Income Taxes
Income before provision for income taxes shown below is based on the geographic location to which such income is attributed for years ended December 31:
|
| | | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| | (in millions) |
United States | | $ | 810 |
| | $ | 752 |
| | $ | 739 |
|
Foreign | | 1,845 |
| | 1,605 |
| | 1,425 |
|
Income before provision for income taxes | | $ | 2,655 |
| | $ | 2,357 |
| | $ | 2,164 |
|
The provision for income taxes consists of the following components for the years ended December 31:
|
| | | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| | (in millions) |
Current: | | | | | | |
Federal and state | | $ | 767 |
| | $ | 544 |
| | $ | 352 |
|
Foreign | | 262 |
| | 352 |
| | 314 |
|
Total current provision | | 1,029 |
| | 896 |
| | 666 |
|
Deferred: | | | | | | |
Federal and state | | 102 |
| | (44 | ) | | (58 | ) |
Foreign | | 22 |
| | (47 | ) | | (68 | ) |
Total deferred provision (benefit) | | 124 |
| | (91 | ) | | (126 | ) |
Total provision for income taxes | | $ | 1,153 |
| | $ | 805 |
| | $ | 540 |
|
On December 22, 2017, the United States enacted the Tax Reform Act, which significantly revised the U.S. corporate income tax law for tax years beginning after December 31, 2017 by (among other provisions):
| |
• | reducing the U.S. federal statutory corporate income tax rate from 35% to 21% for tax years beginning after December 31, 2017; |
| |
• | implementing a modified territorial tax system that includes a one-time transition tax on all accumulated undistributed earnings of foreign subsidiaries; and |
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• | providing for a full deduction on future dividends received from foreign affiliates. |
During the fourth quarter of 2017, in accordance with the SEC Staff Accounting Bulletin No. 118 - Income Tax Accounting Implications of the Tax Cuts and Jobs Act, we recorded a one-time provisional net income tax expense of $617 million, which is comprised of: (i) the one-time transition tax expense on accumulated undistributed earnings of foreign subsidiaries of $635 million, (ii) foreign and U.S. state income tax expense that will be applicable upon repatriation of the accumulated undistributed earnings of our foreign subsidiaries, other than our Indian subsidiaries, of $53 million, partially offset by (iii) an income tax benefit of $71 million resulting from the revaluation of U.S. net deferred income tax liabilities to the new lower U.S. income tax rate. The transition tax on undistributed earnings is payable over the next eight years, of which $51 million is payable within one year. The one-time incremental income tax expense is provisional as it reflects certain assumptions based upon our interpretation of the Tax Reform Act as of January 18, 2018 and may change, possibly materially, as we receive additional clarification and guidance and as the interpretation of the Tax Reform Act evolves over time. We anticipate completing the accounting for the Tax Reform Act within the measurement period.
As a result of the enactment of the Tax Reform Act, our historical and future foreign earnings are no longer subject to U.S. federal income taxes upon repatriation, beyond the one-time transition tax. We therefore reevaluated our assertion that our foreign earnings would be indefinitely reinvested and concluded that our Indian earnings will continue to be indefinitely reinvested while historical accumulated undistributed earnings of our foreign subsidiaries, other than our Indian subsidiaries, are available for repatriation to the United States. Our assertion that our earnings in India continue to be indefinitely reinvested is consistent with our ongoing strategy to expand our Indian operations, including through infrastructure investments. As of December 31, 2017, the amount of unrepatriated Indian earnings is estimated at approximately $4,082 million. If such Indian earnings are repatriated in the future, or are no longer deemed to be indefinitely reinvested, then we would expect to accrue additional tax expense at a rate of approximately 21% of actual cash distributions to the United States, based on our current interpretation of India tax law. This estimate is subject to change based on tax legislation developments in India and other jurisdictions as well as judicial and interpretive developments of applicable tax laws.
In May 2016, India enacted the Finance Bill 2016 that, among other things, expanded the applicability of India’s buyback distribution tax to certain share buyback transactions occurring after June 1, 2016. In mid-May, prior to the June 1, 2016 effective date of the enactment, our principal operating subsidiary in India repurchased shares from its shareholders, which are non-Indian Cognizant entities, valued at $2.8 billion. This transaction, or the India Cash Remittance, was undertaken pursuant to a plan approved by the High Court of Madras and simplified the shareholding structure of our principal operating subsidiary in India. Pursuant to the transaction, our principal Indian operating subsidiary repurchased approximately $1.2 billion of the total $2.8 billion of shares from its U.S. shareholders, resulting in incremental tax expense, while the remaining $1.6 billion was repurchased from its shareholder outside the United States. Net of taxes, the transaction resulted in a remittance of cash to the United States in the amount of $1.0 billion. As a result of this transaction, we incurred an incremental 2016 income tax expense of $238 million.
