INCOME TAXES

12 Months Ended

Dec. 31, 2019

International pre-tax income was $5.7 billion, $4.8 billion and $4.5 billion for the years ended December 31, 2019, 2018 and 2017, respectively. U.S. pre-tax income was $213 million and $47 million for the years ended December 31, 2019 and 2018, respectively, and U.S. pre-tax loss was $122 million for the year ended December 31, 2017.

Provision for Income Taxes

The income tax expense (benefit) for the year ended December 31, 2019 is as follows (in millions):



	Current		Deferred			Total
International	$	915	$	(12	)	$	903
U.S. Federal	22		166			188
U.S. State	34		(32		)	2
Total	$	971	$	122		$	1,093

The income tax expense (benefit) for the year ended December 31, 2018 is as follows (in millions):



	Current		Deferred			Total
International	$	887	$	(3	)	$	884
U.S. Federal	45		(107		)	(62		)
U.S. State	55		(40		)	15
Total	$	987	$	(150	)	$	837

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



	Current		Deferred			Total
International	$	756	$	(10	)	$	746
U.S. Federal	1,327		(57		)	1,270
U.S. State	7		35			42
Total	$	2,090	$	(32	)	$	2,058

U.S. Tax Reform

In December 2017, the Tax Act was enacted into law in the United States. The Tax Act made significant changes to U.S. federal tax law, including a reduction in the U.S. federal statutory tax rate from 35% to 21%, effective January 1, 2018. The Tax Act imposed 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 during the year ended December 31, 2017 in accordance with Staff Accounting Bulletin No. 118 ("SAB 118"), which included U.S. state income taxes and international withholding taxes, related to the mandatory deemed repatriation of estimated accumulated international earnings of approximately $16.5 billion. The Company also recorded a provisional net income tax benefit of $217 million during the year ended December 31, 2017 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 rate from 35% to 21%. The Company expected 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, reduced the transition tax liability to approximately $1.3 billion, which was included in "Long-term U.S. transition tax liability" in the Consolidated Balance Sheet as of December 31, 2017.

In 2018, the Company recorded an income tax benefit of $46 million to adjust its provisional income tax expense that was recorded during the year ended December 31, 2017 relating to the federal one-time deemed repatriation liability, as well as U.S. state income taxes and international withholding taxes associated with the mandatory deemed repatriation. In addition, the Company recorded an income tax benefit of $2 million in 2018 to adjust the remeasurement of its U.S. deferred tax assets and liabilities due to the reduction of the U.S. federal statutory tax rate that resulted from the Tax Act.

In 2019, as a result of additional technical guidance issued by U.S. federal and state tax authorities with respect to the Tax Act, the Company recorded an income tax benefit of $17 million to adjust its income tax expense that was recorded during the year ended December 31, 2017 relating to the federal one-time deemed repatriation liability, as well as U.S. state income taxes associated with the mandatory deemed repatriation. The Company utilized $116 million of deferred tax assets related to U.S. federal NOLs and $111 million of other tax credit carryforwards to reduce its transition tax liability as of December 31, 2019.

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 the Company's 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, which have been accrued by the Company.

The Tax Act also introduced in 2018 a tax on 50% of GILTI, which is income determined to be in excess of a specified routine rate of return, and a base erosion and anti-abuse tax ("BEAT") aimed at preventing the erosion of the U.S. tax base. The Company has adopted an accounting policy to treat taxes on GILTI as period costs.

Deferred Income Taxes

The Company utilized $330 million of its U.S. NOLs to reduce its U.S. federal tax liability for the deemed repatriation tax. After utilization of available NOLs, at December 31, 2019, the Company had U.S. federal NOLs of $81 million, which are subject to an annual limitation and mainly expire from December 31, 2020 to December 31, 2021, and U.S. state NOLs of $317 million, which mainly expire between December 31, 2020 and December 31, 2034. In addition, at December 31, 2019, the Company had $97 million of non-U.S. NOLs, and $20 million of U.S. research tax credit carryforwards available to reduce future tax liabilities and the majority of both 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, 2019 and 2018 are as follows (in millions):



	2019			2018
Deferred tax assets/(liabilities):
Net operating loss carryforward — U.S.	$	37		$	59
Net operating loss carryforward — International	15			20
Accrued expenses	35			50
Stock-based compensation and other stock based payments	49			51
Foreign currency translation adjustment	36			27
Tax credits	14			46
Euro-denominated debt	—			5
Operating lease liabilities	38			—
Property and equipment	31			6
Subtotal - deferred tax assets	255			264

