Income Taxes

Income before income taxes is categorized geographically as follows:



	Year Ended December 31,
	2017		2016		2015
	(In thousands)
United States	$	313,351	$	299,304	$	248,932
Foreign	285,661		281,869		238,718
Total income before income taxes	$	599,012	$	581,173	$	487,650

The provision for income taxes consisted of the following:



	Year Ended December 31,
	2017			2016		2015
	(In thousands)
Current expense:
Federal	$	16,870		$	34,842	$	13,601
State	294			240		156
Foreign, including withholding tax	15,539			19,268		17,241
	32,703			54,350		30,998
Deferred expense (benefit):
Federal	90,113			64,301		65,168
State	19,654			21,492		15,767
Foreign	(706		)	385		481
	109,061			86,178		81,416
Total income tax expense	$	141,764		$	140,528	$	112,414

The difference between income tax expense and the amount resulting from applying the federal statutory rate of 35% to Income before income taxes is attributable to the following:



	Year Ended December 31,
	2017			2016			2015
	(In thousands)
Income tax expense at federal statutory rate	$	209,654		$	203,410		$	170,677
State taxes, net of federal benefit	13,029			14,517			9,616
Differences between statutory rate and foreign effective tax rate	(83,808		)	(79,087		)	(66,238		)
U.S. federal tax rate change	(186,800		)	—			—
U.S. tax on accumulated foreign earnings, net of foreign tax credits	162,353			—			—
Foreign withholding tax on unremitted foreign earnings, net of foreign tax credits	33,619			—			—
Other	(6,283		)	1,688			(1,641		)
Total income tax expense	$	141,764		$	140,528		$	112,414

The Tax Act was enacted on December 22, 2017, most provisions of which will take effect starting in 2018. The Tax Act makes substantial changes to U.S. taxation of corporations, including, lowering the U.S. federal corporate income tax rate from 35% to 21%, and instituting a territorial tax system, along with a one-time tax on accumulated foreign earnings. Upon enactment, the Company remeasured its deferred tax balances to reflect the new 21% U.S. federal tax rate, which resulted in a tax benefit of $186.8 million in 2017. The Company also recorded a provisional deferred tax liability for the one-time U.S. tax of $162.4 million, triggered by the Tax Act, on accumulated foreign earnings, net of $38.3 million of resulting previously unrecognized foreign tax credits. As a result of the Tax Act, the Company no longer intends to indefinitely reinvest the earnings of its foreign subsidiaries offshore, and therefore, recognized a provisional deferred tax liability of $33.6 million for foreign withholding tax on its unremitted foreign earnings, net of $26.3 million of resulting foreign tax credits.

The Company has not completed its accounting for the tax effects of the enactment of the Tax Act. Specifically, the amounts recorded for the U.S. tax on accumulated foreign earnings, net of foreign tax credits and the foreign withholding tax on unremitted foreign earnings, net of foreign tax credits, and the state income tax effects of these two items are provisional amounts based on the Company’s estimates. The Company expects to complete the accounting for these impacts of the Tax Act in the fourth quarter of 2018 as it finalizes its cumulative earnings and profits of its foreign subsidiaries and receives additional guidance from the IRS pertaining to the Tax Act. The impacts of additional guidance and changes in estimates related to the effects of the Tax Act, if any, will be recorded in the period the additional guidance or information is available.

The Company qualifies for a tax holiday in Switzerland which does not expire, unless the required non-Swiss income and expense thresholds are no longer met, or there is a law change which eliminates the holiday. The tax holiday provides reduced rates of taxation on certain types of income and also require certain thresholds of foreign source income. The tax holiday increased the Company’s earnings per share by $0.10, $0.16, and $0.14 in 2017, 2016, and 2015, respectively.

