tax authorities and/or other authorities on the application of these provisions. The Company has not yet adopted an accounting policy as to whether the Company will treat taxes on GILTI as period costs or whether the Company will recognize deferred tax assets and liabilities when basis differences exist that are expected to affect the amount of GILTI inclusion upon reversal.

The provisions of the Tax Act are broad and complex, and there are significant uncertainties about how it will be interpreted at both the U.S. federal and state levels, and limited guidance is available from tax authorities at this time. Further interpretation and implementation of the Tax Act may materially impact the Company's provisional income tax expense and future income tax expense and obligations.

On December 22, 2017, Staff Accounting Bulletin No. 118 ("SAB 118") was issued by the Securities and Exchange Commission to address the application of U.S. GAAP in situations when the registrant does not have all the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete its accounting for the change in tax law. In accordance with SAB 118, to the extent a registrant can reasonably estimate the effects of the Tax Act, a provisional tax amount can be recorded, but must be finalized prior to December 22, 2018. Further analysis is necessary to finalize the Company's accumulated unremitted international earnings subject to the U.S. federal deemed repatriation tax. In addition, since the Company is still evaluating whether and to what extent it will utilize its NOLs against the transition tax liability, the Company’s U.S. deferred tax assets or liabilities may be impacted. Therefore, the Company considers its accounting related to the Tax Act for U.S. federal and state income taxes as well as international withholding taxes as discussed above to be provisional. As the Company refines its estimates and continues to evaluate the Tax Act, the Company will adjust its provision for income taxes in the period when a change in estimate occurs.

Deferred Income Taxes

The Company currently expects that the majority of its available U.S. NOLs as of December 31, 2016 will be utilized in 2017 to reduce its tax liability for the deemed repatriation tax. After utilization of available NOLs, as of December 31, 2017, the Company had U.S. federal NOLs of $180 million, which are subject to an annual limitation and mainly expire from December 31, 2019 to December 31, 2021, and U.S. state NOLs of $510 million, which mainly expire between December 31, 2020 and December 31, 2034. In addition, at December 31, 2017, the Company has approximately $180 million of non-U.S. NOLs, of which $86 million expires between December 31, 2019 and December 31, 2024, and approximately $18 million of U.S. research tax credit carryforwards available to reduce future tax liabilities, the majority of which do not have an expiration date.

The utilization of these NOLs, allowances and credits is dependent upon the Company's ability to generate sufficient future taxable income and the tax laws in the jurisdictions where the losses were generated. The Company periodically evaluates the likelihood of the realization of deferred tax assets, and reduces the carrying amount of these deferred tax assets by a valuation allowance to the extent it believes a portion will not be realized. The Company considers many factors when assessing the likelihood of future realization of the deferred tax assets, including its recent cumulative earnings experience by taxing jurisdiction, expectations of future income, tax planning strategies, the carryforward periods available for tax reporting purposes, and other relevant factors.

The tax effects of temporary differences that give rise to significant portions of deferred tax assets and liabilities at December 31, 2017 and 2016 are as follows (in thousands):



	2017			2016
Deferred tax assets/(liabilities):
Net operating loss carryforward — U.S.	$	70,750		$	15,977
Net operating loss carryforward — International	27,831			18,371
Accrued expenses	57,524			72,631
Stock-based compensation and other stock based payments	48,104			60,937
Euro denominated debt	57,740			—
Fixed assets	8,600			—
Subtotal - deferred tax assets	270,549			167,916

Discount on convertible notes	(32,810		)	(77,845		)
Intangible assets and other	(517,353		)	(740,329		)
Euro denominated debt	—			(117,737		)
Fixed assets	—			(2,245		)
State income tax on accumulated unremitted international earnings	(36,616		)	—
Unrealized gain on investments	(70,408		)	—
Other	(9,480		)	(3,958		)
Subtotal - deferred tax liabilities	(666,667		)	(942,114		)
Valuation allowance on deferred tax assets	(43,694		)	(24,475		)
Net deferred tax liabilities⁽¹⁾	$	(439,812	)	$	(798,673	)

(1) Includes deferred tax assets of $41.3 million and $23.7 million as of December 31, 2017 and 2016, respectively, reported in "Other assets" in the Consolidated Balance Sheets.

