INCOME TAXES

Income before provision for income taxes for the years ended December 31, 2018, 2017, and 2016, consisted of the following (in millions):



	Years Ended December 31,
	2018		2017		2016
U.S.	$	852.7	$	774.7	$	657.0
Foreign	426.8		330.1		328.3
Total income before provision for income taxes	$	1,279.5	$	1,104.8	$	985.3

The provision for income taxes for the years ended December 31, 2018, 2017, and 2016, consisted of the following (in millions):



	Years Ended December 31,
	2018			2017			2016
Current
Federal	$	89.5		$	352.1		$	207.0
State	21.1			13.0			13.4
Foreign	9.9			8.7			5.4
	$	120.5		$	373.8		$	225.8
Deferred
Federal	$	(4.1	)	$	62.8		$	20.5
State	(0.3		)	(0.3		)	0.6
Foreign	38.4			(2.4		)	0.1
	$	34.0		$	60.1		$	21.2
Total income tax expense	$	154.5		$	433.9		$	247.0

Income tax expense differs from amounts computed by applying the statutory federal income rate of 21% for the year ended December 31, 2018 and 35% for the years ended December 31, 2017, and 2016, as a result of the following (in millions):



	Years Ended December 31,
	2018			2017			2016
Federal tax at statutory rate	$	268.7		$	386.7		$	344.9
Increase (reduction) in tax resulting from:
State taxes, net of federal benefits	20.8			16.0			14.0
Foreign rate differential	(44.7		)	(115.7		)	(91.2		)
U.S. tax on foreign earnings	43.7			8.4			5.0
Research and development credit	(25.2		)	(15.3		)	(7.8		)
Share-based compensation not benefited	9.9			10.8			3.6
Domestic production activities deduction	—			(7.9		)	(8.0		)
Reversal of unrecognized tax benefits	(5.2		)	(62.4		)	(15.8		)
Tax Cuts and Jobs Act impact	0.5			317.8			—
Excess tax benefits related to share-based compensation arrangements	(116.2		)	(102.8		)	—
Other	2.2			(1.7		)	2.3
Total income tax expense	$	154.5		$	433.9		$	247.0

Deferred income taxes reflect tax carry forwards and the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities are as follows (in millions):



	December 31,
	2018			2017
Deferred tax assets:
Share-based compensation expense	$	87.2		$	79.1
Expenses deducted in later years for tax purposes	29.1			29.7
Intangible assets	351.9			—
Research and other credits	40.1			27.5
Other	9.0			10.5
Gross deferred tax assets	$	517.3		$	146.8
Valuation allowance	(42.3		)	(29.4		)
Deferred tax assets	$	475.0		$	117.4
Deferred tax liabilities:
Fixed assets	$	(42.2	)	$	(26.3	)
Intangible assets	(7.5		)	(3.6		)
Other	(0.1		)	(15.5		)
Deferred tax liabilities	$	(49.8	)	$	(45.4	)
Net deferred tax assets	$	425.2		$	72.0

In December 2017, the 2017 Tax Act was enacted, which includes a number of changes in existing tax law impacting businesses, including a one-time deemed repatriation of cumulative undistributed foreign earnings and a permanent reduction in the U.S. federal statutory rate from 35% to 21%, effective on January 1, 2018.The Securities Exchange Commission (“SEC”) issued guidance for a measurement period of one year from the enactment date to finalize the accounting for effects of the 2017 Tax Act. The Company recorded an income tax expense of $317.8 million in its 2017 income tax provision related to the 2017 Tax Act which included a provisional estimate of $270.2 million related to the one-time deemed repatriation toll charge (“Toll Tax”), and a provisional estimate of $47.6 million income tax expense in 2017 due to the re-measurement of its net deferred tax assets at a reduced U.S. federal statutory rate of 21%.

The Company repatriated $1.6 billion of its cumulative undistributed foreign earnings back to the U.S. in June 2018 without any significant U.S. income tax consequences. The Company intends to repatriate earnings from its Swiss subsidiary as needed since the U.S. and foreign tax implications of such repatriations are not expected to be significant. The Company will continue to indefinitely reinvest earnings from the rest of our foreign subsidiaries, which are not significant.

