Income Taxes

On December 22, 2017, the U.S. government enacted tax legislation referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to, (1) reducing the U.S. federal corporate tax rate from 35 percent to 21 percent; (2) requiring companies to pay a one-time Deemed Repatriation Transition Tax (“Transition Tax”) on certain unrepatriated earnings of foreign subsidiaries that can be paid over eight years; (3) a new provision designed to tax global intangible low-taxed income (GILTI), which allows for the possibility of using foreign tax credits (FTCs) and a deduction of up to 50 percent to offset the income tax liability (subject to some limitations); (4) the repeal of the domestic production activity deduction beginning January 1, 2018; (5) limitations on the deductibility of certain executive compensation; and (6) a new limitation on deductible interest expense beginning January 1, 2018.

At December 31, 2017, the Company has not completed its accounting for the tax effects of enactment of the Tax Act. However, as described below, the Company has made a reasonable estimate of the effects on its existing deferred tax balances and the one-time Transition Tax. In other cases, the Company has not been able to make a reasonable estimate and continue to account for those items based on its existing accounting under ASC 740 ("Income Taxes"), and the provisions of the tax laws that were in effect immediately prior to enactment. The Company was not able to make a reasonable estimate of the impact of the new limitations on the deductibility of certain executive compensation.

For those items for which it was able to determine a reasonable estimate, the Company recognized a provisional net tax benefit of $128.2 million, which is included as a component of income tax expense from continuing operations. In all cases, the Company will continue to make and refine its calculations as additional analysis is completed. In addition, it is anticipated that the U.S. Treasury Department will publish new regulations providing some clarity to many of the provisions included in the new act. As a result, the Company's estimates may also be affected as it gains a more thorough understanding of the Tax Act via new regulations and other guidance.

The SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act ("SAB 118"), which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.

In connection with its initial analysis of the impact of the Tax Act, the Company has recorded a net tax benefit of $128.2 million in the period ending December 31, 2017. This net benefit primarily consists of a net benefit for the corporate rate reduction on the deferred tax assets and liabilities of $210 million and a net expense for the Transition Tax of $81.8 million. For various reasons that are discussed more fully below, the Company has not completed its accounting for the income tax effects of certain elements of the Tax Act. However, the Company was able to make reasonable estimates of the effects of the elements for which its analysis is not yet complete and recorded provisional adjustments.

The Company's accounting for the following elements of the Tax Act are incomplete. However, the Company was able to make reasonable estimates of certain effects and, therefore, recorded provisional adjustments.

Deferred tax effects

The Tax Act reduces the corporate tax rate to 21 percent, effective January 1, 2018. For its deferred tax assets and deferred tax liabilities, the Company has recorded a provisional decrease of $210 million with a corresponding net adjustment to deferred tax benefit of $210 million for the year ended December 31, 2017. While the Company was able to make a reasonable estimate of the impact of the reduction in corporate rate, the impact may be affected by other analysis related to the Tax Act, including, but not limited to, FLEETCOR's calculation of deemed repatriation of deferred foreign income and the state tax effect of adjustments made to federal temporary differences.

One time transition tax

The Transition Tax is a tax on previously untaxed accumulated and current earnings and profits ("E&P") of certain of the Company's foreign subsidiaries. To determine the amount of the Transition Tax, the Company must determine, in addition to other factors, the amount of post-1986 E&P of the relevant subsidiaries, as well as the amount of non-U.S. income taxes paid on such earnings. The Company was able to make a reasonable estimate of the Transition Tax and recorded a provisional Transition Tax obligation of $81.8 million. However, the Company is continuing to gather additional information to more precisely compute the amount of the Transition Tax. Further, the Transition Tax is based in part on the amount of accumulated and current E&P held in cash and other specified assets. This amount may change when the Company finalizes the calculation of post-1986 foreign E&P previously deferred from U.S. federal taxation and finalize the amounts held in cash or other specified assets. Double tax relief is available for the pool of foreign tax credits attributed to the accumulated and current E&P. The amount of foreign tax credits claimed when the Company finalizes the calculation of the pool of foreign tax credits.

No additional income taxes have been provided for any remaining undistributed foreign earnings not subject to the Transition Tax, or any additional outside basis differences inherent in these entities, as these amounts continue to be indefinitely reinvested in foreign operations. The Company has not been able to make a reasonable estimate of the impact of the unrecognized deferred tax liability related to any remaining undistributed foreign earnings not subject to the Transition Tax or additional outside basis differences in these entities.

