Income Taxes

For the years ended December 31, income (loss) before income taxes consisted of the following:



In millions	2017			2016		2015
Income (loss) before income taxes
United States	$	(26	)	$	93	$	(88	)
Foreign	84			128		(56		)
Total income (loss) before income taxes	$	58		$	221	$	(144	)

For the years ended December 31, income tax expense consisted of the following:



In millions	2017			2016			2015
Income tax expense
Current
Federal	$	132		$	67		$	74
State and local	2			7			9
Foreign	25			25			26
Deferred
Federal	(22		)	7			(19		)
State and local	(4		)	1			(3		)
Foreign	(8		)	(11		)	(17		)
Total income tax expense	$	125		$	96		$	70
Effective income tax rate	215.5		%	43.4		%	(48.6		%)

The following table presents the principal components of the difference between the effective tax rate and the U.S. federal statutory income tax rate for the years ended December 31:



In millions	2017		2016		2015
Income tax expense at the U.S. federal tax rate	35.0	%	35.0	%	35.0	%
Foreign income tax differential	(18.0	)%	(13.2	)%	14.0	%
State and local income taxes	(11.0	)%	0.2	%	0.5	%
U.S. permanent book/tax differences	(12.0	)%	(0.1	)%	3.1	%
Change in valuation allowance for California R&D credit	10.0	%	0.8	%	(3.4	)%
U.S. manufacturing deduction permanent difference	(8.0	)%	(3.5	)%	5.5	%
Goodwill impairment	—	%	8.9	%	(100.1	)%
Tax impact of sale of marketing applications business	—	%	9.9	%	—	%
Impact of excess tax benefits and tax deficiencies	—	%	2.2	%	—	%
Tax impact of U.S. tax law change - IRC Section 987	—	%	3.5	%	—	%
Deferred tax impact from U.S. rate change	(27.0	)%	—	%	—	%
Tax impact of transition Tax- U.S. tax reform	250.0	%	—	%	—	%
Other, net	(3.5	)%	(0.3	)%	(3.2	)%
Effective income tax rate	215.5	%	43.4	%	(48.6	)%

The 2017 effective tax rate was impacted by the Tax Act, which was signed into law on December 22, 2017, making significant changes to the U.S. Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, the transition of U.S. international taxation from a worldwide tax system to a modified territorial tax system, and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017. On December 22, 2017, Staff Accounting Bulletin No. 118 ("SAB 118") was issued to address the application of GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act.

In accordance with SAB 118, the Company has determined its best estimate of the impact of the Tax Act in its year-end income tax provision in accordance with its understanding of the Tax Act and guidance available as of the date of this filing and has recorded $126 million as additional income tax expense in the fourth quarter of 2017. The provisional amount related to the one-time transition tax on the mandatory deemed repatriation of foreign earnings was $145 million of tax expense based on cumulative foreign earnings of $1.3 billion, which the Company expects to pay over an 8-year period. In addition, a tax benefit of $19 million was recorded, a majority of which related to the re-measurement of certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future. The ultimate impact may differ materially from these provisional amounts, due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made, additional regulatory guidance that may be issued, and actions the Company may take as a result of the Tax Act.

The 2016 effective tax rate was impacted by the $57 million of goodwill impairment charges recorded in the first quarter of 2016, all of which was treated as a permanent, non-deductible tax item. In addition, a discrete tax charge of $22 million was recorded in the third quarter of 2016 related to the tax impact of the sale of the marketing applications business, which occurred on July 1, 2016. In the fourth quarter of 2016, the Company recorded $8 million of tax expense associated with the issuance of new U.S. Treasury Regulations under Internal Revenue Code Section 987 on December 7, 2016, which clarified how companies calculate foreign currency translation gains and losses for income tax purposes for branches whose accounting records are kept in a currency other than the currency of the Company. Also in the fourth quarter of 2016, the Company elected to early adopt Accounting Standards Update 2016-09, Improvements to Employee Share-based Payment Accounting. As a result, the Company incurred a $5 million discrete tax expense associated with the net shortfall arising from 2016 equity compensation vestings and exercises.

