Income Taxes

12 Months Ended

Dec. 31, 2020

INCOME TAXES

Income before provision for income taxes for the years ended December 31, 2020, 2019, and 2018, consisted of the following (in millions):


	Years Ended December 31,
	2020		2019		2018
U.S.	$	926.8	$	1,053.7	$	852.7
Foreign	280.2		448.5		426.8
Total income before provision for income taxes	$	1,207.0	$	1,502.2	$	1,279.5

The provision for income taxes for the years ended December 31, 2020, 2019, and 2018, consisted of the following (in millions):


	Years Ended December 31,
	2020		2019		2018
Current
Federal	$	34.2	$	82.0	$	89.5
State	21.5		26.5		21.1
Foreign	26.9		18.0		9.9
	$	82.6	$	126.5	$	120.5
Deferred
Federal	$	23.8	$	8.5	$	(4.1)
State	1.6		3.2		(0.3)
Foreign	32.2		(17.8)		38.4
	$	57.6	$	(6.1)	$	34.0
Total income tax expense	$	140.2	$	120.4	$	154.5

Income tax expense differs from amounts computed by applying the statutory federal income rate of 21% for the years ended December 31, 2020, 2019, and 2018, as a result of the following (in millions):


	Years Ended December 31,
	2020		2019		2018
Federal tax at statutory rate	$	253.5	$	315.5	$	268.7
Increase (reduction) in tax resulting from:
State taxes, net of federal benefits	23.1		29.7		20.8
Foreign rate differential	(19.3)		(56.2)		(44.7)
U.S. tax on foreign earnings	29.3		55.0		43.7
Research and development credit	(37.1)		(32.7)		(25.2)
Share-based compensation not benefited	14.3		13.5		9.9
Unrecognized tax benefit related to share-based compensation	39.3		—		—
Reversal of unrecognized tax benefits	(4.0)		(8.4)		(5.2)

Excess tax benefits related to share-based compensation	(166.2)		(146.5)		(116.2)
Deferred tax remeasurement due to Swiss Tax Reform	—		(51.3)		—
Other	7.3		1.8		2.7
Total income tax expense	$	140.2	$	120.4	$	154.5

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,
	2020		2019
Deferred tax assets:
Net operating losses	$	27.7	$	5.1
Share-based compensation expense	101.1		95.6
Lease liabilities	$	12.0	$	17.0
Expenses deducted in later years for tax purposes	29.3		25.0
Intangible assets	321.8		362.3
Research and other credits	76.3		56.1
Other	—		5.3
Gross deferred tax assets	$	568.2	$	566.4
Valuation allowance	(81.4)		(57.2)
Deferred tax assets	$	486.8	$	509.2
Deferred tax liabilities:
Fixed assets	$	(91.1)	$	(58.3)
Right-of-use assets	(8.4)		(17.0)
Intangible assets	(10.1)		(8.3)
Other	(13.2)		—
Deferred tax liabilities	$	(122.8)	$	(83.6)
Net deferred tax assets	$	364.0	$	425.6

As of December 31, 2020, and 2019, the Company had valuation allowances of $81.4 million and $57.2 million, respectively, primarily related to California research and development credit carry forwards, for which the Company does not believe a tax benefit is more likely than not to be realized.

As of December 31, 2020, the Company had foreign federal net operating loss carryforwards of $253 million and foreign local net operating loss carryforwards of $534 million, which will begin to expire in 2024, if not utilized. Utilization of these net operating loss carryforwards may be subject to certain limitations. The Company does not expect the limitations to result in any permanent loss of these tax benefits.

The Company intends to repatriate earnings from its Swiss subsidiary and joint venture in Hong Kong, as needed, and 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 August 2019, Swiss tax reform was enacted, which resulted in a higher statutory rate for the Company's Swiss entity for years after 2019. The Company remeasured its Swiss deferred tax asset at the enacted tax rate and recorded an income tax benefit of $51.3 million in its 2019 income tax provision.

A reconciliation of the beginning and ending amounts of gross unrecognized income tax benefits for the years ended December 31, 2020, 2019, and 2018, are as follows (in millions):


	Years Ended December 31,
	2020		2019		2018
Beginning balance	$	96.7	$	78.8	$	65.4
Increases related to tax positions taken during the current year	40.1		26.5		22.5

Increases related to tax positions taken during a prior year	46.1		1.2		—
Decreases related to tax positions taken during a prior year	—		—		(0.9)
Decreases related to settlements with tax authorities	(0.5)		(3.8)
Decreases related to expiration of statute of limitations	(6.1)		(6.0)		(8.2)
Ending balance	$	176.3	$	96.7	$	78.8

As of December 31, 2020, 2019, and 2018, gross interest related to unrecognized tax benefits accrued was $11.0 million, $2.9 million, and $2.6 million, respectively. The Company’s net unrecognized tax benefits and related interest are presented in other long-term liabilities and long term deferred tax assets on the Consolidated Balance Sheets.

Total gross unrecognized tax benefits as of December 31, 2020, were $176.3 million, which, if recognized, would result in a reduction of the Company’s effective tax rate.

In July 2015, a U.S. Tax Court opinion (the “2015 Opinion”) was issued involving an independent third party related to charging foreign subsidiaries for share-based compensation. Based on the findings of the U.S. Tax Court, direct share-based compensation had been excluded from our intercompany charges starting in 2015. In June 2019, the Ninth Circuit Court of Appeals (the "Ninth Circuit") reversed the 2015 Opinion (the “Ninth Circuit Opinion”). Subsequently, a re-hearing of the case was requested, but was denied in November 2019. In February 2020, a petition was filed to appeal the Ninth Circuit Opinion to the U.S. Supreme Court. The petition was denied by the U.S. Supreme Court on June 22, 2020, which makes the Ninth Circuit Opinion binding precedent in the Ninth Circuit. As a result, the Company recorded an increase in the income tax provision of $39.3 million during the year ended December 31, 2020. The Company will continue to monitor future IRS actions or other developments regarding this matter and will assess the impact of any such developments to our income tax provision in the quarter that they occur. We are treating share-based compensation expense in accordance with the Ninth Circuit Opinion for 2020 and future periods.

The Company files federal, state, and foreign income tax returns in many U.S. and OUS jurisdictions. Years before 2016 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.