The Company has also not been able to make a reasonable estimate of the impact of the new limitations on the deductibility of certain executive compensation and continues to account for that item based on its existing accounting under ASC 740 and the provisions of the tax laws that were in effect immediately prior to enactment.

Global Intangible Low-Taxed Income

The Tax Act subjects a U.S. shareholder to current tax on global intangible low-taxed income (GILTI) earned by certain foreign subsidiaries. The FASB Staff Q&A, Topic 740 No. 5, "Accounting for Global Intangible Low-Taxed Income", states that an entity can make an accounting policy election to either recognize deferred taxes for temporary differences expected to reverse as GILTI in future years or provide for the tax expense related to GILTI in the year the tax is incurred. Based on the Company's preliminary assessment of the GILTI tax, the Company believes it will recognize tax on GILTI as a period expense.

Income before the provision for income taxes is attributable to the following jurisdictions for years ended December 31 (in thousands) :



	2017		2016		2015
United States	$	524,669	$	383,427	$	304,743
Foreign	368,921		259,492		231,261
Total	$	893,590	$	642,919	$	536,004

The provision for income taxes for the years ended December 31 consists of the following (in thousands):



	2017			2016			2015
Current:
Federal	$	303,514		$	147,406		$	82,926
State	19,234			10,725			8,051
Foreign	78,354			61,084			51,970
Total current	401,102			219,215			142,947
Deferred:
Federal	(255,188		)	(18,723		)	36,723
State	276			1,608			1,525
Foreign	7,200			(11,566		)	(7,622		)
Total deferred	(247,712		)	(28,681		)	30,626
Total provision	$	153,390		$	190,534		$	173,573

The provision for income taxes differs from amounts computed by applying the U.S. federal tax rate of 35% to income before income taxes for the years ended December 31 due to the following (in thousands):



	2017					2016					2015
Computed “expected” tax expense	$	312,756		35.0	%	$	225,022		35.0	%	$	187,601		35.0	%
Changes resulting from:
Change in valuation allowance	18,289			2.0		11,952			1.9		20,243			3.8
Foreign income tax differential	(38,695		)	(4.3	)	(25,533		)	(4.0	)	(23,718		)	(4.4	)
State taxes net of federal benefits	12,884			1.4		9,439			1.5		6,711			1.2
Foreign-sourced nontaxable income	(8,836		)	(1.0	)	(13,659		)	(1.2	)	(10,573		)	(2.0	)
IRC Section 199 deduction	(8,844		)	(1.0	)	(7,731		)	(1.2	)	(10,221		)	(1.9	)
Excess tax benefits related to stock-based compensation	(18,058		)	(2.0	)	(11,974		)	(1.9	)	—			—
Subpart F income/transition tax - federal only	195,779			21.9		—			—		—			—
Foreign tax credit/transition tax - federal only	(113,955		)	(12.8	)	—			—		—			—
Tax reform - federal rate reduction	(209,966		)	(23.5	)	—			—		—			—
Other	12,036			1.3		3,018			(0.4	)	3,530			0.7
Provision for income taxes	$	153,390		17.2	%	$	190,534		29.7	%	$	173,573		32.4	%

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



	2017			2016
Deferred tax assets:
Accounts receivable, principally due to the allowance for doubtful accounts	$	6,752		$	7,148
Accrued expenses not currently deductible for tax	442			2,647
Stock based compensation	37,274			41,415
Income tax credits	376			376
Net operating loss carry forwards	41,168			45,969
Investments	37,804			53,379
Accrued escheat	4,768			7,290
Fixed assets, intangibles and other	12,604			15,622
Deferred tax assets before valuation allowance	141,188			173,846
Valuation allowance	(59,349		)	(76,395		)
Deferred tax assets, net	81,839			97,451
Deferred tax liabilities:
Intangibles—including goodwill	(508,958		)	(687,443		)
Basis difference in investment in foreign subsidiaries	(39,287		)	(48,354		)
Prepaid expenses	(1,605		)	(3,644		)
Property and equipment, principally due to differences between book and tax depreciation, and other	(49,100		)	(24,157		)
Deferred tax liabilities	(598,950		)	(763,598		)
Net deferred tax liabilities	$	(517,111	)	$	(666,147	)

The Company’s deferred tax balances are classified in its balance sheets as of December 31 as follows (in thousands):



