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Income Taxes | 12 Months Ended
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Dec. 31, 2019
Income Tax Disclosure [Abstract] |
Income Taxes | NOTE 11: INCOME TAXES The following table presents a summary of our domestic and foreign income before income taxes:
|  | Year Ended December 31, |
|  | 2019 |  |  | 2018 |  |  | 2017 |
|  | (in millions) |
Domestic |  | $ | 92 |  |  | $ | 104 |  |  | $ | 81 |
Foreign |  |  | 102 |  |  |  | 69 |  |  |  | 29 |
Total |  | $ | 194 |  |  | $ | 173 |  |  | $ | 110 |
The following table presents a summary of the components of our provision for income taxes:
|  | Year Ended December 31, |
|  | 2019 |  |  | 2018 |  |  | 2017 |
|  | (in millions) |
Current income tax expense: |  |  |  |  |  |  |  |  |  |  |  |
Federal |  | $ | 31 |  |  | $ | 37 |  |  | $ | 93 |
State |  |  | 5 |  |  |  | 12 |  |  |  | 1 |
Foreign |  |  | 26 |  |  |  | 17 |  |  |  | 6 |
Current income tax expense |  |  | 62 |  |  |  | 66 |  |  |  | 100 |
Deferred income tax expense (benefit): |  |  |  |  |  |  |  |  |  |  |  |
Federal |  |  | 25 |  |  |  | (10 | ) |  |  | 25 |
State |  |  | 7 |  |  |  | (1 | ) |  |  | 2 |
Foreign |  |  | (26 | ) |  |  | 5 |  |  |  | 2 |
Deferred income tax expense (benefit): |  |  | 6 |  |  |  | (6 | ) |  |  | 29 |
Provision for income taxes |  | $ | 68 |  |  | $ | 60 |  |  | $ | 129 |
The Company reduced its current income tax payable by $24 million, $15 million and $27 million for the years ended December 31, 2019, 2018 and 2017, respectively, for tax deductions attributable to the exercise or settlement of the Company’s stock-based awards. The significant components of our deferred tax assets and deferred tax liabilities as of December 31, 2019 and 2018 are as follows:
|  | December 31, |
|  | 2019 |  |  | 2018 |
|  | (in millions) |
Deferred tax assets: |  |  |  |  |  |  |  |
Stock-based compensation |  | $ | 47 |  |  | $ | 44 |
Net operating loss carryforwards |  |  | 49 |  |  |  | 38 |
Provision for accrued expenses |  |  | 6 |  |  |  | 6 |
Deferred rent |  |  | — |  |  |  | 3 |
Lease financing obligation |  |  | 24 |  |  |  | 22 |
Foreign advertising spend |  |  | 15 |  |  |  | 15 |
Deferred expense related to cost-sharing arrangement |  |  | - |  |  |  | 31 |
Interest carryforward |  |  | 20 |  |  |  | 14 |
Other |  |  | 14 |  |  |  | 10 |
Total deferred tax assets |  | $ | 175 |  |  | $ | 183 |
Less: valuation allowance |  |  | (72 | ) |  |  | (57 | )
Net deferred tax assets |  | $ | 103 |  |  | $ | 126 |
Deferred tax liabilities: |  |  |  |  |  |  |  |
Intangible assets |  | $ | (51 | ) |  | $ | (57 | )
Property and equipment |  |  | (27 | ) |  |  | (22 | )
Prepaid expenses |  |  | (2 | ) |  |  | (2 | )
Building - corporate headquarters |  |  | (22 | ) |  |  | (23 | )
Deferred income related to cost-sharing arrangement |  |  | — |  |  |  | (16 | )
Other |  |  | (2 | ) |  |  | — |
Total deferred tax liabilities |  | $ | (104 | ) |  | $ | (120 | )
