Income Taxes

12 Months Ended

Dec. 31, 2019

Net income before provision for income taxes and equity in losses of investee consists of the following (in thousands):



	Year ended December 31,
	2019		2018		2017
Domestic	$	184,956	$	171,658	$	123,696
Foreign	377,695		294,993		241,103
Net income before provision for income taxes and equity in losses of investee	$	562,651	$	466,651	$	364,799

The provision for (benefit from) income taxes consists of the following (in thousands):



	Year Ended December 31,
	2019			2018			2017
Federal
Current	$	76,528		$	35,788		$	91,214
Deferred	1,235			(5,989		)	15,724
	77,763			29,799			106,938
State
Current	9,169			9,568			2,580
Deferred	209			(3,274		)	2,677
	9,378			6,294			5,257
Foreign
Current	28,364			22,753			15,285
Deferred	(3,158		)	(1,123		)	2,682
	25,206			21,630			17,967
Provision for income taxes	$	112,347		$	57,723		$	130,162

The differences between income taxes using the federal statutory income tax rate for 2019, 2018 and 2017 and our effective tax rates are as follows:



	Year Ended December 31,
	2019		2018		2017
U.S. federal statutory income tax rate	21.0	%	21.0	%	35.0	%
State income taxes, net of federal tax benefit	1.7		1.3		1.4
U.S. tax on foreign earnings	1.9		4.1		1.5
Impact of U.S. Tax Cuts and Jobs Act (“TCJA”)	—		2.1		23.1
Impact of differences in foreign tax rates	(5.1	)	(6.7	)	(18.0	)
Impact of expiration of statute of limitations	—		(6.2	)	—
Stock-based compensation	(1.2	)	(3.4	)	(6.3	)
Other items not individually material	1.7		0.2		(1.0	)
Effective tax rate	20.0	%	12.4	%	35.7	%

The TCJA was enacted into law on December 22, 2017 and made significant changes to the Internal Revenue Code, including, but not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, the transition of U.S. international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017.

On December 22, 2017, Staff Accounting Bulletin No. 118 ("SAB 118") was issued to address the application of GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the TCJA. As of December 31, 2017, we recorded a provisional tax charge for the estimated impact of the TCJA of $84.3 million, of which $73.9 million was related to a provisional transition tax liability on the mandatory deemed repatriation of foreign earnings and $10.4 million was related to the remeasurement of certain deferred tax assets and liabilities. We finalized our assessment of the impact of the TCJA on our 2017 financial statements and recorded additional charges of $3.0 million in 2018, all of which relate to the transition tax on the mandatory deemed repatriation of foreign earnings.

As of December 31, 2019, undistributed earnings of our foreign subsidiaries totaled $452.6 million and substantially all of the earnings previously determined to be not indefinitely reinvested have been repatriated. Under the GILTI provisions of the TCJA, U.S. income taxes have already been provided on the $452.6 million undistributed earnings that is indefinitely reinvested in our international operations, therefore, the tax impact upon distribution is limited to mainly state income and withholding taxes and is not significant.

As of December 31, 2019 and 2018, the significant components of our deferred tax assets and liabilities are (in thousands):



	Year Ended December 31,
	2019			2018
Deferred tax assets:
Net operating loss and capital loss carryforwards	$	18,182		$	25,410
Reserves and accruals	39,264			24,769
Stock-based compensation	8,416			8,571
Deferred revenue	20,909			14,285
Net translation losses	1,589			1,158
Credit carryforwards	1,801			115
	90,161			74,308
Deferred tax liabilities:
Depreciation and amortization	23,817			8,320
Prepaid expenses	1,341			902
Unremitted foreign earnings	—			612
	25,158			9,834
Net deferred tax assets before valuation allowance	65,003			64,474
Valuation allowance	(1,086		)	(251		)
Net deferred tax assets	$	63,917		$	64,223

The available positive evidence at December 31, 2019 included historical operating profits and a projection of future income sufficient to realize most of our remaining deferred tax assets. As of December 31, 2019, it was considered more likely than not that our deferred tax assets would be realized with the exception of certain capital loss carryovers as we are unable to forecast sufficient future profits to realize the deferred tax assets.

