INCOME TAXES

C.H. Robinson Worldwide, Inc. and its 80 percent (or more) owned U.S. subsidiaries file a consolidated federal income tax return. We file unitary or separate state returns based on state filing requirements.

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code, including but not limited to, reducing the U.S. federal corporate tax rate from 35 percent to 21 percent and requiring companies to pay a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries.

The SEC staff issued Staff Accounting Bulletin (“SAB”) 118, which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under Accounting Standards Codification (“ASC”) 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements.

In connection with our initial analysis of the impact of the Tax Act, we have recorded a discrete net tax benefit of $12.1 million in the year ended December 31, 2017. The net benefit consists of a benefit for the revaluation of deferred tax assets and liabilities of $22.9 million, a net expense for one-time impacts of the Tax Act of $6.8 million, and an expense for transition taxes of $4.0 million. We have not yet completed our accounting for the income tax effects of certain elements of the Tax Act but we were able to make reasonable estimates for elements in which our analysis is not complete and have therefore recorded provisional adjustments. These items include our revaluation of deferred tax assets and liabilities and the expense for transition taxes.

During 2017, we recorded a net tax benefit of $19.7 million due to deductions under Section 199 of the Internal Revenue Code.

During the first quarter of 2017, we adopted ASU 2016-09, Compensation - Stock Compensation (Topic 718). The adoption of ASU 2016-09 prospectively impacts the recording of income taxes related to share-based payment awards in our consolidated financial position and results of operations, as well as the operating and financing cash flows on the consolidated statements of cash flows. This adoption resulted in a net tax benefit of $13.7 million during the year.

During the first quarter of 2016, we asserted that we will indefinitely reinvest earnings of foreign subsidiaries to support expansion of our international business. In 2017, our indefinite reinvestment strategy, with respect to unremitted earnings of our foreign subsidiaries provided an approximate $3.7 million benefit to our provision for income taxes related to current year earnings. If we repatriated all foreign earnings, the estimated effect on income taxes payable would be an increase of approximately $12.1 million as of December 31, 2017. With few exceptions, we are no longer subject to audits of U.S. federal, state and local, or non-U.S. income tax returns before 2010.

Income before provision for income taxes consisted of (in thousands):



	2017		2016		2015
Domestic	$	638,718	$	710,931	$	729,390
Foreign	89,745		101,019		93,391
Total	$	728,463	$	811,950	$	822,781

A reconciliation of the beginning and ending amount of unrecognized tax benefits, excluding interest and penalties, is as follows (in thousands):



	2017			2016			2015
Unrecognized tax benefits, beginning of period	$	12,268		$	13,271		$	18,274
Additions based on tax positions related to the current year	4,014			—			1,520
Additions for tax positions of prior years	16,713			55			—
Reductions for tax positions of prior years	—			(211		)	(810		)
Lapse in statute of limitations	(1,189		)	(847		)	(5,188		)
Settlements	—			—			(525		)
Unrecognized tax benefits, end of the period	$	31,806		$	12,268		$	13,271

As of December 31, 2017, we had $38.6 million of unrecognized tax benefits and related interest and penalties, all of which would affect our effective tax rate if recognized. We are not aware of any tax positions for which it is reasonably possible that the total amount of unrecognized tax benefit will significantly increase or decrease in the next 12 months.

Income tax expense considers amounts which may be needed to cover exposures for open tax years. We do not expect any material impact related to open tax years; however, actual settlements may differ from amounts accrued.

We recognize interest and penalties related to uncertain tax positions in the provision for income taxes. During the years ended December 31, 2017, 2016, and 2015, we recognized approximately $0.7 million $0.9 million, and $1.2 million in interest and penalties. We had approximately $6.8 million and $6.6 million for the payment of interest and penalties accrued within noncurrent income taxes payable as of December 31, 2017 and 2016. These amounts are not included in the reconciliation above.

The components of the provision for income taxes consist of the following for the years ended December 31 (in thousands):



	2017			2016			2015
Tax provision:
Federal	$	189,708		$	222,685		$	259,793
State	29,320			31,786			37,129
Foreign	32,638			29,086			33,255
	251,666			283,557			330,177
Deferred provision (benefit):
Federal	(21,389		)	13,936			(14,559		)
State	(3,048		)	1,986			(2,074		)
Foreign	(3,659		)	(913		)	(462		)
	(28,096		)	15,009			(17,095		)
Total provision	$	223,570		$	298,566		$	313,082

Our provision for income taxes decreased by $19.7 million due to the benefit of deductions under section 199 of the Internal Revenue Code, by $13.7 million due to our adoption of ASU 2016-09, and $12.1 million due to the impact of the Tax Act.

A reconciliation of the provision for income taxes using the statutory federal income tax rate to our effective income tax rate for the years ended December 31 is as follows:



	2017		2016		2015
Federal statutory rate	35.0	%	35.0	%	35.0	%
State income taxes, net of federal benefit	2.6		2.7		2.8
Tax Act impact	(1.7	)	—		—
Section 199 deduction	(2.8	)	—		—
ASU 2016-09 adoption	(1.9	)	—		—
Other	(0.5	)	(0.9	)	0.3
Effective income tax rate	30.7	%	36.8	%	38.1	%

Deferred tax assets (liabilities) are comprised of the following at December 31 (in thousands):



	2017			2016
Deferred tax assets:
Compensation	$	52,538		$	80,338
Receivables	8,819			13,471
Other	7,892			11,433
Deferred tax liabilities:
Intangible assets	(81,932		)	(131,698		)
Prepaid assets	(8,247		)	(14,540		)
Long-lived assets	(15,465		)	(21,268		)
Other	(2,090		)	(608		)
Net deferred tax liabilities	$	(38,485	)	$	(62,872	)

The Tax Act reduces the corporate tax rate to 21 percent, effective January 1, 2018. Consequently, we have recorded a provisional decrease related to deferred tax assets and deferred tax liabilities of $34.4 million and $57.3 million, respectively.

We had foreign net operating loss carryforwards with a tax effect of $10.9 million as of December 31, 2017, and $9.0 million as of December 31, 2016. The net operating loss carryforwards will expire at various dates from 2018 to 2025, with certain jurisdictions having indefinite carryforward terms. A full valuation allowance has been established for these net operating loss carryforwards due to the uncertainty of the use of the tax benefit in future periods.