The tax effects of temporary differences that give rise to significant portions of the Company’s deferred tax assets and liabilities are as follows:



	As of December 31,
	2017			2016
	(In thousands)
Deferred tax assets:
Net operating loss carryforwards	$	70,587		$	46,879
Deductible goodwill and intangible assets	1,192			10,473
Tax credit carryforwards	52,659			59,337
Deferred revenue, accruals and reserves	77,869			114,548
Capital loss carryforwards	778,430			1,161,772
Other	5,584			4,791
Total deferred tax assets	986,321			1,397,800
Valuation allowance	(783,725		)	(1,162,101		)
Net deferred tax assets	202,596			235,699
Deferred tax liabilities:
Property and equipment	(1,577		)	(4,212		)
U.S. tax on accumulated foreign earnings	(162,912		)	—
Foreign withholding tax on unremitted earnings	(33,619		)	—
Subordinated Convertible debentures	(430,088		)	(590,921		)
Other	(3,116		)	(2,614		)
Total deferred tax liabilities	(631,312		)	(597,747		)
Total net deferred tax liabilities	$	(428,716	)	$	(362,048	)

With the exception of deferred tax assets related to capital loss and certain state net operating loss carryforwards, management believes it is more likely than not that the tax effects of the deferred tax liabilities together with future taxable income, will be sufficient to fully recover the remaining deferred tax assets.

As of December 31, 2017, the Company had federal, state and foreign net operating loss carryforwards of approximately $5.5 million, $1.3 billion and $18.9 million, respectively, before applying tax rates for the respective jurisdictions. As of December 31, 2017, the Company had federal and state research tax credits of $4.2 million and $2.3 million, respectively, and alternative minimum tax credits of $17.0 million available for future years. Certain net operating loss carryforwards and credits are subject to an annual limitation under Internal Revenue Code Section 382, but are expected to be fully realized. The federal and state net operating loss and federal tax credit carryforwards expire in various years from 2018 through 2034. The foreign net operating loss can be carried forward indefinitely. As of December 31, 2017, the Company had federal and state capital loss carryforwards of $2.9 billion and $3.1 billion, respectively, before applying tax rates for the respective jurisdictions. The capital loss carryforwards expire in 2018 and are also subject to annual limitations under Internal Revenue Code Section 382. The Company does not expect to realize any tax benefits from the capital loss carryforwards and accordingly has reserved the entire amount through valuation allowance and accrual for uncertain tax positions. As of December 31, 2017, the Company has foreign tax credit carryforwards of $121.5 million. The majority of these foreign tax credits will expire in 2024.

The deferred tax liability related to the Subordinated Convertible Debentures is driven by the excess of the tax deduction taken for interest expense over the amount of interest expense recognized in the consolidated financial statements. The interest expense deducted for tax purposes is based on the adjusted issue price of the Subordinated Convertible Debentures, while the interest expense recognized in accordance with GAAP is based only on the liability portion of the Subordinated Convertible Debentures. The adjusted issue price of the Subordinated Convertible Debentures grows over the term due to the difference between the interest deduction taken for income tax, using a comparable yield of 8.5%, and the coupon rate of 3.25%, compounded annually, adjusted for actual versus projected contingent interest payments

The Company maintains liabilities for uncertain tax positions. These liabilities involve considerable judgment and estimation and are continuously monitored by management based on the best information available including changes in tax regulations and other information. A reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits is as follows:



	As of December 31,
	2017			2016
	(In thousands)
Beginning balance	$	220,682		$	220,280
Increases in tax positions for prior years	3,699			119
Decreases in tax positions for prior years	(144		)	(71		)
Increases in tax positions for current year	395			354
Decreases in tax positions due to settlement with taxing authorities	(1,416		)	—
Ending balance	$	223,216		$	220,682

As of December 31, 2017, approximately $217.0 million of unrecognized tax benefits, including penalties and interest, could affect the Company’s tax provision and effective tax rate. It is reasonably possible that during the next twelve months, the Company’s unrecognized tax benefits may change by a significant amount as a result of IRS audits. However the timing of completion and ultimate outcome of the audits remains uncertain. Therefore, the Company cannot currently estimate the impact on the balance of unrecognized tax benefits.

In accordance with its accounting policy, the Company recognizes accrued interest and penalties related to unrecognized tax benefits as a component of tax expense. These accruals were not material in any period presented.

The Company’s major taxing jurisdictions are the U.S., the state of Virginia, and Switzerland. The Company’s U.S. federal income tax returns are currently under examination by the IRS for 2010 through 2014. The Company’s other tax returns are not currently under examination by their respective taxing jurisdictions. Because the Company has used net operating loss carryforwards and other tax attributes to offset its taxable income in current and future years’ income tax returns for the U.S. and Virginia, such attributes can be adjusted by these taxing authorities until the statute closes on the year in which such attributes were utilized. The open years in Switzerland are the 2012 tax year and forward.