NOTE 11 — Income Taxes

The following table summarizes our U.S. and foreign income (loss) before income taxes:



	Year Ended December 31,
	2016			2015		2014
	(In thousands)
U.S.	$	(47,205	)	$	24,397	$	176,820
Foreign	323,805			901,565		287,821
Total	$	276,600		$	925,962	$	464,641

Provision for Income Taxes

The following table summarizes our provision for income taxes:



	Year Ended December 31,
	2016			2015			2014
				(In thousands)
Current income tax expense:
Federal	$	(41,418	)	$	154,050		$	120,541
State	5,875			1,440			6,645
Foreign	64,946			69,359			43,536
Current income tax expense	29,403			224,849			170,722
Deferred income tax (benefit) expense:
Federal	$	(5,166	)	$	(6,865	)	$	(47,390	)
State	(2,863		)	2,156			(2,419		)
Foreign	(6,059		)	(16,926		)	(29,222		)
Deferred income tax (benefit) expense:	(14,088		)	(21,635		)	(79,031		)
Income tax expense	$	15,315		$	203,214		$	91,691

We reduced our current income tax payable by $76 million, $130 million and $69 million for the years ended December 31, 2016, 2015 and 2014 for tax deductions attributable to stock-based compensation.

Deferred Income Taxes

As of December 31, 2016 and 2015, the significant components of our deferred tax assets and deferred tax liabilities were as follows:



	December 31,
	2016			2015
	(In thousands)
Deferred tax assets:
Provision for accrued expenses	$	94,031		$	95,499
Loyalty rewards reserve	163,410			132,980
Occupancy tax reserve	27,814			16,358
Net operating loss and tax credit carryforwards	114,470			202,220
Stock-based compensation	81,221			56,729
Fair value of debt adjustment	—			24,770
Other	31,569			28,766
Total deferred tax assets	512,515			557,322
Less valuation allowance	(65,516		)	(122,850		)
Net deferred tax assets	$	446,999		$	434,472
Deferred tax liabilities:
Prepaid merchant bookings and prepaid expenses	$	(20,289	)	$	(41,006	)
Intangible assets	(718,810		)	(758,976		)
Property and equipment	(152,550		)	(87,308		)
Other	(16,662		)	(5,565		)
Total deferred tax liabilities	$	(908,311	)	$	(892,855	)
Net deferred tax liability	$	(461,312	)	$	(458,383	)

As of December 31, 2016, we had federal, state, and foreign net operating loss carryforwards (“NOLs”) of approximately $121 million, $119 million and $329 million. If not utilized, the federal and state NOLs will expire at various times between 2017 and 2036. Foreign NOLs of $235 million may be carried forward indefinitely, and foreign NOLs of $94 million will expire at various times between 2017 and 2024.

As of December 31, 2016, we had a valuation allowance of approximately $66 million related to certain NOL carryforwards for which it is more likely than not the tax benefit will not be realized. The valuation allowance decreased by $57 million from the amount recorded as of December 31, 2015 due to the release of a valuation allowance on cumulative foreign net operating losses for which realization is now certain, predominantly at certain United Kingdom and German entities. The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period change, or if objective negative evidence in the form of cumulative losses is no longer present and additional weight may be given to subjective evidence such as our projections for growth.

We have not provided deferred income taxes on taxable temporary differences related to investments in certain foreign subsidiaries where the foreign subsidiary has or will invest undistributed earnings indefinitely outside of the United States. The total amount of such undistributed earnings was $1.8 billion as of December 31, 2016, which approximates the related taxable temporary difference. In the event we distribute such earnings in the form of dividends or otherwise, we may be subject to income taxes. Further, a sale of these subsidiaries may cause these temporary differences to become taxable. Due to complexities in tax laws, uncertainties related to the timing and source of any potential distribution of such earnings, and other important factors such as the amount of associated foreign tax credits, it is not practicable to estimate the amount of unrecognized deferred taxes on these taxable temporary differences.

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

A reconciliation of amounts computed by applying the federal statutory income tax rate to income from continuing operations before income taxes to total income tax expense is as follows:



	Year Ended December 31,
	2016			2015			2014
				(In thousands)
Income tax expense at the federal statutory rate of 35%	$	96,810		$	324,087		$	162,624
Foreign tax rate differential	(66,947		)	(162,784		)	(81,371		)
Unrecognized tax benefits and related interest	33,170			33,362			(1,625		)
Change in valuation allowance	(13,924		)	27,320			13,914
Return to provision true-ups	(14,420		)	(8,875		)	(4,472		)
Pay-to-play penalties	—			(11,222		)	1,322
Acquisition related costs	1,611			12,545			56
Federal research and development credit	(15,000		)	(11,500		)	(6,000		)
trivago stock-based-compensation	16,956			—			—
Excess tax benefits related to stock-based compensation	(39,751		)	—			—
Other, net	16,810			281			7,243
Income tax expense	$	15,315		$	203,214		$	91,691

Our effective tax rate in 2016, 2015 and 2014 was lower than the 35% federal statutory income tax rate due to earnings in foreign jurisdictions, primarily Switzerland, where the statutory income tax rate is lower.

In addition, the decrease in our effective tax rate for 2016 compared to 2015 was due to tax benefits from the adoption of new accounting guidance relating to stock-based compensation and the release of valuation allowances in the United Kingdom and Germany on cumulative foreign net operating losses for which it is more likely than not the tax benefit will be realized. The 2014 and 2015 rate presentation has been adjusted to separately show federal research and development credits and return to provision true-ups to align with 2016 effective tax rate presentation.

Uncertain Tax Positions

A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows:



	2016			2015			2014
				(In thousands)
Balance, beginning of year	$	171,177		$	110,561		$	109,712
Increases to tax positions related to the current year	42,877			33,880			28,416
Increases to tax positions related to prior years	8,124			26,219			4,469
Decreases to tax positions related to prior years	(2,262		)	—			—
Reductions due to lapsed statute of limitations	(4,688		)	(2,525		)	(23,709		)
Settlements during current year	—			(100		)	—
Interest and penalties	5,304			3,142			(8,327		)
Balance, end of year	$	220,532		$	171,177		$	110,561

As of December 31, 2016, we had $221 million of gross unrecognized tax benefits, $181 million of which, if recognized, would affect the effective tax rate. As of December 31, 2015, we had $171 million of gross unrecognized tax benefits, $138 million of which, if recognized, would affect the effective tax rate.

We recognize interest and penalties related to unrecognized tax benefits in income tax expense. As of December 31, 2016 and 2015, total gross interest and penalties accrued was $15 million and $10 million, respectively. In connection with our unrecognized tax benefits, we recognized interest (benefit) expense in 2016, 2015 and 2014 of $5 million, $3 million and $(8) million.

The Company is routinely under audit by federal, state, local and foreign income tax authorities. These audits include questioning the timing and the amount of income and deductions and the allocation of income and deductions among various tax jurisdictions. The IRS is currently examining Expedia’s U.S. consolidated federal income tax returns for the periods ended December 31, 2009 through December 31, 2013. As of December 31, 2016, for the Expedia, Inc. and subsidiaries, statute of limitations for tax years 2009 through 2015 remain open to examination in the federal and most state jurisdictions. For the HomeAway and Orbitz groups, statutes of limitations for tax years 2001 through 2015 remain open to examination in the federal and most state jurisdictions due to net operating loss carryforwards.