	2017			2016
Long term deferred tax assets and liabilities:
Long term deferred tax assets	1,801			2,433
Long term deferred tax liabilities	(518,912		)	(668,580		)
Net long term deferred taxes	(517,111		)	(666,147		)
Net deferred tax liabilities	$	(517,111	)	$	(666,147	)

The valuation allowance for deferred tax assets at December 31, 2017 and 2016 was $59.3 million and $76.4 million, respectively. These valuation allowances related to basis differences in equity method investments, capital loss carryforwards, income tax credits, foreign net operating loss carryforwards and state net operating loss carryforwards. The net change in the total valuation allowance for the years ended December 31, 2017 and 2016 was a decrease of $17.0 million and an increase of $13.8 million, respectively. The valuation decrease from the prior year was due to the U.S. tax rate reduction that resulted from the Tax Act, which was offset by an increase in basis differences related to equity method investments completed in 2014. The increase in 2016 was primarily due to changes in the Company's deferred tax asset related to basis differences in an equity method investment.

The valuation allowance for deferred tax assets changed during 2017 as follows (in thousands):



Balances at December 31, 2014	$	27,082
Additions	35,523
Balance at December 31, 2015	62,605
Additions	13,790
Balance at December 31, 2016	76,395
Additions	5,332
Reduction in valuation allowance due to rate change from Tax Act	(22,378		)
Balance at December 31, 2017	$	59,349

The valuation allowances relate to basis differences in cost method investments, capital loss carryforwards, income tax credits, foreign net operating loss carryforwards and state net operating loss carryforwards. The net change in the total valuation allowance for the year ended December 31, 2017 was a decrease of $17.0 million. The valuation decrease from the prior year was due to the U.S. tax rate reduction that resulted from the Tax Act, which was partially offset by an increase in the basis differences related to cost method investments. The increase in 2015 and 2016 were primarily due to changes in the Company's deferred tax asset related to basis differences in a cost method investment.

As of December 31, 2017, the Company had a net operating loss carryforward for state income tax purposes of approximately $590.0 million that is available to offset future state taxable income through 2029. Additionally, the Company had $44.0 million net operating loss carryforwards for foreign income tax purposes that are available to offset future foreign taxable income. The foreign net operating loss carryforwards will not expire in future years.

The Company recognizes interest and penalties on unrecognized tax benefits (including interest and penalties calculated on uncertain tax positions on which the Company believes it will ultimately prevail) within the provision for income taxes on continuing operations in the consolidated financial statements. This policy is a continuation of the Company's policy prior to the adoption of the guidance regarding uncertain tax positions. During 2017 and 2016, the Company had recorded accrued interest and penalties related to the unrecognized tax benefits of $1.3 million and $5.9 million, respectively.

A reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits including interest for the years ended December 31, 2017, 2016 and 2015 is as follows (in thousands):



Unrecognized tax benefits at December 31, 2014	$	18,641
Additions based on tax provisions related to the current year	9,079
Additions based on tax provisions related to the prior year	477
Deductions based on settlement/expiration of prior year tax positions	(6,363		)
Unrecognized tax benefits at December 31, 2015	21,834
Additions based on tax provisions related to the current year	3,332
Additions based on tax provisions related to the prior year	2,496
Deductions based on settlement/expiration of prior year tax positions	(1,507		)
Unrecognized tax benefits at December 31, 2016	26,155
Additions based on tax provisions related to the current year	4,143
Additions for tax positions due to acquisitions	9,208
Additions based on tax provisions related to the prior year	1,171
Deductions based on settlement/expiration of prior year tax positions	(9,119		)
Unrecognized tax benefits at December 31, 2017	$	31,558

As of December 31, 2017, the Company had total unrecognized tax benefits of $31.6 million of which $31.6 million, if recognized, would affect its effective tax rate. It is not anticipated that there are any unrecognized tax benefits that will significantly increase or decrease within the next twelve months.

The Company files numerous consolidated and separate income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. The statute of limitations for the Company’s U.S. federal income tax returns has expired for years prior to 2014. The statute of limitations for the Company’s U.K. income tax returns has expired for years prior to 2015. The statute of limitations has expired for years prior to 2014 for the Company’s Czech Republic income tax returns, 2014 for the Company’s Russian income tax returns, 2012 for the Company’s Mexican income tax returns, 2012 for the Company’s Brazilian income tax returns, 2012 for the Company’s Luxembourg income tax returns, 2013 for the Company’s New Zealand income tax returns, and 2015 for the Company’s Australian income tax returns.