EXPEDITORS INTERNATIONAL OF WASHINGTON INC

INCOME TAXES

On December 22, 2017, the United States enacted the 2017 Tax Act. The 2017 Tax Act, which is also commonly referred to as “U.S. tax reform”, significantly changes U.S. corporate income tax laws by, among other things, reducing the U.S. corporate income tax rate from 35% to 21% starting in 2018 and creates a territorial tax system with a one-time mandatory tax on the undistributed foreign earnings of the Company's non-U.S. subsidiaries. As a result, the Company recorded a net income tax benefit of $13.9 million during the fourth quarter of 2017. This amount, which reduced income tax expense in the consolidated statements of earnings, consists of three components:

i.$116.2 million of deferred income tax benefit resulting from completion of the remeasurement of net deferred tax liabilities based on the new lower U.S. income tax rate,

ii.$70.2 million provisional estimate of deferred income tax expense for the reversal of net deferred tax asset provided for its foreign income tax credits in excess of unremitted foreign earnings (after adjustment of the unremitted foreign earnings liability to reflect the lower U.S. tax rate) to transition to the territorial tax system, and

iii.$32.1 million of current income tax expense relating to the provisional estimate of the one-time mandatory tax on undistributed earnings of non-U.S. subsidiaries.

In addition, as a result of the transition to a territorial tax system in the U.S., the effective tax rate for the year ended December 31, 2017 included a $25.4 million income tax benefit as foreign tax rates are lower than the 2017 U.S. corporate income tax rate of 35%. Although the $13.9 million and $25.4 million net income tax benefits represent what the Company believes are reasonable estimates of the impact of the 2017 Tax Act on the Company's consolidated financial statements as of December 31, 2017, they should be considered provisional.

Given the significance of the legislation, the Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 118 (SAB 118), which allows registrants to record provisional amounts during a one year “measurement period”. However, the measurement period is deemed to have ended earlier when the registrant has obtained, prepared and analyzed the information necessary to finalize its accounting. During the measurement period, impacts of the law are expected to be recorded at the time a reasonable estimate for all or a portion of the effects can be made, and provisional amounts can be recognized and adjusted as information becomes available, prepared or analyzed.

SAB 118 summarizes a three-step process to be applied at each reporting period to account for and qualitatively disclose: (1) the effects of the change in tax law for which accounting is complete; (2) provisional amounts (or adjustments to provisional amounts) for the effects of the tax law where accounting is not complete, but that a reasonable estimate has been determined; and (3) a reasonable estimate cannot yet be made and therefore taxes are reflected in accordance with law prior to the enactment of the 2017 Tax Act.

Provisional amounts include any changes as a result of future guidance and interpretations to be issued and also includes any indirect impacts required to be recorded, including for example amounts recorded for state income taxes. The Company will finalize its tax positions and calculations when it files its 2017 U.S. tax returns. At that time, the Company will be able to conclude finally whether any further adjustments are required to its net current and deferred tax accounts in the U.S. as of December 31, 2017, as well as to the provisional liability associated with the one-time mandatory tax. Any adjustments to these provisional amounts will be reported as a component of income tax expense in the reporting period in which any such adjustments are determined, which will be no later than the fourth quarter of 2018.

Significant provisions that are not yet effective but may impact income taxes in future years include an incremental tax (base erosion anti-abuse tax or BEAT) on excessive amounts paid to foreign related parties, and a minimum tax on certain foreign earnings in excess of 10 percent of the foreign subsidiaries tangible assets (i.e., global intangible low-taxed income or GILTI). The Company is still evaluating whether to make a policy election to treat the GILTI tax as a period expense or to provide U.S. deferred taxes on foreign temporary differences that are expected to generate GILTI income when they reverse in future years.

Income tax expense (benefit) includes the following components:



	Federal			State		Foreign	Total
2017
Current	$	101,821		20,490		149,596	271,907
Deferred	(42,474		)	(1,221	)	—	(43,695	)
	$	59,347		19,269		149,596	228,212
2016
Current	$	85,330		16,082		137,076	238,488
Deferred	16,903			(1,068	)	—	15,835
	$	102,233		15,014		137,076	254,323
2015
Current	$	95,046		16,973		147,174	259,193
Deferred	17,631			368		—	17,999
	$	112,677		17,341		147,174	277,192

Income tax expense differs from amounts computed by applying the United States Federal income tax rate of 35% to earnings before income taxes as a result of the following:



	2017			2016	2015
Computed “expected” tax expense	$	251,508		240,400	257,841
Increase in income taxes resulting from:
State income taxes, net of Federal income tax benefit	12,525			9,759	11,272
Nondeductible stock compensation expense, net	63			3,629	5,241
Enactment of 2017 Tax Act	(13,894		)	—	—
Effect of lower foreign tax rates	(25,374		)	—	—
Other, net	3,384			535	2,838
	$	228,212		254,323	277,192

The components of earnings before income taxes are as follows:



	2017		2016	2015
United States	$	276,714	243,754	236,932
Foreign	441,881		443,102	499,757
	$	718,595	686,856	736,689

The tax effects of temporary differences and tax credits that give rise to significant portions of deferred tax assets and deferred tax liabilities are as follows:



Years ended December 31,	2017		2016
Deferred Tax Assets:
Accrued third party obligations, deductible for taxes upon economic performance	$	8,075	15,153
Provision for doubtful accounts receivable	628		497
Excess of financial statement over tax depreciation	4,804		10,650
Deductible stock compensation expense, net	17,326		21,758
Foreign currency translation adjustment	24,448		57,207
Retained liability for cargo claims	1,062		1,178
Total gross deferred tax assets	56,343		106,443
Deferred Tax Liabilities:
Unremitted foreign earnings, net of related foreign tax credits	43,136		120,170
Total gross deferred tax liabilities	43,136		120,170
Net deferred tax assets (liabilities)	$	13,207	(13,727	)

Based on management’s review of the Company’s tax positions, the Company had no significant unrecognized tax benefits as of December 31, 2017 and 2016.

The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction and various state, local and foreign jurisdictions. The Company is no longer subject to U.S. federal income tax examinations by tax authorities for years prior to 2014. With respect to state and local jurisdictions and countries outside of the United States, with limited exceptions, the Company and its subsidiaries are no longer subject to income tax audits for years prior to 2001. In the normal course of business, the Company is subject to examination by taxing authorities throughout the world. The outcome of a tax audit is always uncertain. Although the Company records estimates for additional tax expense, as well as interest and penalties that could arise from certain tax audits, the final resolution of these audits could differ materially from the estimates recorded by the Company. Any interest and penalties expensed in relation to the underpayment of income taxes were insignificant for the years ended December 31, 2017, 2016 and 2015.