(11) INCOME TAXES

The components of our income before provision for income taxes for the fiscal years ended March 31, 2019, 2018 and 2017 are as follows (in millions):



	Year Ended March 31,
	2019		2018		2017
Domestic	$	170	$	440	$	382
Foreign	909		1,009		828
Income before provision for income taxes	$	1,079	$	1,449	$	1,210

Provision for income taxes for the fiscal years ended March 31, 2019, 2018 and 2017 consisted of (in millions):



	Current		Deferred			Total
Year Ended March 31, 2019
Federal	$	29	$	(18	)	$	11
State	5		—			5
Foreign	42		2			44
	$	76	$	(16	)	$	60
Year Ended March 31, 2018
Federal	$	138	$	197		$	335
State	4		9			13
Foreign	61		(3		)	58
	$	203	$	203		$	406
Year Ended March 31, 2017
Federal	$	86	$	96		$	182
State	3		9			12
Foreign	51		(2		)	49
	$	140	$	103		$	243

Our effective tax rate and resulting provision for income taxes for the fiscal year ended March 31, 2018 were significantly impacted by the U.S. Tax Cuts and Jobs Act (the “U.S. Tax Act”), enacted on December 22, 2017. The U.S. Tax Act significantly revised the U.S. corporate income tax system by, among other things, lowering U.S. corporate income tax rate to 21 percent, generally implementing a territorial tax system and imposing a one-time transition tax on the deemed repatriation of undistributed earnings of foreign subsidiaries (the “Transition Tax”).

We have concluded the accounting under the U.S. Tax Act within the time period set forth in SAB 118, the SEC guidance that allowed for a measurement period of up to one year after the enactment date of the U.S. Tax Act to finalize the recording of the related tax impacts, including the impacts of the Transition Tax, the remeasurement of U.S. deferred tax assets and liabilities as a result of the reduction of the U.S. corporate tax rate, and the accounting policy election related to U.S. taxes on foreign earnings. We recorded tax expense of $235 million related to the U.S. Tax Act for the fiscal year ended March 31, 2018, $192 million of which relates to the Transition Tax. During the fiscal year ended March 31, 2019, we made no material adjustments to our provisional amounts recognized due to the U.S. Tax Act during the fiscal year ended March 31, 2018.

Upon adoption of ASU 2016-09 at the beginning of fiscal year 2018, we reflected excess tax benefits of $20 million and $43 million for the fiscal years ended March 31, 2019 and 2018, respectively, in the Consolidated Statements of Operations as a component of the provision for income taxes. For fiscal year ended March 31, 2017, excess tax benefits of $65 million was recognized in additional paid-in-capital in the Consolidated Balance Sheets.

The differences between the statutory tax expense rate and our effective tax expense rate, expressed as a percentage of income before provision for income taxes, for the fiscal years ended March 31, 2019, 2018 and 2017 were as follows:



	Year Ended March 31,
	2019		2018		2017
Statutory federal tax expense rate	21.0	%	31.5	%	35.0	%
State taxes, net of federal benefit	0.7	%	0.8	%	1.0	%
Differences between statutory rate and foreign effective tax rate	(14.4	)%	(19.1	)%	(19.3	)%
Tax reform	(0.4	)%	16.2	%	—	%
Excess tax benefit	(1.9	)%	(3.0	)%	—	%
Research and development credits	(2.4	)%	(1.4	)%	(0.7	)%
Unremitted earnings of foreign subsidiaries	—	%	—	%	2.2	%
Non-deductible stock-based compensation	2.3	%	2.7	%	2.3	%
Other	0.7	%	0.3	%	(0.4	)%
Effective tax expense rate	5.6	%	28.0	%	20.1	%

We generated income in lower tax jurisdictions primarily related to our European and Asia Pacific businesses that are headquartered in Switzerland.

Prior to the U.S. Tax Act, a substantial majority of undistributed earnings of our foreign subsidiaries were considered to be indefinitely reinvested. As a result of the U.S. Tax Act, substantially all previously unremitted earnings for which no U.S. deferred tax liability had been accrued have now been subject to U.S. tax. Any future earnings of our foreign subsidiaries are generally available for repatriation without a material incremental U.S. tax cost.

The components of net deferred tax assets, as of March 31, 2019 and 2018 consisted of (in millions):



	As of March 31,
	2019			2018
Deferred tax assets:
Accruals, reserves and other expenses	$	101		$	81
Tax credit carryforwards	140			121
Stock-based compensation	33			24
Net operating loss & capital loss carryforwards	22			23
Total	296			249
Valuation allowance	(162		)	(138		)
Deferred tax assets, net of valuation allowance	134			111
Deferred tax liabilities:
Amortization and depreciation	(28		)	(27		)
Change in tax accounting method	(66		)	—
Other	(7		)	(2		)
Total	(101		)	(29		)
Deferred tax assets, net of valuation allowance and deferred tax liabilities	$	33		$	82

As of March 31, 2019, we maintained a valuation allowance of $162 million, primarily related to certain U.S. state deferred tax assets and foreign capital loss carryovers, due to uncertainty about the future realization of these assets. In determining the amount of deferred tax assets that are more likely than not to be realized, we evaluated the potential to realize the assets through the utilization of tax loss and credit carrybacks, the reversal of existing taxable temporary differences, future taxable income exclusive of the reversal of existing taxable temporary differences, and certain tax planning strategies.