Net deferred tax asset (liability) |  | $ | (1 | ) |  | $ | 6 |
At December 31, 2019, we had federal, state and foreign net operating loss carryforwards (“NOLs”) of approximately $4 million, $32 million and $201 million, respectively. If not utilized, the federal and state NOLs will expire at various times between 2020 and 2037 and the foreign NOLs will expire at various times between 2020 and 2028. As of December 31, 2019, we had a valuation allowance of approximately of $72 million related to certain NOL carryforwards and other foreign deferred tax assets for which it is more likely than not, the tax benefit will not be realized. This amount represented an increase of $15 million, as compared to balance as of December 31, 2018. The increase is primarily related to additional foreign net operating losses. Except for certain foreign deferred tax assets, we expect to realize all of our deferred tax assets based on a strong history of earnings in the U.S. and other jurisdictions, as well as future reversals of taxable temporary differences. A reconciliation of the provision for income taxes to the amounts computed by applying the statutory federal income tax rate to income before income taxes is as follows:
|  | Year Ended December 31, |
|  | 2019 |  |  | 2018 |  |  | 2017 |
|  | (in millions) |
Income tax expense at the federal statutory rate |  | $ | 40 |  |  | $ | 36 |  |  | $ | 38 |
Foreign rate differential |  |  | (16 | ) |  |  | (17 | ) |  |  | (25 | )
State income taxes, net of effect of federal tax benefit |  |  | 9 |  |  |  | 9 |  |  |  | 5 |
Unrecognized tax benefits and related interest |  |  | 11 |  |  |  | 15 |  |  |  | 12 |
Change in cost-sharing treatment of stock-based compensation |  |  | 15 |  |  |  | (3 | ) |  |  | (5 | )
FDII, GILTI and other provisions |  |  | (3 | ) |  |  | (5 | ) |  |  | — |
Impacts related to the 2017 Tax Act |  |  | — |  |  |  | — |  |  |  | 73 |
Research tax credit |  |  | (11 | ) |  |  | (9 | ) |  |  | (8 | )
Stock-based compensation |  |  | 4 |  |  |  | 8 |  |  |  | 13 |
Change in valuation allowance |  |  | 6 |  |  |  | 9 |  |  |  | 25 |
Local income tax on intercompany transaction (1) |  |  | 7 |  |  |  | 10 |  |  |  | — |
Executive compensation |  |  | 3 |  |  |  | 2 |  |  |  | 1 |
Other, net |  |  | 3 |  |  |  | 5 |  |  |  | — |
Provision for income taxes |  | $ | 68 |  |  | $ | 60 |  |  | $ | 129 |
| (1) | During 2018, we completed an intra-entity transfer from Australia to the U.S. of certain intangible property (“IP”) rights associated with a subsidiary’s technology platform. This transfer resulted in an income tax expense for Australian tax purposes of approximately $10 million. As a result of the IP transfer, we utilized NOLs and consequently released the valuation allowance on our Australian entity. During 2019, we completed an intra-entity transfer from China to Singapore of certain IP. As a result of the transfer, we utilized NOLs and consequently released the valuation allowance on certain deferred tax assets on our China entity.