The 2015 effective tax rate was impacted by the $437 million of goodwill impairment charges recorded for 2015, of which $414 million was treated as a permanent non-deductible tax item. This resulted in full-year income tax expense in 2015 of $70 million, on a pre-tax net loss of $(144) million, causing a negative tax rate of (48.6)%.

Deferred income tax assets and liabilities included in the balance sheets at December 31 were as follows:



In millions	2017			2016
Deferred income tax assets
Employee pensions and other liabilities	$	50		$	59
Other balance sheet reserves and allowances	13			18
Tax loss and credit carryforwards	59			53
Deferred revenue	3			3
Other	2			—
Total deferred income tax assets	127			133
Valuation allowance	(32		)	(26		)
Net deferred income tax assets	95			107
Deferred income tax liabilities
Intangibles and capitalized software	30			63
Property and equipment	12			22
Other	—			6
Total deferred income tax liabilities	42			91
Total net deferred income tax assets	$	53		$	16

As of December 31, 2017, Teradata has net operating loss ("NOL") and tax credit carryforwards totaling $59 million (tax effected and before any valuation allowance offset and application of recognition criteria for uncertain tax positions). Of the total tax carryforwards, $15 million are NOL's in the U.S. and certain foreign jurisdictions, a small portion of which will begin to expire in 2019 and $44 million are California R&D tax credits that have an indefinite carryforward period (which has a $32 million valuation allowance offset recorded).

Prior to the enactment of the Tax Act, the Company had not provided for taxes on the undistributed earnings of its foreign subsidiaries as the Company either reinvested or intended to reinvest those earnings outside of the U.S. As a result of the 2017 Tax Act, the Company has changed its indefinite reinvestment assertion related to foreign earnings that have been taxed in the U.S. and now considers a majority of these earnings no longer indefinitely reinvested. As a result of U.S. tax reform legislation, distributions of profits from non-U.S. subsidiaries are not expected to cause a significant U.S. tax impact in the future. However, these distributions may be subject to non-U.S. withholding taxes if profits are distributed from certain jurisdictions. The Company has not recorded any provisional foreign or state tax expense with respect to earnings which have been subject to federal income tax as they either would not be taxable upon remittance or they are considered permanently reinvested. Additional information and analysis are needed to determine the final amount of deferred tax liability considering factors such as whether non-U.S. entities are subject to withholding taxes, have reserve requirements, or have projected working capital and other capital needs in the country where the earnings were generated that would result in a decision to indefinitely reinvest a portion or all their earnings. The Company will disclose any future impact, if any, in the reporting period in which the accounting is completed, which will not exceed one year from the date of enactment of the Tax Act in accordance with SAB 118.

The Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The Company reflects any interest and penalties recorded in connection with its uncertain tax positions as a component of income tax expense.

As of December 31, 2017, the Company’s uncertain tax positions totaled approximately $28 million, of which $2 million is reflected in current taxes payable as it is anticipated the liability will be settled within the next twelve months, and $14 million is reflected in the other liabilities section of the Company’s balance sheet as a non-current liability. The remaining balance of $12 million of uncertain tax positions relates to certain tax attributes both generated by the Company and acquired in various acquisitions, which are netted against the underlying deferred tax assets recorded on the balance sheet. The entire balance of $28 million in uncertain tax positions would cause a decrease in the effective income tax rate upon recognition. Teradata has recorded $2 million of interest accruals related to its uncertain tax liabilities as of December 31, 2017.

Below is a roll-forward of the Company’s liability related to uncertain tax positions at December 31:



In millions	2017			2016
Balance at January 1	$	30		$	38
Gross decreases for prior period tax positions	(1		)	(7		)
Gross increases for current period tax positions	3			3
Decreases due to the lapse of applicable statute of limitations	(4		)	(4		)
Balance at December 31	$	28		$	30

The Company and its subsidiaries file income tax returns in the U.S. and various state jurisdictions, as well as numerous foreign jurisdictions. As of December 31, 2017, the Company has ongoing tax audits in a limited number of state and foreign jurisdictions. However, no material adjustments have been proposed or made in any of these examinations to date, which would result in any incremental income tax expense in future periods to the Company. The Company's tax returns for years 2014-2017 are still open for assessment by tax authorities in its major jurisdictions.