Note 15

Income Taxes

The provision for income taxes includes income taxes currently payable and those deferred because of temporary differences between the financial statement carrying amounts and tax bases of assets and liabilities.

The components of income tax expense included in the Consolidated Statements of Income were as follows:


	Years Ended December 31,
(in thousands)	2015			2014			2013
Current income tax expense:
Federal	$	139,228			126,203			74,327
State		9,255			5,161			2,949
Foreign		4,762			7,694			6,822

Total current income tax expense		153,245			139,058			84,098

Deferred income tax expense (benefit):
Federal		(2,198	)		(3,623	)		27,447
State		442			(2,039	)		(55	)
Foreign		(125	)		(3,635	)		(509	)

Total deferred income tax expense (benefit)		(1,881	)		(9,297	)		26,883

Total income tax expense	$	151,364			129,761			110,981


	Years Ended December 31,
(in thousands)	2015		2014		2013
Components of income before income tax expense:
Domestic	$	488,515		369,888		328,052
Foreign		8,373		23,041		24,424

Total income before income tax expense	$	496,888		392,929		352,476

Income tax expense differed from the amounts computed by applying the statutory U.S. federal income tax rate of 35% to income before income taxes, noncontrolling interest and equity in income of equity investments as a result of the following:


	Years Ended December 31,
(in thousands)	2015			2014			2013
Computed “expected” income tax expense	$	173,911			137,525			123,367
Increase (decrease) in income tax expense resulting from:
International tax rate differential and equity income		8,367			6,541			1,870
State income tax expense, net of federal income tax effect		7,101			4,823			3,408
Increase (decrease) in valuation allowance		(517	)		(4,550	)		1,715
Tax credits		(28,831	)		(3,459	)		(6,141	)
Deduction for domestic production activities		(11,550	)		(8,750	)		(8,225	)
Permanent differences and other, net		2,883			(2,369	)		(5,013	)

Total income tax expense	$	151,364			129,761			110,981

Temporary differences between the financial statement carrying amounts and tax bases of assets and liabilities that give rise to significant portions of the net deferred tax liability as of December 31, 2015 and 2014 relate to the following:


	As of December 31,
(in thousands)	2015			2014
Deferred income tax assets:
Net operating loss and income tax credit carryforwards	$	29,522			31,978
Allowances for doubtful accounts and billing adjustments		1,399			1,328
Deferred revenue		31,713			31,240
Share-based compensation		22,088			24,449
Other, net		34,673			24,743

Total deferred income tax assets		119,395			113,738
Less valuation allowance for deferred income tax assets		(18,446	)		(18,963	)

Net deferred income tax assets		100,949			94,775

Deferred income tax liabilities:
Excess tax over financial statement depreciation		(61,161	)		(53,527	)
Computer software development costs		(82,835	)		(67,703	)
Purchase accounting adjustments		(114,171	)		(136,701	)
Foreign currency translation		(4,522	)		(7,642	)
Other, net		(24,462	)		(18,830	)

Total deferred income tax liabilities		(287,151	)		(284,403	)

Net deferred income tax liabilities	$	(186,202	)		(189,628	)

Total net deferred tax assets (liabilities):
Current	$	24,670			15,190
Noncurrent		(210,872	)		(204,818	)

Net deferred income tax liability	$	(186,202	)		(189,628	)

As of December 31, 2015, TSYS had recognized deferred tax assets from net operating losses and federal and state income tax credit carryforwards of $4.5 million and $25.0 million, respectively. As of December 31, 2014, TSYS had recognized deferred tax assets from net operating losses and federal and state income tax credit carryforwards of $5.9 million and $26.1 million, respectively

In assessing the realizability of deferred income tax assets, management considers whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized. The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment.

Management believes it is more likely than not that TSYS will realize the benefits of these deductible differences, net of existing valuation allowances. The valuation allowance for deferred tax assets was $18.4 million and $19.0 million at December 31, 2015 and 2014, respectively. The decrease in the valuation allowance for deferred income tax assets was $0.5 million for 2015. The decrease relates to foreign and state losses which, more likely than not, will not be realized in later years.

TSYS has adopted the permanent reinvestment exception under GAAP, with respect to future earnings of certain foreign subsidiaries. As a result, TSYS considers foreign earnings related to these foreign operations to be permanently reinvested. No provision for U.S. federal and state incomes taxes has been made in the consolidated financial statements for those non-U.S. subsidiaries whose earnings are considered to be reinvested. The amount of undistributed earnings considered to be “reinvested” which may be subject to tax upon distribution was approximately $83.9 million as of December 31, 2015. Although TSYS does not intend to repatriate these earnings, a distribution of these non-U.S. earnings in the form of dividends, or otherwise, would subject the Company to both U.S. federal and state income taxes, as adjusted for non-U.S. tax credits, and withholding taxes payable to the various non-U.S. countries. Determination of the amount of any unrecognized deferred income tax liability on these undistributed earnings is not practicable.

TSYS is the parent of an affiliated group that files a consolidated U.S. federal income tax return and most state and foreign income tax returns on a separate entity basis. In the normal course of business, the Company is subject to examinations by these taxing authorities unless statutory examination periods lapse. TSYS is no longer subject to U.S. federal income tax examinations for years before 2011 and with few exceptions, the Company is no longer subject to income tax examinations from state and local or foreign tax authorities for years before 2005. There are currently federal income tax examinations in progress for the years 2009 through 2012 for a subsidiary which was acquired in 2013. Additionally, a number of tax examinations are in progress by the relevant state tax authorities. Although TSYS is unable to determine the ultimate outcome of these examinations, TSYS believes that its liability for uncertain tax positions relating to these jurisdictions for such years is adequate.

GAAP prescribes a recognition threshold and measurement attribute for the financial statement recognition, measurement and disclosure of a tax position taken or expected to be taken in a tax return. During the year ended December 31, 2015, TSYS increased its liability for prior year uncertain income tax positions as a discrete item by a net amount of approximately $6.4 million (net of the federal tax effect). The Company is not able to reasonably estimate the amount by which the liability will increase or decrease over time; however, at this time, the Company does not expect any significant changes related to these obligations within the next twelve months.

A reconciliation of the beginning and ending amount of unrecognized tax liabilities is as follows¹:


(in millions)	Year Ended December 31, 2015
Beginning balance	$	6.7
Current activity:
Additions based on tax positions related to current year		2.3
Additions for tax positions of prior years		4.7
Reductions for tax positions of prior years		(0.6	)

Net, current activity		6.4

Ending balance	$	13.1

1	Unrecognized state tax liabilities are not adjusted for the federal tax impact

TSYS recognizes potential interest and penalties related to the underpayment of income taxes as income tax expense in the Consolidated Statements of Income. Gross accrued interest and penalties on unrecognized tax benefits totaled $0.7 million and $0.3 million as of December 31, 2015 and December 31, 2014, respectively. The total amounts of unrecognized income tax benefits as of December 31, 2015 and December 31, 2014 that, if recognized, would affect the effective tax rates are $13.2 million and $6.5 million (net of the federal benefit on state tax issues), respectively, which includes interest and penalties of $0.5 million and $0.2 million, respectively.