12 — Income Taxes

Income before taxes consisted of the following:



	Year Ended July 31,
(In thousands)	2017		2016		2015
U.S.	$	385,526	$	339,013	$	286,169
International	54,574		56,852		45,900
Total income before taxes	$	440,100	$	395,865	$	332,069

Income tax expense (benefit) from continuing operations consisted of the following:



	Year Ended July 31,
(In thousands)	2017			2016			2015
Federal:
Current	$	12,752		$	103,127		$	95,468
Deferred	20,094			7,019			5,841
	32,846			110,146			101,309
State:
Current	1,659			5,347			1,160
Deferred	499			151			(86		)
	2,158			5,498			1,074
International:
Current	11,468			10,855			11,062
Deferred	(633		)	(994		)	(1,159		)
	10,835			9,861			9,903
Income tax expense	$	45,839		$	125,505		$	112,286

A reconciliation of the expected U.S. statutory tax rate to the actual effective income tax rate is as follows:



	Year Ended July 31,
(In thousands)	2017		2016		2015
Federal statutory rate	35.0	%	35.0	%	35.0	%
State income taxes, net of federal income tax benefit	1.3		0.9		1.1
International rate differential	(1.8	)	(1.8	)	(1.9	)
Compensation and fringe benefits ⁽¹⁾	(24.3	)	(3.6	)	0.1
Other differences	0.2		1.2		(0.5	)
Effective tax rate	10.4	%	31.7	%	33.8	%

(1)

Included in the compensation and fringe benefits rate reconciliation is the impact of the Company’s adoption, during the fourth quarter of fiscal 2016 on a modified retrospective basis, of ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting. Under this standard, all excess tax benefits and tax deficiencies related to exercises of stock options are recognized as income tax expense or benefit in the income statement as discrete items in the reporting period in which they occur.

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets (liabilities) are presented below:



	July 31,
(In thousands)	2017			2016
Deferred tax assets:
Allowance for doubtful accounts	$	1,177		$	1,396
Accrued compensation and benefits	26,621			43,594
State taxes	215			638
Accrued other	2,684			3,018
Deferred revenue	(371		)	(545		)
Property and equipment	9,405			14,170
Losses carried forward	3,688			3,312
Federal tax benefit	10,542			10,757
Total gross deferred tax assets	53,961			76,340
Less: Valuation allowance	(6,455		)	(5,420		)
Net deferred tax assets	47,506			70,920
Deferred tax liabilities:
Vehicle pooling costs	(9,590		)	(8,871		)
Prepaid insurance	(1,333		)	(1,142		)
Intangibles and goodwill	(38,580		)	(39,773		)
Total gross deferred tax liabilities	(49,503		)	(49,786		)
Net deferred tax (liabilities) assets	$	(1,997	)	$	21,134

The above net deferred tax assets and liabilities have been reflected in the accompanying consolidated balance sheets as follows:



	July 31,
(In thousands)	2017			2016
U.S. current (liabilities) assets	$	(92	)	$	1,444
U.S. non-current assets	1,054			23,506
International non-current liabilities	(2,959		)	(3,816		)
Net deferred tax (liabilities) assets	$	(1,997	)	$	21,134

As of July 31, 2017 and 2016, the Company had foreign operating losses and a U.S. federal tax credit carryforward of $5.5 million and $5.0 million, respectively. The foreign operating losses, subject to certain limitations, usually can be carried forward from a minimum of eight years to indefinitely. If not used, those foreign operating losses would start to expire after 2023. The U.S. federal related tax credit, if not used, would start to expire after 2026.

The Company’s ability to realize deferred tax assets is dependent on its ability to generate future taxable income. Accordingly, the Company has established a valuation allowance in taxable jurisdictions where the utilization of the tax assets is uncertain. Additional timing differences or future tax losses may occur which could warrant a need for establishing additional valuation allowances against certain deferred tax assets. The valuation allowance for the years ended July 31, 2017 and 2016 was $6.5 million and $5.4 million, respectively. The valuation allowance for deferred tax assets primarily related to operating losses in certain international jurisdictions and certain tax credits that are unlikely to be realized.

As of July 31, 2017 and 2016, if recognized, the portion of liabilities for unrecognized tax benefits that would favorably affect the Company’s effective tax rate was $13.0 million and $14.0 million, respectively. It is possible that the amount of unrecognized tax benefits will change in the next twelve months, due to tax legislation updates or future audit outcomes; however, an estimate of the range of the possible change cannot be made at this time.

The following table summarizes the activities related to the Company’s unrecognized tax benefits:



	July 31,
(In thousands)	2017			2016			2015
Beginning balance	$	20,715		$	17,428		$	18,419
Increases related to current year tax position	2,807			4,311			3,441
Prior year tax positions:
Prior year increase	2,694			1,120			599
Prior year decrease	(3,605		)	—			—
Cash settlement	(1,123		)	(412		)	(225		)
Lapse of statute of limitations	(2,219		)	(1,732		)	(4,806		)
Ending balance	$	19,269		$	20,715		$	17,428

It is the Company’s continuing practice to recognize interest and penalties related to income tax matters in income tax expense. As of July 31, 2017, 2016 and 2015, the Company had accrued interest and penalties related to unrecognized tax benefits of $5.3 million, $4.9 million and $3.8 million, respectively.

The Company is currently under examination by certain taxing authorities in the U.S. for fiscal years 2012 to 2016. At this time, the Company does not believe that the outcome of any examination will have a material impact on the Company’s consolidated results of operations and financial position.

During the year ended July 31, 2016, the Company adopted ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting, which impacted the accounting for share-based payments, including income tax consequences, classification of awards and the classification on the consolidated statements of cash flows. As of July 31, 2017 and 2016 the Company recognized excess tax benefits of $107.6 million and $14.7 million, respectively, as a reduction to tax expense in the consolidated statements of income.

In the year ended July 31, 2015, the Company recognized a tax benefit of $3.0 million, upon the exercise of certain stock options, which was reflected in stockholders’ equity.

The Company has not provided for U.S. federal income and foreign withholding taxes on $181.4 million of its international subsidiaries’ undistributed earnings as of July 31, 2017, because the Company intends to reinvest such earnings indefinitely in its international operations. Specifically, the earnings will be dedicated to the following areas outside the U.S. (i) funding operating and capital spending needs in existing foreign markets; (ii) funding merger and acquisition deals both in existing and new international markets; and (iii) other investments to help expand the Company’s footprint in international emerging markets. The Company does not anticipate the need for any international cash in its U.S. operations. It is not practical to determine the income tax liability that might be incurred if these earnings were to be distributed in the form of dividends or otherwise. If distributed, however, foreign tax credits may become available under then current law to reduce or eliminate the resultant U.S. income tax liability.