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Income Taxes | 12 Months Ended
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Dec. 31, 2017
Income Tax Disclosure [Abstract] |
Income Taxes | Income Taxes The geographical sources of income (loss) before income taxes were as follows (in millions):
| Year Ended December 31,
| 2017 |  | 2016 |  | 2015
United States | $ | (152 | ) |  | $ | (120 | ) |  | $ | (288 | )
Outside United States | 240 |  |  | (9 | ) |  | 108 |
Total | $ | 88 |  |  | $ | (129 | ) |  | $ | (180 | )
Income tax expense (benefit) consisted of the following (in millions):
| Year Ended December 31,
| 2017 |  | 2016 |  | 2015
Current: |  |  |  |  |
Federal | $ | 10 |  |  | $ | 14 |  |  | $ | 84 |
State | 8 |  |  | 6 |  |  | 4 |
Foreign | 62 |  |  | 31 |  |  | 32 |
Total current | 80 |  |  | 51 |  |  | 120 |
Deferred: |  |  |  |  |
Federal | 20 |  |  | (31 | ) |  | (117 | )
State | (10 | ) |  | (6 | ) |  | (24 | )
Foreign | (19 | ) |  | (6 | ) |  | (1 | )
Total deferred | (9 | ) |  | (43 | ) |  | (142 | )
Total expense (benefit) | $ | 71 |  |  | $ | 8 |  |  | $ | (22 | )
The Company recognized tax expense of $71 million and $8 million for the years ended December 31, 2017 and 2016, respectively. The Company’s effective tax rates were 80.7% and (6.2)% as of December 31, 2017 and 2016, respectively. The Company’s effective tax rate was higher than the federal statutory rate of 35% primarily due to deferred income taxed on the outbound transfer of U.S. assets, an increase in uncertain tax benefits, increased valuation allowance for its foreign deferred tax assets, foreign non-deductible expenses, the one-time transition tax and remeasurement of its net U.S. deferred tax assets under U.S. tax reform. These increases were partially offset by the benefit of lower tax rates in foreign jurisdictions, recognition of deferred tax assets on intercompany asset transfers, the generation of tax credits in the current year, and deductions from vesting of equity compensation. A reconciliation between the Provision computed at the statutory rate and the Provision for income taxes is provided below:
| Year Ended December 31,
| 2017 |  | 2016 |  | 2015
Provision computed at statutory rate | 35.0 | % |  | 35.0 | % |  | 35.0 | %
U.S. Tax Reform - One-time transaction tax | 41.8 |  |  | 0.0 |  |  | 0.0 |
Remeasurement of Deferred Taxes | (56.0 | ) |  | 0.0 |  |  | 0.0 |
Change in valuation allowance | 96.4 |  |  | (1.0 | ) |  | (8.3 | )
US impact of Enterprise acquisition | 12.9 |  |  | (14.1 | ) |  | (26.7 | )
Change in contingent income tax reserves | 14.0 |  |  | (1.6 | ) |  | (3.3 | )
Foreign earnings subject to U.S. taxation | 2.0 |  |  | (6.6 | ) |  | (3.9 | )
Foreign rate differential | (29.1 | ) |  | (16.0 | ) |  | 13.9 |
Intra-entity transactions | (18.8 | ) |  | 0.0 |  |  | 0.0 |
State income tax, net of federal tax benefit | (5.3 | ) |  | (1.0 | ) |  | 1.1 |
Tax credits | (5.7 | ) |  | 9.5 |  |  | 6.1 |
Equity compensation deductions | (5.6 | ) |  | (0.4 | ) |  | 0.0 |
Return to provision and other true ups | (3.2 | ) |  | (3.7 | ) |  | 0.0 |
Other | 2.3 |  |  | (6.3 | ) |  | (1.7 | )
Provision for income taxes | 80.7 | % |  | (6.2 | )% |  | 12.2 | %
The Company earns a significant amount of our operating income outside of the U.S., primarily in the United Kingdom, Singapore, and Luxembourg, with statutory rates of 19%, 17%, and 27%, respectively. During 2017, the Company affirmed an incentivized tax rate of 10% with the Singapore Economic Development Board with the Company’s commitment to make increased investments in Singapore; this tax rate will expire on December 31, 2018, unless the Company applies for and is granted an extension. The Company has recognized $12 million of deferred tax benefit related to the impact of a sale of intangible assets within the consolidated group where the tax basis of assets was stepped up to fair market value. With the Company’s adoption of ASU 2016-16, the tax impact of non-inventory intra-entity transfers of assets are recognized in the period in which the transfer occurs. See Note 2, Summary of Significant Accounting Policies for further explanation. Tax effects of temporary differences that resulted in deferred tax assets and liabilities are as follows (in millions):
| December 31,
| 2017 |  | 2016
Deferred tax assets: |  |  |
Capitalized research expenditures | $ | 32 |  |  | $ | 58 |
