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Income Taxes

12 Months Ended

Jul. 31, 2019

10 — Income Taxes

Income before taxes consisted of the following:



	Year Ended July 31,
(In thousands)	2019		2018		2017
U.S.	$	634,874	$	501,961	$	385,526
International	70,077		60,550		54,574
Total income before taxes	$	704,951	$	562,511	$	440,100

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



	Year Ended July 31,
(In thousands)	2019			2018			2017
Federal:
Current	$	59,848		$	109,804		$	12,752
Deferred	27,779			17,094			20,094
	87,627			126,898			32,846
State:
Current	12,720			9,100			1,659
Deferred	702			(111		)	499
	13,422			8,989			2,158
International:
Current	12,508			8,820			11,468
Deferred	(299		)	(203		)	(633		)
	12,209			8,617			10,835
Income tax expense	$	113,258		$	144,504		$	45,839

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)	2019		2018		2017
Federal statutory rate	21.0	%	26.9	%	35.0	%
State income taxes, net of federal income tax benefit	1.4	%	1.3	%	1.3	%
International rate differential	0.3	%	(0.8	)%	(1.8	)%
Compensation and fringe benefits ⁽¹⁾	(6.4	)%	(3.5	)%	(24.3	)%
Provisional transition tax	(0.7	)%	2.2	%	—	%
Deferred tax remeasurement	—	%	(0.8	)%	—	%
Other differences	0.5	%	0.4	%	0.2	%
Effective tax rate	16.1	%	25.7	%	10.4	%

(1)

Included in the compensation and fringe benefits rate reconciliation is the impact of the Company’s adoption 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)	2019			2018
Deferred tax assets:
Allowance for doubtful accounts	$	919		$	1,068
Accrued compensation and benefits	18,397			17,704
State taxes	559			580
Accrued other	3,312			1,930
Deferred revenue	1,322			929
Losses carried forward	7,631			3,065
Federal tax benefit	7,998			6,441
Total gross deferred tax assets	40,138			31,717
Less: Valuation allowance	(8,578		)	(4,592		)
Net deferred tax assets	31,560			27,125
Deferred tax liabilities:
Vehicle pooling costs	(15,731		)	(6,523		)
Property and equipment	(38,475		)	(14,147		)
Prepaid insurance	(987		)	(708		)
Intangibles and goodwill	(24,639		)	(25,010		)
Total gross deferred tax liabilities	(79,832		)	(46,388		)
Net deferred tax liabilities	$	(48,272	)	$	(19,263	)

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



	July 31,
(In thousands)	2019			2018
U.S. non-current liabilities	$	(44,499	)	$	(16,018	)
International non-current liabilities	(3,773		)	(3,245		)
Net deferred tax liabilities	$	(48,272	)	$	(19,263	)

On December 22, 2017 legislation, commonly referred to as the Tax Cuts and Jobs Act (the “Act”), was enacted. The Act included a one-time tax on accumulated unremitted earnings of the Company’s foreign subsidiaries (“Transition Tax”). SEC Staff Accounting Bulletin No. 118 allows the use of provisional amounts (reasonable estimates) if accounting for the income tax effects of the Act has not been completed. Provisional amounts must be adjusted within one year from the enactment date of the Act. As of July 31, 2018, the Company recorded a $12.4 million provisional Transition Tax charge. No adjustment to the provisional Transition Tax charge was made in the first quarter of fiscal year 2019. The Company completed its accounting for the tax effects of the enactment of the Tax Act during the three months ended January 31, 2019, and recorded a discrete decrease in tax expense of $1.1 million, whose effect on the Company’s effective tax rate was immaterial.

The Act reduced the federal statutory tax rate from 35.0% to 21.0%, effective January 1, 2018, which results in federal statutory tax rates for the Company of 21.0%, 26.9%, and 35.0% for fiscal years 2019, 2018 and 2017, respectively. In fiscal year 2018 the Company recorded a $4.3 million benefit to remeasure deferred taxes as of the enactment date of the Act to reflect the federal statutory rate reduction.

The Act contains Global Intangible Low-Taxed Income (“GILTI”) provisions, which first impact the Company in fiscal year 2019. The GILTI provisions effectively subject income earned by the Company's foreign subsidiaries to current U.S. tax at a rate of 10.5%, less foreign tax credits. Under U.S. GAAP, the Company can make an accounting policy election to either recognize deferred taxes for temporary differences expected to impact GILTI in future years or provide for tax expense related to GILTI in the year the tax is incurred as a period expense. The Company has elected to treat tax generated by GILTI provisions as a period expense.

The Act also includes a favorable tax treatment for certain Foreign Derived Intangible Income (“FDII”), effective for the Company starting August 1, 2018. The Company’s estimate for both GILTI and FDII did not materially impact the effective income tax rate or income tax expense for the fiscal year ended July 31, 2019.

As of July 31, 2019 and 2018, the Company had foreign operating losses and a U.S. federal tax credit carryforward of $8.2 million and $3.8 million, respectively. The foreign operating losses, subject to certain limitations, usually can be carried forward indefinitely. 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, 2019 and 2018 was $8.6 million and $4.6 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, 2019 and 2018, if recognized, the portion of liabilities for unrecognized tax benefits resulting from uncertain tax positions that would favorably affect the Company’s effective tax rate was $22.0 million and $16.0 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 resulting from uncertain tax positions:



	July 31,
(In thousands)	2019			2018			2017
Beginning balance	$	21,322		$	19,269		$	20,715
Increases related to current year tax position	6,588			5,169			2,807
Prior year tax positions:
Prior year increase	800			554			2,694
Prior year decrease	(305		)	(2,079		)	(3,605		)
Cash settlement	(534		)	(519		)	(1,123		)
Lapse of statute of limitations	(334		)	(1,072		)	(2,219		)
Ending balance	$	27,537		$	21,322		$	19,269

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, 2019, 2018 and 2017, the Company had accrued interest and penalties related to unrecognized tax benefits of $7.6 million, $6.0 million and $5.3 million, respectively.

The Company files income tax returns in the U.S. federal jurisdiction, various states and foreign jurisdictions. The Company is currently under examination by certain taxing authorities in the U.S. for fiscal years from 2014. 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.

The Act eliminated any additional federal tax upon repatriation of outside basis difference primarily resulted from undistributed foreign earnings; however, those undistributed earnings may still be subject to foreign withholding taxes if they are repatriated. As of July 31, 2019, the Company's foreign subsidiaries have accumulated undistributed earnings of $165.0 million. No deferred tax liability has been recognized for the repatriation of these earnings or any residual outside basis difference as the Company intends to permanently reinvest them.

The Company’s effective income tax rates were 16.1%, 25.7%, and 10.4% for fiscal 2019, 2018 and 2017, respectively. The Company’s U.S. federal statutory tax rate for fiscal year 2019 is 21.0% and was favorably impacted by $10.2 million of discrete tax items related to amending previously filed income tax returns. The effective tax rate for the fiscal year ending July 31, 2018, was computed based on a reduced blended U.S. federal statutory tax rate of 26.9% and included the effects of the Act. The tax rates in the prior years were also impacted from the result of recognizing excess tax benefits from the exercise of employee stock options of $46.1 million, $21.3 million and $107.6 million, for the years ended July 31, 2019, 2018 and 2017, respectively.