In December 2018, the Company completed its accounting for the effect of the 2017 Tax Act within the measurement period under the SEC guidance, and reflected a net $0.5 million increase in the 2018 income tax expense. The Company has adopted the approach of recording the consequences of the GILTI provision of the 2017 Tax Act as period costs when incurred.

The Company’s tax holiday obtained in 2007 for business operations in Switzerland ended on December 31, 2017. The Company received a new tax ruling in Switzerland for new business operations. The new ruling is effective for years 2018 through 2022, which will be extended for the next five years thereafter, to the extent certain terms and conditions continue to be met. The new ruling allows for a reduced cantonal tax rate based on various thresholds of investment, including the ownership, development, and use of the non-U.S. intellectual property rights and employment in such jurisdiction. The tax benefits from Swiss tax holidays for the year ended December 31, 2018 were insignificant, while for the years ended December 31, 2017 and 2016 were approximately $10.9 million, or $0.09 per diluted share, and $10.0 million, or $0.08 per diluted share, respectively.

As of December 31, 2018, and 2017, the Company had valuation allowances of $42.3 million and $29.4 million, respectively, primarily related to California deferred tax assets generated by California R&D credit forwards which have no expiration period. The Company recorded a valuation allowance against its California deferred tax assets as it is more likely than not these deferred tax assets will not be realized as a result of the computation of California taxes under the single sales factor.

The Company recorded a net increase of its gross unrecognized tax benefits of approximately $13.4 million during the year ended December 31, 2018. The net increase was primarily due to increases related to 2018 uncertain tax positions, partially offset by the reversal of gross unrecognized tax benefits in connection with the expiration of certain statutes of limitation in various jurisdictions. The Company had gross unrecognized tax benefits of approximately $78.8 million, $65.4 million, and $106.0 million as of December 31, 2018, 2017, and 2016, respectively, which if recognized, would result in a reduction of the Company’s effective tax rate. The Company included interest expense accrued on unrecognized tax benefits as a component of its income tax expense. As of December 31, 2018, 2017, and 2016, gross interest related to unrecognized tax benefits accrued was approximately $2.6 million, $1.8 million, and $3.7 million, respectively. A majority of the Company’s net unrecognized tax benefits and related interest is presented in other accrued liabilities on the Consolidated Balance Sheets.

A reconciliation of the beginning and ending amounts of gross unrecognized income tax benefits for the years ended December 31, 2018, 2017, and 2016, are as follows (in millions):



	Years Ended December 31,
	2018			2017			2016
Beginning balance	$	65.4		$	106.0		$	92.4
Increases related to tax positions taken during the current year	22.5			21.1			29.9
Decreases related to tax positions taken during a prior year	(0.9		)	(46.5		)	(0.5		)
Decreases related to settlements with tax authorities	—			(0.5		)	—
Decreases related to expiration of statute of limitations	(8.2		)	(14.7		)	(15.8		)
Ending balance	$	78.8		$	65.4		$	106.0

The Company files federal, state and foreign income tax returns in many U.S. and OUS jurisdictions. Years before 2015 are closed for the significant jurisdictions. Certain of the Company’s unrecognized tax benefits could change due to activities of various tax authorities, including potential assessment of additional tax, possible settlement of audits, or through normal expiration of various statutes of limitations, which could affect the Company’s effective tax rate in the period in which they change. Due to the uncertainty related to the timing and potential outcome of audits, the Company cannot estimate the range of reasonably possible change in unrecognized tax benefits that may occur in the next 12 months.

The Company is subject to the examination of its income tax returns by the Internal Revenue Service and other tax authorities. The outcome of these audits cannot be predicted with certainty. The Company’s management regularly assesses the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of the Company’s provision for income taxes. If any issues addressed in the Company’s tax audits are resolved in a manner not consistent with management’s expectations, the Company could be required to adjust its provision for income taxes in the period such resolution occurs.