The valuation allowance on deferred tax assets of $43.7 million at December 31, 2017 includes $26.8 million related to international operations and $16.9 million related to U.S. research credits, capital loss carryforwards and Connecticut NOLs. The valuation allowance increased by $19.2 million during the year ended December 31, 2017, principally due to certain non-U.S. NOLs acquired in the Momondo Group transaction.

Pursuant to the adoption of an accounting update on January 1, 2017, the Company recorded a deferred tax asset of $301.4 million related to previously unrecognized U.S. equity tax deductions, with an offsetting cumulative-effect adjustment to retained earnings (see Note 2), the majority of which was utilized during the year ended December 31, 2017.

Reconciliation of U.S. Federal Statutory Income Tax Rate to Effective Income Tax Rate

A significant portion of the Company's taxable earnings are generated in the Netherlands. According to Dutch corporate income tax law, income generated from qualifying innovative activities is taxed at a rate of 5% ("Innovation Box Tax") rather than the Dutch statutory rate of 25%. A portion of Booking.com's earnings during the years ended December 31, 2017, 2016 and 2015 qualifies for Innovation Box Tax treatment, which had a significant beneficial impact on the Company's effective tax rate for those years. During December 2017, legislation was enacted in the Netherlands that increased the Innovation Box Tax rate to 7%, effective for tax years beginning on or after January 1, 2018.

The effective income tax rate of the Company is different from the amount computed using the expected U.S. statutory federal rate of 35% as a result of the following items (in thousands):



	2017			2016			2015
Income tax expense at federal statutory rate	$	1,539,413		$	949,633		$	1,094,912
Adjustment due to:
Foreign rate differential	(458,252		)	(377,542		)	(316,078		)
Innovation Box Tax benefit	(397,074		)	(324,633		)	(260,193		)
Impairment of goodwill and cost-method investment	—			343,484			—
Tax Act - Remeasurement of deferred tax balances	(216,572		)	—			—
Tax Act - U.S. transition tax and other transition impacts	1,562,532			—			—
Other	27,510			(12,691		)	58,319
Income tax expense	$	2,057,557		$	578,251		$	576,960

Uncertain Tax Positions

See Note 2 for the Company's accounting policy on uncertain tax positions. The following is a reconciliation of the total beginning and ending amount of unrecognized tax benefits (in thousands):



	2017			2016			2015
Unrecognized tax benefit — January 1	$	32,715		$	42,594		$	52,356
Gross increases — tax positions in current period	5,119			2,468			3,411
Gross increases — tax positions in prior periods	5,822			859			4,305
Gross decreases — tax positions in prior periods	(9,202		)	(217		)	(10,365		)
Reduction due to lapse in statute of limitations	(1,009		)	(9,077		)	(7,113		)
Reduction due to settlements during the current period	(1,050		)	(3,912		)	—
Unrecognized tax benefit — December 31	$	32,395		$	32,715		$	42,594

The unrecognized tax benefits are included in "Other long-term liabilities" and "Deferred income taxes" in the Consolidated Balance Sheets for the years ended December 31, 2017 and 2016. The Company does not expect further significant changes in the amount of unrecognized tax benefits during the next twelve months.

The Company's Netherlands, U.S. federal, Connecticut, California, New York, Massachusetts, Singapore and U.K. income tax returns, constituting the returns of the major taxing jurisdictions, are subject to examination by the taxing authorities as prescribed by applicable statute. The statute of limitations remains open for: the Company's Netherlands returns from 2014 and forward; the Company's Singapore returns from 2013 and forward; the Company's U.S. federal and Connecticut returns from 2012 and forward; the Company's California returns from 2008 and forward; the Company's New York returns from 2012 and forward; the Company's Massachusetts returns from 2012 and forward and the Company's U.K. returns for the tax years 2015 and 2016. No income tax waivers have been executed that would extend the period subject to examination beyond the period prescribed by statute in the major taxing jurisdictions in which the Company is a taxpayer. The Company’s 2015 U.S. federal income tax return is currently under audit by the Internal Revenue Service. See Note 14 for more information regarding tax contingencies.