Deferred revenue | 21 |  |  | 57 |
Tax credits | 31 |  |  | 33 |
Net operating loss carryforwards | 338 |  |  | 35 |
Other accruals | 20 |  |  | 31 |
Inventory items | 20 |  |  | 27 |
Capitalized software costs | 14 |  |  | 25 |
Sales return/rebate reserve | 33 |  |  | 27 |
Share-based compensation expense | 12 |  |  | 15 |
Accrued bonus | 1 |  |  | 11 |
Unrealized gains and losses on securities and investments | 8 |  |  | 4 |
Valuation allowance | (134 | ) |  | (47 | )
Total deferred tax assets | 396 |  |  | 276 |
Deferred tax liabilities: |  |  |
Depreciation and amortization | 275 |  |  | 165 |
Undistributed earnings | 2 |  |  | 1 |
Total deferred tax liabilities | $ | 277 |  |  | $ | 166 |
Net deferred tax assets | $ | 119 |  |  | $ | 110 |
At December 31, 2017, the Company has approximately $338 million (tax effected) of net operating losses (“NOLs”) and approximately $30 million of credit carryforwards. Approximately $45 million of NOLs will expire beginning in 2033 thru 2037, and $24 million of credits will expire beginning in 2023 thru 2032. $293 million of NOLs and $6 million of credits have no expiration date. The Company elected a fiscal unity regime for its Luxembourg group which allows the Company to offset losses against other group member income. As a result of this election, the Company has remeasured the value of its deferred tax assets and liabilities in Luxembourg at the statutory rate of 27%, giving rise to an increase of $290 million in its net operating loss carryforwards, an increase of $66 million in valuation allowances, and an increase of $224 million in its depreciation and amortization deferred tax liability. Impact of U.S. Tax Reform TCJA was enacted on December 22, 2017. The Act reduces the U.S. federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings. At December 31, 2017, we have not completed our accounting for the tax effects of enactment of the Act; however, in certain cases, as described below, we have made a reasonable estimate of the effects on our existing deferred tax balances and the one-time transition tax. In other cases, we have not been able to make a reasonable estimate and continue to account for those items based on our existing accounting under ASC 740, Income Taxes, and the provisions of the tax laws that were in effect immediately prior to enactment. For the items for which we were able to determine a reasonable estimate, we recognized a provisional amount of $72 million, which is included as a component of income tax expense. Provisional amounts Deferred tax assets and liabilities: We remeasured U.S. deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%. However, we are still analyzing certain aspects of the Act and refining our calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. The provisional amount recorded related to the remeasurement of our deferred tax balance was $35 million. Foreign Tax Effects The one-time transition tax is based on our total post-1986 earnings and profits (“E&P”) that we previously deferred from U.S. income taxes. We recorded a provisional amount for our one-time transition tax liability, resulting in an increase in income tax expense of $37 million. We have not yet completed our calculation of the total post-1986 E&P for these foreign subsidiaries. Further, the transition tax is based in part on the amount of those earnings held in cash and other specified assets. This amount may change when we finalize 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. We have reduced our deferred tax asset for income tax credits by $10 million which is available to offset the one-time transition tax, resulting in an estimated cash tax liability of $26 million which is to be remitted over the next eight years as follows:
| One-Time Transition Tax - Payments Due for Calendar Year Tax Returns
| 2017 |  | 2018 |  | 2019 |  | 2020 |  | 2021 |  | 2022 |  | 2023 |  | 2024
Unremitted Earnings Payments | $ | 2 |  |  | $ | 2 |  |  | $ | 2 |  |  | $ | 2 |  |  | $ | 2 |  |  | $ | 4 |  |  | $ | 5 |  |  | $ | 7 |