During 2011, the Singapore Economic Development Board accepted our application to receive a tax incentive under the International Headquarters Award. This incentive provides for a reduced tax rate on qualifying income of 5% as compared to Singapore’s statutory tax rate of 17% and is conditional upon our meeting certain employment and investment thresholds. This agreement has been extended until June 30, 2021 as we have met certain employment and investment thresholds. This benefit resulted in a decrease to our 2019 provision for income tax expense of $2 million. The 2017 Tax Act was signed into United States tax law on December 22, 2017. The 2017 Tax Act significantly changed the U.S. corporate income tax regime by, among other things, lowering the U.S. corporate tax rate from 35% to 21% effective January 1, 2018. The 2017 Tax Act also provided for a mandatory one-time tax on the deemed repatriation of accumulative foreign earnings of foreign subsidiaries (the “Transition Tax”), as well as prospective changes beginning in 2018, including additional limitations on executive compensation. Under GAAP, the effects of changes in income tax rates and laws are recognized in the period in which the new legislation is enacted. We recorded an estimate of $67 million of Transition Tax, and $6 million due to a remeasurement of our net deferred tax assets, during the year ended December 31, 2017, which reflected provisional amounts for those specific income tax effects of the 2017 Tax Act. Subsequent adjustments in 2018 were not significant. We are subject to additional requirements of the 2017 Tax Act during the year ended December 31, 2019. Those provisions include a deduction for foreign derived intangible income (“FDII”), a tax on global intangible low-taxed income (“GILTI”), a limitation of certain executive compensation, and other immaterial provisions. We have elected to account for GILTI as a period cost, and therefore included GILTI expense in the effective income tax rate calculation. Our 2019 effective income tax rate includes our estimates of these new provisions, with a net tax benefit of $3 million recorded during the year ended December 31, 2019. Our estimates may be revised in future periods as we obtain additional data, and as the IRS issues new guidance implementing the law changes. As a result of the 2017 Tax Act, foreign earnings may now generally be repatriated back to the U.S. without incurring U.S. federal income tax. Historically, we have asserted our intention to indefinitely reinvest the cumulative undistributed earnings of our foreign subsidiaries. In response to increased cash requirements in the U.S. related to the Company’s declaration of a special cash dividend and other strategic initiatives during the fourth quarter of 2019, we determined that we no longer consider $501 million of these foreign earnings to be indefinitely reinvested. During the year ended December 31, 2019, we recorded a deferred tax liability of $1 million for the U.S. state income tax and foreign withholding tax liabilities on the cumulative undistributed foreign earnings that are not indefinitely reinvested. We intend to indefinitely reinvest $118 million of our foreign earnings in our non-US subsidiaries. Determination of the amount of unrecognized deferred income tax liability related to these earnings is not practicable. For purposes of governing certain of the ongoing relationships between us and Expedia at and after the Spin-Off, and to provide for an orderly transition, we and Expedia entered into various agreements at the time of the Spin-Off, which Tripadvisor has satisfied its obligations. However, Tripadvisor continues to be subject to certain post Spin-Off obligations under the Tax Sharing Agreement. Under the Tax Sharing Agreement between us and Expedia, we are generally required to indemnify Expedia for any taxes resulting from the Spin-Off (and any related interest, penalties, legal and professional fees, and all costs and damages associated with related stockholder litigation or controversies) to the extent such amounts resulted from (i) any act or failure to act by us described in the covenants in the tax sharing agreement, (ii) any acquisition of our equity securities or assets or those of a member of our group, or (iii) any failure of the representations with respect to us or any member of our group to be true or any breach by us or any member of our group of any covenant, in each case, which is contained in the separation documents or in the documents relating to the IRS private letter ruling and/or the opinion of counsel. The full text of the Tax Sharing Agreement is incorporated by reference in this Annual Report on Form 10-K as Exhibit 10.2. By virtue of consolidated income tax returns previously filed with Expedia, we are currently under an IRS audit for the 2009, 2010 and short-period 2011 tax years. We are separately under examination by the IRS for the short-period 2011 and 2012-2016 tax years, under an employment tax audit by the IRS for the 2013-2016 tax years, and have various ongoing audits for state income tax returns. These audits include questioning of the timing and the amount of income and deductions and the allocation of income among various tax jurisdictions. These examinations may lead