Income Taxes

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



In millions	2018			2017			2016
Income (loss) before income taxes
United States	$	(79	)	$	(26	)	$	93
Foreign	106			84			128
Total income before income taxes	$	27		$	58		$	221

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



In millions	2018			2017			2016
Income tax (benefit) expense
Current
Federal	$	(10	)	$	132		$	67
State and local	6			2			7
Foreign	19			25			25
Deferred
Federal	(20		)	(22		)	7
State and local	(4		)	(4		)	1
Foreign	6			(8		)	(11		)
Total income tax (benefit) expense	$	(3	)	$	125		$	96
Effective income tax rate	(11.1		%)	215.5		%	43.4		%

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



In millions	2018		2017		2016
Income tax expense at the U.S. federal tax rate	21.0	%	35.0	%	35.0	%
Foreign income tax differential	2.1	%	(22.6	)%	(14.0	)%
U.S. tax on foreign earnings	2.0	%	4.3	%	0.9	%
State and local income taxes	(25.0	)%	(11.0	)%	0.2	%
U.S. permanent book/tax differences	(2.7	)%	(1.5	)%	1.3	%
U.S. research and development tax credits	(29.5	)%	(11.2	)%	(1.6	)%
Change in valuation allowance	27.7	%	10.0	%	0.8	%
U.S. manufacturing deduction permanent difference	—	%	(8.0	)%	(3.5	)%
Goodwill impairment	—	%	—	%	8.9	%
Tax impact of sale of marketing applications business	—	%	—	%	9.9	%
Tax impact of equity compensation	(1.4	)%	0.7	%	2.4	%
Tax impact of U.S. tax law change - IRC Section 987	—	%	—	%	3.5	%
Deferred tax impact from U.S. rate change from Tax Reform	—	%	(27.0	)%	—	%
Tax impact of U.S. Tax Reform/ Transition Tax	(23.9	)%	250.0	%	—	%
Tax Impact of uncertain tax positions	20.2	%	(3.6	)%	(0.6	)%
Other, net	(1.6	)%	0.4	%	0.2	%
Effective income tax rate	(11.1	)%	215.5	%	43.4	%

The 2018 and 2017 effective tax rates were impacted by the Tax Act, which was signed into law on December 22, 2017, making significant changes to the United States 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 United States 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 completed its analysis of the impact of the Tax Act during the fourth quarter of 2018 in accordance with its understanding of the Tax Act and guidance available as of the date of this filing. For the year ended December 31, 2018, the Company recorded a $6 million tax benefit as an adjustment to the 2017 provisional estimate in accordance with SAB 118 because of additional regulatory guidance and changes in interpretations and assumptions the Company initially made as a result of the Tax Act. Effective in 2018, the Tax Act subjects United States shareholders to a tax on GILTI earned by certain foreign subsidiaries. The Company has elected to provide for the tax expense related to GILTI in the year the tax is incurred. For 2018, the Company recorded $1 million of tax expense for GILTI tax.

In the fourth quarter of 2017, the Company recorded $126 million as additional income tax expense as its provisional estimate of the impact of the Tax Act. The amount included $145 million of tax expense for the one-time transition tax on cumulative foreign earnings of $1.3 billion, which the Company will pay over an 8-year period ending in 2025. 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 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.

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



In millions	2018			2017
Deferred income tax assets
Employee pensions and other liabilities	$	49		$	50
Other balance sheet reserves and allowances	18			13
Tax loss and credit carryforwards	63			59
Deferred revenue	20			3
Other	—			2
Total deferred income tax assets	150			127
Valuation allowance	(39		)	(32		)
Net deferred income tax assets	111			95
Deferred income tax liabilities
Intangibles and capitalized software	17			30
Property and equipment	11			12
Other	19			—
Total deferred income tax liabilities	47			42
Total net deferred income tax assets	$	64		$	53

As of December 31, 2018, Teradata has net operating loss ("NOL") and tax credit carryforwards totaling $63 million (tax effected and before any valuation allowance offset and application of recognition criteria for uncertain tax positions). Of the total tax carryforwards, $11 million are NOL's in the United States and certain foreign jurisdictions, a small portion of which will begin to expire in 2020, $1 million are United States foreign tax credit carryforwards which expire in 2028, which has a full valuation allowance offset; and $51 million are California R&D tax credits that have an indefinite carryforward period (which have a $38 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 United States. Because of the 2017 Tax Act, the Company has changed its indefinite reinvestment assertion related to foreign earnings that have been taxed in the United States and now considers a majority of these earnings no longer indefinitely reinvested. Because of United States tax reform legislation, distributions of profits from non-U.S. subsidiaries are not expected to cause a significant United States 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 recorded $1 million of deferred foreign withholding tax expense with respect to certain earnings which are not considered permanently reinvested as they would be taxable upon remittance. Deferred taxes have not been provided on earnings considered indefinitely reinvested as it is not expected that the distribution of these earnings would give rise to a material tax liability.

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, 2018, the Company’s uncertain tax positions totaled approximately $34 million, of which $17 million is reflected in the other liabilities section of the Company’s balance sheet as a non-current liability. The remaining balance of $17 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 $34 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, 2018.

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



In millions	2018			2017
Balance at January 1	$	28		$	30
Gross decreases for prior period tax positions	—			(1		)
Gross increases for prior period tax positions	3			—
Gross increases for current period tax positions	8			3
Decreases due to the lapse of applicable statute of limitations	(1		)	(4		)
Decreases relating to settlements with taxing authorities	(4		)	—
Balance at December 31	$	34		$	28

On July 24, 2018, the Ninth Circuit Court of Appeals issued an opinion in Altera Corp. v. Commissioner requiring related parties in an intercompany cost-sharing arrangement to share expenses related to stock-based compensation. This opinion reversed the prior decision of the United States Tax Court. On August 7, 2018, the Ninth Circuit published an order withdrawing its opinion and is re-examining the opinion. The Company is awaiting the revised opinion of the Court to determine the impact, if any, on the Company.

The Company and its subsidiaries file income tax returns in the United States and various state jurisdictions, as well as numerous foreign jurisdictions. As of December 31, 2018, 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 2015-2018 are still open for assessment by tax authorities in its major jurisdictions.