EURONET WORLDWIDE INC

Income Taxes

The sources of income before income taxes for the years ended December 31, 2017, 2016 and 2015 are presented as follows:



	Year Ended December 31,
(in thousands)	2017		2016		2015
Income before taxes:
United States	$	55,117	$	41,804	$	10,686
Foreign	201,218		191,089		130,408
Total income before income taxes	$	256,335	$	232,893	$	141,094

The Company's income tax expense for the years ended December 31, 2017, 2016 and 2015 consisted of the following:



	Year Ended December 31,
(in thousands)	2017			2016			2015
Current tax expense (benefit):
U.S.	$	29,620		$	(2,886	)	$	1,277
Foreign	79,475			59,515			45,150
Total current	109,095			56,629			46,427
Deferred tax expense (benefit):
U.S.	14,056			9,908			2,037
Foreign	(23,756		)	(7,742		)	(5,862		)
Total deferred	(9,700		)	2,166			(3,825		)
Total tax expense	$	99,395		$	58,795		$	42,602

The following is a reconciliation of the federal statutory income tax rate of 35% to the effective income tax rate for the years ended December 31, 2017, 2016 and 2015:



	Year Ended December 31,
(dollar amounts in thousands)	2017			2016			2015
U.S. federal income tax expense at applicable statutory rate	$	89,684		$	81,513		$	49,383
Tax effect of:
State income tax expense (benefit) at statutory rates	968			1,341			894
Non-deductible expenses	5,648			3,482			4,947
Share-based compensation	(4,845		)	(1		)	(684		)
Other permanent differences	8,458			(4,929		)	(5,505		)
Difference between U.S. federal and foreign tax rates	(24,270		)	(18,432		)	(13,615		)
Provision in excess of statutory rates	8,426			2,490			2,400
Change in federal and foreign valuation allowance	(30,224		)	(8,163		)	1,724
Impairment of goodwill and acquired intangibles assets	8,248			—			—
Tax Cuts and Jobs Act of 2017	41,597			—			—
Other	(4,295		)	1,494			3,058
Total income tax expense	$	99,395		$	58,795		$	42,602
Effective tax rate	38.8		%	25.2		%	30.2		%

Tax Cuts and Jobs Act of 2017

We calculated our provision for federal, state and international income taxes based on current tax law. On December 22, 2017, the U.S. enacted into law what is informally called the Tax Cuts and Jobs Act of 2017 (the "Act"). The most significant provisions of the Act are the transition tax on previously undistributed foreign earnings of foreign subsidiaries, the reduction in the U.S. corporate statutory income tax rate from 35% to 21% beginning on January 1, 2018, and new taxes on certain foreign sourced earnings.

Under the accounting rules, companies are required to recognize the effects of changes in tax laws and tax rates on deferred tax assets and liabilities in the period in which the new legislation is enacted. The SEC staff issued Staff Accounting Bulletin ("SAB") 118, which provides guidance on accounting for the tax effects of the Act. SAB 118 provides a measurement period of up to one year from the Act's enactment date for companies to complete their accounting. In accordance with SAB 118, we are providing provisional amounts where appropriate which we believe represents a reasonable estimate based on available information and our interpretations of the Act. We will continue to evaluate the Act and adjust the provisional amounts as additional information becomes available. The Company expects to complete its detailed analysis no later than the fourth quarter of 2018.

In the fourth quarter of 2017, the Company recorded a net provisional tax expense of $41.6 million resulting from the enactment of the Act. Included in the net tax expense is a current tax expense of approximately $28.1 million primarily related to the Act's transition tax on previously undistributed foreign earnings of foreign subsidiaries. The Company expects to utilize its U.S. federal net operating losses to partially offset the transition tax and release the associated valuation allowance. The transition tax is payable over 8 years at the election of the taxpayer. The remaining tax expense of approximately $13.5 million is the required remeasurement of the Company's U.S. deferred tax assets and liabilities considering the Act's newly enacted tax rates and certain other impacts. The recorded impact of the Act is provisional and the final amount may differ, possibly materially, due to, among other things, the issuance of new guidance, legislative actions, changes in IRS interpretations, changes in accounting standards or related interpretations in response to the Act, and future actions by states within the U.S. that have not currently adopted the Act which is the basis for our estimates, interpretations and assumptions of the tax effects of the Act on the Company. Any tax impacts for these items will be recorded in subsequent quarters, as discrete adjustments to our income tax provision, once complete.

The Company continues to analyze the Act including the tax impacts on its indefinite reinvestment assertion. This includes the potential tax impact of the global intangible low-taxed income ("GILTI") provision. The FASB issued guidance that allows for either recognizing deferred taxes for temporary differences expected to reverse as GILTI in future years or recognizing such taxes as current period expenses when incurred. Due to the complexity of calculating GILTI and management's current assertion that foreign earnings are indefinitely reinvested, we have not determined which method we will apply.