Discount on convertible notes	(10		)	(22		)
Intangible assets and other	(133		)	(482		)
Euro-denominated debt	(14		)	—
State income tax on accumulated unremitted international earnings	(8		)	(25		)
Unrealized gains on investments	(191		)	(2		)
Operating lease assets	(35		)	—
Installment sale liability	(284		)	—
Other	(11		)	(15		)
Subtotal - deferred tax liabilities	(686		)	(546		)
Valuation allowance on deferred tax assets	(45		)	(36		)
Net deferred tax liabilities⁽¹⁾	$	(476	)	$	(318	)

(1) Includes deferred tax assets of $400 million and $51 million at December 31, 2019 and 2018, respectively, reported in "Other assets" in the Consolidated Balance Sheets.

During the year ended December 31, 2019, the Company recorded a deferred tax asset of $335 million, which is included in “Other Assets” in the Consolidated Balance Sheet, and a deferred tax liability of $325 million, both related to an internal restructuring.

The valuation allowance on deferred tax assets of $45 million at December 31, 2019 includes $30 million related to international operations and $15 million primarily related to U.S. research credits, capital loss carryforwards and Connecticut NOLs. The valuation allowance on deferred tax assets of $36 million at December 31, 2018 includes $20 million related to international operations and $16 million primarily related to U.S. research credits, capital loss carryforwards and Connecticut NOLs.

Pursuant to the adoption of an accounting update on January 1, 2017 related to share-based compensation, the Company recorded a deferred tax asset of $301 million related to previously unrecognized U.S. equity tax deductions, with an offsetting cumulative-effect adjustment to retained earnings, the majority of which was utilized during the year ended December 31, 2017.

The Company does not intend to indefinitely reinvest its international earnings that were subject to U.S. taxation pursuant to the mandatory deemed repatriation or subject to U.S. taxation as GILTI.

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

A significant portion of the Company's taxable earnings is generated in the Netherlands. According to Dutch corporate income tax law, income generated from qualifying innovative activities is taxed at a rate of 7% ("Innovation Box Tax") for periods beginning on or after January 1, 2018 rather than the Dutch statutory rate of 25%. Previously, the Innovation Box Tax rate had been 5%. A portion of Booking.com's earnings during the years ended December 31, 2019, 2018 and 2017 qualified for Innovation Box Tax treatment, which had a significant beneficial impact on the Company's effective tax rate for those years.

The effective income tax rate of the Company is different from the amount computed using the expected U.S. statutory federal rate of 21% in 2019 and 2018 and 35% in 2017 as a result of the following items (in millions):



	2019			2018			2017
Income tax expense at U.S. federal statutory rate	$	1,251		$	1,015		$	1,539
Adjustment due to:
Foreign rate differential	210			210			(458		)
Innovation Box Tax benefit	(443		)	(435		)	(397		)
Tax Act - Remeasurement of deferred tax balances	—			(2		)	(217		)
Tax Act - U.S. transition tax and other transition impacts	(17		)	(46		)	1,563
Other	92			95			28
Income tax expense	$	1,093		$	837		$	2,058

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 millions):



	2019			2018			2017
Unrecognized tax benefit — January 1	$	45		$	32		$	33
Gross increases — tax positions in current period	3			1			5
Gross increases — tax positions in prior periods	11			19			5
Gross decreases — tax positions in prior periods	(3		)	(3		)	(9		)
Reduction due to lapse in statute of limitations	—			(2		)	(1		)
Reduction due to settlements during the current period	—			(2		)	(1		)
Unrecognized tax benefit — December 31	$	56		$	45		$	32

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, 2019 and 2018. The unrecognized tax benefits, if recognized, would affect the effective tax rate. The Company does not expect further significant changes in the amount of unrecognized tax benefits during the next twelve months. As of December 31, 2019 and 2018, total gross interest and penalties accrued was $10 million and $8 million, respectively.

The Company's major taxing jurisdictions include: the Netherlands, United States, Singapore and United Kingdom. The statutes of limitations that remain open related to these major tax jurisdictions are: the Company's Netherlands returns from 2014 and forward, U.S. returns for 2014 and forward, Singapore returns from 2017 and forward and U.K. returns for 2015 and forward. An income tax waiver has been executed for the U.S. federal 2015 return that would extend the period subject to examination beyond the period prescribed by statute or for the period just stated above. The Company’s 2015 U.S. federal income tax return is currently under audit by the Internal Revenue Service. See Note 16 for more information regarding tax contingencies.