The Company earns a significant amount of our operating income outside of the U.S. As of year-ended December 31, 2017, the Company is indefinitely reinvested with respect to its U.S. directly-owned subsidiary earnings and therefore has not accrued any withholding taxes on those earnings. However, certain foreign affiliate parent companies are not indefinitely reinvested and the Company has recorded a deferred tax liability of $2 million for foreign withholding taxes on those earnings. The Company’s policy considers its U.S. investment in directly-owned foreign affiliates to be indefinitely reinvested. Under the Act, future unremitted foreign earnings will no longer be subject to tax when repatriated to its U.S. parent, but may be subject to withholding taxes of the payor affiliate country. Additionally, gains and losses on taxable dispositions of U.S.-owned foreign affiliates continue to be subject to U.S. tax. For the years ended December 31, 2017 and 2016, the Company has not recognized deferred tax liabilities in the U.S. with respect to foreign withholding taxes or its outside basis differences in its directly-owned foreign affiliates and quantification of the unrecognized deferred tax liability is not practical. Performance-Based Executive Compensation The Act amends the rules related to the exclusion of performance-based compensation under Internal Revenue Code 162(m). The Company will no longer be able to claim a deduction for compensation accrued after January 1, 2018 for a covered employee which exceeds $1 million, unless the compensation is earned in respect of a binding contract in existence on November 2, 2017 (“Grandfathered Contracts”). The Company has estimated the remeasurement of the Section 162(m) grandfathered deferred tax assets at 21% for its covered employees for equity award agreements issued and executed prior to November 2, 2017, assuming that its benefit plan documents will fall within the grandfathered contract rules; should guidance to the contrary be issued by U.S. Treasury, the Company would have to remeasure its grandfathered deferred tax assets at $0. Additionally, the Company has determined that its short-term bonus plan will not qualify for the grandfathered contract provisions, thus any deferred short-term bonus to be paid to covered employees in 2018 has been remeasured at a 0% rate. The Company has not recorded an adjustment to its state and local current or deferred income tax provision as a result of the Act. Guidance from state tax authorities which do not fully conform with the U.S. Internal Revenue Code is not available to allow the Company to estimate the financial statement impact at this time. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in millions):
| Year ended December 31,
| 2017 |  | 2016
Balance at beginning of year | $ | 42 |  |  | $ | 40 |
Additions for tax positions related to the current year | — |  |  | 2 |
Additions for tax positions related to prior years | 11 |  |  | 2 |
Reductions for tax positions related to prior years | (1 | ) |  | (2 | )
Settlements for tax positions | (1 | ) |  | — |
Balance at end of year | $ | 51 |  |  | $ | 42 |
At December 31, 2017 and December 31, 2016, there are $47 million and $40 million of unrecognized tax benefits that if recognized would affect the annual effective tax rate. The Company continues to believe its positions are supportable, however, the Company anticipates that $20 million of uncertain tax benefits may be paid within the next twelve months and, as such, is reflected as a current liability within the Company’s Consolidated Balance Sheets. The Company is currently undergoing audits of the 2013 through 2015 U.S. federal income tax returns. The Company is engaged in an inquiry from the UK Her Majesty’s Revenue and Customs (“HMRC”) for the years 2012 and 2014. The tax years 2004 through 2016 remain open to examination by multiple foreign and U.S. state taxing jurisdictions. Due to uncertainties in any tax audit outcome, the Company’s estimates of the ultimate settlement of uncertain tax positions may change and the actual tax benefits may differ significantly from the estimates. The Company recognized $2 million of interest and/or penalties related to income tax matters as part of income tax expense for the year ended December 31, 2017. The Company accrued $6 million and $4 million of interest and penalties accrued in the Consolidated Balance Sheets as of December 31, 2017 and 2016.

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- Definition The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -URI http://asc.fasb.org/topic&trid=2144680 + Details
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