The tax effect of temporary differences and carryforwards that give rise to deferred tax assets and liabilities from continuing operations are as follows:



	As of December 31,
(in thousands)	2017			2016
Deferred tax assets:
Tax loss carryforwards	$	25,494		$	34,858
Share-based compensation	7,244			9,252
Accrued expenses	14,621			16,970
Property and equipment	14,984			10,947
Goodwill and intangible amortization	13,866			15,635
Intercompany notes	9,596			12,654
Accrued revenue	32,947			21,005
Other	9,631			12,517
Gross deferred tax assets	128,383			133,838
Valuation allowance	(20,257		)	(37,255		)
Net deferred tax assets	108,126			96,583
Deferred tax liabilities:
Intangibles related to purchase accounting	(29,361		)	(27,974		)
Goodwill and intangible amortization	(11,537		)	(14,457		)
Accrued expenses	(33,728		)	(24,124		)
Intercompany notes	(7,348		)	(2,559		)
Accrued interest	(27,449		)	(37,514		)
Capitalized research and development	(7,020		)	(9,520		)
Property and equipment	(4,717		)	(2,029		)
Accrued revenue	(5,027		)	(4,668		)
Other	(3,227		)	(4,180		)
Total deferred tax liabilities	(129,414		)	(127,025		)
Net deferred tax liabilities	$	(21,288	)	$	(30,442	)

Subsequently recognized tax benefits relating to the valuation allowance for deferred tax assets as of December 31, 2017 are expected to be allocated to income taxes in the Consolidated Statements of Income.

As of December 31, 2017, and 2016, the Company's U.S. federal and foreign tax loss carryforwards were $90.2 million and $231.9 million, respectively, and U.S. state tax loss carryforwards were $59.1 million and $88.1 million, respectively.

In assessing the Company's ability to realize deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not the Company will only realize the benefits of these deductible differences, net of the existing valuation allowances, as of December 31, 2017.

As of December 31, 2017, the Company had foreign tax net operating loss carryforwards of $90.2 million, which will expire as follows:



(in thousands)	Gross		Tax Effected
Year ending December 31,
2018	$	343	$	85
2019	2,459		604
2020	6,053		1,386
2021	5,992		1,348
2022	5,033		1,178
Thereafter	42,582		10,452
Unlimited	27,769		6,189
Total	$	90,231	$	21,242

In addition, the Company's state tax net operating loss carryforwards of $59.1 million will expire periodically from 2018 through 2037.

While U.S. tax expense has been recognized as a result of the transition tax provision of the Act, the Company has not provided additional deferred taxes, if any, on undistributed earnings attributable to foreign subsidiaries that have been considered to be reinvested indefinitely. Gross undistributed earnings reinvested indefinitely in foreign subsidiaries aggregated approximately $1,196.7 million as of December 31, 2017. Other than the transition tax provision of the Act, no deferred tax liabilities with respect to items such as certain foreign exchange gains or losses, foreign withholding taxes or additional state taxes have been recognized and it is not practical to determine the income tax liability that would be payable if such earnings were not reinvested indefinitely.

Accounting for uncertainty in income taxes

A reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended December 31, 2017 and 2016 is as follows:



	Year Ended December 31,
(in thousands)	2017			2016
Beginning balance	$	17,988		$	16,370
Additions based on tax positions related to the current year	8,364			5,847
Additions for tax positions of prior years	3,157			—
Reductions for tax positions of prior years	—			(255		)
Settlements	(321		)	(642		)
Statute of limitations expiration	(651		)	(3,332		)
Ending balance	$	28,537		$	17,988

As of December 31, 2017 and 2016, approximately $26.7 million and $15.1 million, respectively, of the unrecognized tax benefits would impact the Company's provision for income taxes and effective income tax rate, if recognized. Total estimated accrued interest and penalties related to the underpayment of income taxes was $3.5 million and $2.1 million as of December 31, 2017 and 2016, respectively. The following income tax years remain open in the Company's major jurisdictions as of December 31, 2017:



Jurisdictions	Periods
U.S. (Federal)	2014 through 2017
Spain	2009 through 2017
Australia	2010 through 2017
U.K.	2009 through 2017
Germany	2013 through 2017

It is reasonably possible that the balance of gross unrecognized tax benefits could significantly change within the next twelve months as a result of the resolution of audit examinations and expirations of certain statutes of limitations and, accordingly, materially affect the Company's operating results. At this time, it is not possible to estimate the range of change due to the uncertainty of potential outcomes.