As of March 31, 2019, we have state net operating loss carry forwards of approximately $598 million of which approximately $7 million is attributable to various acquired companies. These carryforwards, if not fully realized, will begin to expire in 2029. We also have California and Canada tax credit carryforwards of $132 million and $5 million, respectively. The California and Canada tax credit carryforwards can be carried forward indefinitely.

The total unrecognized tax benefits as of March 31, 2019, 2018 and 2017 were $417 million, $457 million and $389 million, respectively. A reconciliation of the beginning and ending balance of unrecognized tax benefits is summarized as follows (in millions):



Balance as of March 31, 2016	$	331
Increases in unrecognized tax benefits related to prior year tax positions	3
Decreases in unrecognized tax benefits related to prior year tax positions	(3		)
Increases in unrecognized tax benefits related to current year tax positions	64
Decreases in unrecognized tax benefits related to settlements with taxing authorities	—
Reductions in unrecognized tax benefits due to lapse of applicable statute of limitations	(3		)
Changes in unrecognized tax benefits due to foreign currency translation	(3		)
Balance as of March 31, 2017	389
Increases in unrecognized tax benefits related to prior year tax positions	10
Decreases in unrecognized tax benefits related to prior year tax positions	(12		)
Increases in unrecognized tax benefits related to current year tax positions	75
Decreases in unrecognized tax benefits related to settlements with taxing authorities	(7		)
Reductions in unrecognized tax benefits due to lapse of applicable statute of limitations	(2		)
Changes in unrecognized tax benefits due to foreign currency translation	4
Balance as of March 31, 2018	457
Increases in unrecognized tax benefits related to prior year tax positions	—
Decreases in unrecognized tax benefits related to prior year tax positions	(41		)
Increases in unrecognized tax benefits related to current year tax positions	43
Decreases in unrecognized tax benefits related to settlements with taxing authorities	(16		)
Reductions in unrecognized tax benefits due to lapse of applicable statute of limitations	(21		)
Changes in unrecognized tax benefits due to foreign currency translation	(5		)
Balance as of March 31, 2019	$	417

As of March 31, 2019, approximately $236 million of the unrecognized tax benefits would affect our effective tax rate.

Interest and penalties related to estimated obligations for tax positions taken in our tax returns are recognized in income tax expense in our Consolidated Statements of Operations. The combined amount of accrued interest and penalties related to tax positions taken on our tax returns and included in non-current other liabilities was approximately $17 million as of March 31, 2019 and $18 million as of March 31, 2018.

We file income tax returns in the United States, including various state and local jurisdictions. Our subsidiaries file tax returns in various foreign jurisdictions, including Canada, France, Germany, Switzerland and the United Kingdom. We remain subject to income tax examination by the IRS for fiscal years after 2015. In addition, we remain subject to income tax examination for several other jurisdictions including in Germany for fiscal years after 2016, France for fiscal years after 2016, the United Kingdom for fiscal years after 2017, Canada for fiscal years after 2010, and Switzerland for fiscal years after 2009.

We are also currently under income tax examination in the United States for fiscal year 2017, Germany for fiscal years 2013 through 2016, Spain for fiscal years 2014 through 2015, Sweden for fiscal years 2016 through 2017, and India for fiscal years 2009 through 2013.

The timing of the resolution of income tax examinations is highly uncertain, and the amounts ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ materially from the amounts accrued for each year. Although potential resolution of uncertain tax positions involves multiple tax periods and jurisdictions, it is reasonably possible that a reduction of up to $10 million of unrecognized tax benefits may occur within the next 12 months, some of which, depending on the nature of the settlement or expiration of statutes of limitations, may affect the Company’s income tax provision and therefore benefit the resulting effective tax rate. The actual amount could vary significantly depending on the ultimate timing and nature of any settlements.

Subsequent to the fiscal year ended March 31, 2019, we completed an intra-entity sale of some of our intellectual property rights to our Swiss subsidiary, where our international business is headquartered. The transaction did not result in a taxable gain. Under U.S. GAAP, any profit resulting from this intercompany transaction will be eliminated upon consolidation. However, the transaction resulted in a step-up of the Swiss tax deductible basis in the transferred intellectual property rights and, accordingly, created a temporary difference between the book basis and the tax basis of such intellectual property rights. As a result, this transaction will result in the recognition of a deferred tax asset, which we estimate at approximately $2.3 billion, subject to a realizability analysis. The deferred tax asset will be recognized as a one-time tax benefit in our consolidated financial statements during the three months ending June 30, 2019. This deferred tax asset will reverse over a 20-year period and is subject to a periodic realizability analysis. The deferred tax asset and the one-time tax benefit will be measured based on the Swiss tax rate expected to apply in the years the asset will be recovered. We will not recognize any deferred taxes related to the U.S. taxes on foreign earnings associated with this transfer due to our policy election to recognize these taxes as a period cost. We do not expect the transaction to impact our cash taxes or our operating cash flow in fiscal year 2020.