to proposed or ordinary course adjustments to our taxes. We are no longer subject to tax examinations by tax authorities for years prior to 2009. As of December 31, 2019, no material assessments have resulted, except as noted below regarding our 2009, 2010, and 2011 IRS audit with Expedia and our 2012 and 2013 standalone IRS audit. In January 2017 and April 2019, as part of the IRS audit of Expedia, we received Notices of Proposed Adjustment from the IRS for the 2009, 2010, and 2011 tax years. Subsequently, in September 2019, as part of Tripadvisor’s standalone audit, we received Notices of Proposed Adjustment from the IRS for the 2012 and 2013 tax years. These proposed adjustments are related to certain transfer pricing arrangements with our foreign subsidiaries, and would result in an increase to our worldwide income tax expense in an estimated range of $35 million to $40 million at the close of the audit if the IRS prevails, after consideration of competent authority relief and Transition Tax, exclusive of interest and penalties. We disagree with the proposed adjustments and we intend to defend our position through applicable administrative and, if necessary, judicial remedies. Our policy is to review and update tax reserves as facts and circumstances change. Based on our interpretation of the regulations and available case law, we believe the position we have taken with regard to transfer pricing with our foreign subsidiaries is sustainable. In addition to the risk of additional tax for 2009 through 2013 transactions, if the IRS were to seek transfer pricing adjustments of a similar nature for transactions in subsequent years, we would be subject to significant additional tax liabilities. In July 2015, the United States Tax Court (the “Court”) issued an opinion favorable to Altera with respect to Altera’s litigation with the IRS. This opinion was submitted as a final decision under Tax Court Rule 155 during December 2015. The litigation relates to the treatment of stock-based compensation expense in an inter-company cost-sharing arrangement with Altera’s foreign subsidiary. In its opinion, the Court accepted Altera’s position of excluding stock-based compensation from its inter-company cost-sharing arrangement. The IRS appealed the Court decision on February 19, 2016. On June 7, 2019, a three-judge panel from the Ninth Circuit Court of Appeals reversed the Court’s decision and upheld the validity of the Treasury regulation (Reg. sec. 1.482-7A(d)(2)) requiring stock-based compensation costs to be included in the costs shared in a cost-sharing arrangement. Based on this Ninth Circuit Court of Appeals decision, we recorded a cumulative income tax expense of $15 million during the year ended December 31, 2019, which was a reversal of income tax benefits taken by the Company since the Court’s 2015 opinion. If the June 7, 2019 Ninth Circuit Court of Appeals decision is reversed, we would anticipate recording an income tax benefit at that time. In November 2019, the Ninth Circuit denied Altera’s request for a rehearing en banc. On February 10 th, 2020, Altera filed a certiorari petition with the Supreme Court, asking it to hear an appeal of the Ninth Circuit’s decision. If the Supreme Court does not hear the appeal, the Ninth Circuit’s decision will be final. The Company will continue to monitor this matter and related potential impacts to its consolidated financial statements. A reconciliation of the beginning and ending amount of gross unrecognized tax benefits (excluding interest and penalties) is as follows:
|  | December 31, |
|  | 2019 |  |  | 2018 |  |  | 2017 |
|  | (in millions) |
Balance, beginning of year |  | $ | 136 |  |  | $ | 123 |  |  | $ | 105 |
Increases to tax positions related to the current year |  |  | 11 |  |  |  | 11 |  |  |  | 17 |
Increases to tax positions related to the prior year |  |  | 1 |  |  |  | 2 |  |  |  | 1 |
Reductions due to lapsed statute of limitations |  |  | — |  |  |  | — |  |  |  | — |
Decreases to tax positions related to the prior year |  |  | (8 | ) |  |  | — |  |  |  | — |
Settlements during current year |  |  | — |  |  |  | — |  |  |  | — |
Balance, end of year |  | $ | 140 |  |  | $ | 136 |  |  | $ | 123 |
As of December 31, 2019, we had $140 million of unrecognized tax benefits, net of interest, which is classified as long-term and included in other long-term liabilities and deferred income taxes, net on our consolidated balance sheet. The amount of unrecognized tax benefits, if recognized, would reduce income tax expense by $82 million, due to correlative adjustments in other tax jurisdictions. We recognize interest and penalties related to unrecognized tax benefits in income tax expense on our consolidated statement of operations. As of December 31, 2019 and 2018, total gross interest accrued was $29 million and $20 million, respectively. We anticipate that the liability for unrecognized tax benefits could decrease by up to $12 million within the next twelve months due to the settlement of examinations of issues with tax authorities.

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- Definition The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -URI http://asc.fasb.org/topic&trid=2144680 + Details
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