The total valuation allowance as of December 31, 2019 as well as the increase for the year 2019 was not material to our financial statements.

As of December 31, 2019, we have foreign net operating loss carryforwards of approximately $82.1 million, the majority of which can be carried forward indefinitely, and a minor portion of which, if not utilized, will expire beginning after 2024.

In the event of a change in ownership, as defined under federal and state tax laws, our tax credit carryforwards may be subject to annual limitations. The annual limitations may result in the expiration of the tax credit carryforwards before utilization.

The changes in the balance of gross unrecognized tax benefits, which exclude interest and penalties, for the year ended December 31, 2019, 2018 and 2017, are as follows (in thousands):



Unrecognized tax benefits as of December 31, 2016	$	46,384
Tax positions related to current year:
Additions for uncertain tax positions	1,819
Tax positions related to prior year:
Additions for uncertain tax positions	1,809
Decreases for uncertain tax positions	(826		)
Settlements with tax authorities	(1,527		)
Reductions due to lapse of applicable statute of limitations	(3		)
Unrecognized tax benefits as of December 31, 2017	47,656
Tax positions related to current year:
Additions for uncertain tax positions	14,519
Tax positions related to prior year:
Additions for uncertain tax positions	80
Reductions due to lapse of applicable statute of limitations	(28,993		)
Unrecognized tax benefits as of December 31, 2018	33,262
Tax positions related to current year:
Additions for uncertain tax positions	19,012
Tax positions related to prior year:
Additions for uncertain tax positions	143
Decreases for uncertain tax positions	(3,783		)
Reductions due to lapse of applicable statute of limitations	(1,984		)
Unrecognized tax benefits as of December 31, 2019	$	46,650

The total amount of gross unrecognized tax benefits as of December 31, 2019 was $46.7 million, of which $43.9 million would impact our effective tax rate if recognized.

We file U.S. federal, U.S. state, and non-U.S. income tax returns. Our major tax jurisdictions include U.S. federal, the State of California and the Netherlands. For U.S. federal and state tax returns, we are no longer subject to tax examinations for years before 2015. We are currently under examination by the Internal Revenue Service for tax years 2015 and 2016. With few exceptions, we are no longer subject to examination by foreign tax authorities for years before 2012.

We have elected to recognize interest and penalties related to unrecognized tax benefits as a component of income taxes. Interest and penalties included in tax expense for the year ended December 31, 2019 and 2018 as well as accrued as of December 31, 2019 and 2018 was not material to our financials. The timing and resolution of income tax examinations is uncertain, and the amounts ultimately paid, if any, upon resolution of issues raised by the taxing authorities may differ materially from the amounts accrued for each year. Although it is possible that our balance of gross unrecognized tax benefits could materially change in the next 12 months, given the uncertainty in the development of ongoing income tax examinations, we are unable to estimate the full range of possible adjustments to this balance.

Subsequent to the year ended December 31, 2019, we completed an intra-entity transfer of certain intellectual property rights and fixed assets to our new Swiss subsidiary, where our EMEA regional headquarters is now located beginning January 1, 2020. The transfer of intellectual property rights did not result in a taxable gain; however, it did result in a step-up of the Swiss tax deductible basis in the transferred assets, and accordingly, created a temporary difference between the book basis and the tax basis of such intellectual property rights. Consequently, this transaction will result in the recognition of a deferred tax asset and related one-time tax benefit of up to $1.6 billion, in our consolidated financial statements during the three months ending March 31, 2020. We continue to assess the realizability of this deferred tax asset as we take into account new information, including the profitability of our Swiss headquarters and ongoing communication with the Swiss tax authorities. Effective January 1, 2020, Switzerland will become a major tax jurisdiction owing to the relocation of our EMEA regional headquarters from the Netherlands.