Income Taxes

Income before income taxes is categorized geographically as follows:



	Year Ended December 31,
	2018		2017		2016
	(In thousands)
United States	$	420,597	$	313,351	$	299,304
Foreign	308,919		285,661		281,869
Total income before income taxes	$	729,516	$	599,012	$	581,173

The provision for income taxes consisted of the following:



	Year Ended December 31,
	2018			2017			2016
	(In thousands)
Current expense:
Federal	$	99,127		$	16,870		$	34,842
State	1,088			294			240
Foreign, including withholding tax	76,199			15,539			19,268
	176,414			32,703			54,350
Deferred expense (benefit):
Federal	(16,448		)	90,113			64,301
State	42,624			19,654			21,492
Foreign	(55,563		)	(706		)	385
	(29,387		)	109,061			86,178
Total income tax expense	$	147,027		$	141,764		$	140,528

Federal current expense and federal deferred benefit for 2018 includes $96.4 million of the one-time U.S. tax on accumulated foreign earnings (“Transition tax”), net of $106.7 million of carried forward and newly-generated foreign tax credits, payable as a result of the Tax Act. This amount will be paid in installments over 8 years starting in 2018, as allowed by the Tax Act. As discussed below, the Transition tax was recorded as a provisional deferred tax liability in 2017.

State tax expense for 2018 is increased by $10.0 million remeasurement of deferred tax assets because of changes in certain state apportionment rates, and $5.6 million change in estimate related to the 2017 state income tax returns.

Foreign current expense and foreign deferred benefit for 2018 includes $60.7 million of withholding taxes paid upon the repatriation of cash held by foreign subsidiaries. As discussed below, the withholding tax was recorded as a provisional deferred tax liability in 2017.

The difference between income tax expense and the amount resulting from applying the federal statutory rate of 21% in 2018 and 35% in 2017 and 2016, to Income before income taxes is attributable to the following:



	Year Ended December 31,
	2018			2017			2016
	(In thousands)
Income tax expense at federal statutory rate	$	153,199		$	209,654		$	203,410
State taxes, net of federal benefit	35,852			13,029			14,517
Differences between statutory rate and foreign effective tax rate	(46,928		)	(83,808		)	(79,087		)
Excess tax benefits from stock-based compensation	(9,006		)	(7,728		)	—
Capital loss carryforwards expiration	769,706			—			—
Change in valuation allowance	(773,737		)	(5,813		)	(511		)
U.S. federal tax rate change	—			(186,800		)	—
Transition tax, net of foreign tax credits	(5,602		)	162,353			—
U.S. tax on foreign earnings, net of foreign tax credits	24,208			4,123			2,881
Foreign withholding tax on unremitted foreign earnings, net of foreign tax credits	(812		)	33,619			—
Other	147			3,135			(682		)
Total income tax expense	$	147,027		$	141,764		$	140,528

The Tax Act was enacted on December 22, 2017, and most of its provisions became effective in 2018. The Tax Act made 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. In 2017, the Company also recorded a provisional deferred tax liability of $162.4 million, for the Transition tax, net of $38.3 million of resulting previously unrecognized foreign tax credits. The Company recorded a $5.6 million adjustment in 2018 as it finalized the provisional Transition tax amount. In 2018, the Company completed the repatriation of $1.15 billion of cash held by foreign subsidiaries, net of $60.7 million of foreign withholding taxes which was recorded in deferred tax liabilities in 2017.

The Company recorded additional impacts and changes in estimates related to the Tax Act during 2018 as additional guidance or information became available. As of December 31, 2018, the Company has completed its accounting for the tax effects of the enactment of the Tax Act.

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 reduced the Company’s income tax expense by $16.9 million in 2018, $12.3 million in 2017, and $21.3 million in 2016. This resulted in an increase in the Company’s earnings per share by $0.14, $0.10, and $0.16 in 2018, 2017, and 2016, 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,
	2018			2017
	(In thousands)
Deferred tax assets:
Net operating loss carryforwards	$	40,729		$	70,587
Tax credit carryforwards	3,970			52,659
Deferred revenue, accruals and reserves	74,437			77,869
Capital loss carryforwards	—			778,430
Other	6,724			6,776
Total deferred tax assets	125,860			986,321
Valuation allowance	(10,153		)	(783,725		)
Net deferred tax assets	115,707			202,596
Deferred tax liabilities:
Property and equipment	(2,764		)	(1,577		)
Transition tax	—			(162,912		)
Foreign withholding tax on unremitted earnings	(2,733		)	(33,619		)
Subordinated Convertible Debentures	—			(430,088		)
Other	(5,352		)	(3,116		)
Total deferred tax liabilities	(10,849		)	(631,312		)
Total net deferred tax assets (liabilities)	$	104,858		$	(428,716	)

With the exception of deferred tax assets related to certain state and foreign 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, 2018, the Company’s Other long-term tax liabilities includes the $81.0 million noncurrent liability for Transition tax, net of applicable foreign tax credits, while the $4.8 million current portion of the liability is included in Accounts payable and accrued liabilities. Both the current and noncurrent portion of these liabilities in addition to the $10.6 million paid in 2018, had been included in deferred tax liabilities as of December 31, 2017. The excess interest deductions on the Subordinated Convertible Debentures that were converted were not subject to recapture, and accordingly, the $439.2 million deferred tax liability related to the debentures, as of the conversion date, was reversed into Additional paid-in capital upon extinguishment of the debt.

As of December 31, 2018, the Company had federal, state and foreign net operating loss carryforwards of approximately $4.5 million, $738.3 million and $18.1 million, respectively, before applying tax rates for the respective jurisdictions. As of December 31, 2018, the Company had state research tax credits of $2.3 million and alternative minimum tax credits of $6.9 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 2019 through 2034. The foreign net operating loss can be carried forward indefinitely. As of December 31, 2018, the Company’s federal and state capital loss carryforwards expired and the associated valuation allowance reserve was also released. As of December 31, 2018, the Company has foreign tax credit carryforwards of $18.6 million. The majority of these foreign tax credits will expire in 2024.

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,
	2018			2017
	(In thousands)
Beginning balance	$	223,216		$	220,682
Increases in tax positions for prior years	333			3,699
Decreases in tax positions for prior years	(196		)	(144		)
Increases in tax positions for current year	436			395
Decreases in tax positions due to settlement with taxing authorities	—			(1,416		)
Lapse in statute of limitations	(334		)	—
Ending balance	$	223,455		$	223,216

As of December 31, 2018, approximately $219.5 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 material 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.