The reconciliation between our effective income tax rate and the U.S. federal statutory rate were as follows for the years ended December 31:
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| | | | | | | | | | | | | | | | | | | | | |
| | 2017 | | % | | 2016 | | % | | 2015 | | % |
| | (Dollars in millions) |
Tax expense, at U.S. federal statutory rate | | $ | 929 |
| | 35.0 |
| | $ | 825 |
| | 35.0 |
| | $ | 757 |
| | 35.0 |
|
State and local income taxes, net of federal benefit | | 39 |
| | 1.5 |
| | 42 |
| | 1.8 |
| | 42 |
| | 2.0 |
|
Non-taxable income for Indian tax purposes | | (216 | ) | | (8.2 | ) | | (203 | ) | | (8.6 | ) | | (201 | ) | | (9.3 | ) |
Rate differential on foreign earnings | | (76 | ) | | (2.9 | ) | | (55 | ) | | (2.3 | ) | | (34 | ) | | (1.6 | ) |
Net impact related to the Tax Reform Act | | 617 |
| | 23.2 |
| | — |
| | — |
| | — |
| | — |
|
India Cash Remittance | | — |
| | — |
| | 238 |
| | 10.1 |
| | — |
| | — |
|
Recognition of previously unrecognized income tax benefits related to uncertain tax positions | | (73 | ) | | (2.7 | ) | | (16 | ) | | (0.7 | ) | | (23 | ) | | (1.1 | ) |
Credits and other incentives | | (37 | ) | | (1.4 | ) | | (57 | ) | | (2.4 | ) | | (23 | ) | | (1.0 | ) |
Other | | (30 | ) | | (1.1 | ) | | 31 |
| | 1.3 |
| | 22 |
| | 1.0 |
|
Total provision for income taxes | | $ | 1,153 |
| | 43.4 |
| | $ | 805 |
| | 34.2 |
| | $ | 540 |
| | 25.0 |
|
The significant components of deferred income tax assets and liabilities recorded on the consolidated statements of financial position were as follows as of December 31:
|
| | | | | | | | |
| | 2017 | | 2016 |
| | (in millions) |
Deferred income tax assets: | | | | |
Net operating losses | | $ | 15 |
| | $ | 14 |
|
Revenue recognition | | 55 |
| | 69 |
|
Compensation and benefits | | 125 |
| | 165 |
|
Stock-based compensation | | 14 |
| | 25 |
|
Minimum alternative tax (MAT) and other credits | | 369 |
| | 274 |
|
Other accrued expenses | | 22 |
| | 161 |
|
| | 600 |
| | 708 |
|
Less: valuation allowance | | (10 | ) | | (10 | ) |
Deferred income tax assets, net | | 590 |
| | 698 |
|
Deferred income tax liabilities: | | | | |
Depreciation and amortization | | 209 |
| | 266 |
|
Deferred costs | | 65 |
| | — |
|
Other | | 44 |
| | 13 |
|
Deferred income tax liabilities | | 318 |
| | 279 |
|
Net deferred income tax assets | | $ | 272 |
| | $ | 419 |
|
In the table above, certain unrecognized income tax benefits have been netted against available same-jurisdiction deferred income tax carryforward assets.
At December 31, 2017, we had foreign and U.S. net operating loss carryforwards of approximately $38 million and $12 million, respectively. We have recorded valuation allowances on certain foreign net operating loss carryforwards. As of December 31, 2017 and 2016, deferred income tax assets related to the minimum alternative tax, or MAT, were approximately $278 million and $286 million, respectively. The calculation of the MAT includes all profits realized by our Indian subsidiaries and any MAT paid is creditable against future corporate income tax, subject to certain limitations. Our existing MAT assets expire between March 2023 and March 2032 and we expect to fully utilize them within the applicable expiration periods, which was extended to 15 years from 10 years by the 2017 Union Budget of India.
Our Indian subsidiaries, collectively referred to as Cognizant India, are primarily export-oriented and are eligible for certain income tax holiday benefits granted by the government of India for export activities conducted within Special Economic Zones, or SEZs, for periods of up to 15 years. Our SEZ income tax holiday benefits are currently scheduled to expire in whole or in part during the years 2018 to 2026 and may be extended on a limited basis for an additional five years per unit if certain reinvestment criteria are met. Our Indian profits ineligible for SEZ benefits are subject to corporate income tax at the rate of 34.6%. In addition, all Indian profits, including those generated within SEZs, are subject to the MAT, at the rate of 21.3%. For the years ended December 31, 2017, 2016 and 2015, the effect of the income tax holidays granted by the Indian government was to reduce the overall income tax provision and increase net income by approximately $217 million, $203 million and $201 million, respectively, and increase diluted EPS by $0.36, $0.33 and $0.33, respectively. Any MAT paid is creditable against future Indian corporate income tax, subject to limitations.
We conduct business globally and file income tax returns in the United States, including federal and state, as well as various foreign jurisdictions. Tax years that remain subject to examination by the Internal Revenue Service are 2012 and onward, and years that remain subject to examination by state authorities vary by state. Years under examination by foreign tax authorities are 2001 and onward. We record incremental tax expense, based upon the more-likely-than-not standard, for any uncertain tax positions. In addition, when applicable, we adjust the previously recorded income tax expense to reflect examination results when the position is effectively settled or otherwise resolved. Our ongoing evaluations of the more-likely-than-not outcomes of the examinations and related tax positions require judgment and can result in adjustments that increase or decrease our effective income tax rate, as well as impact our operating results. The specific timing of when the resolution of each tax position will be reached is uncertain.
Changes in unrecognized income tax benefits were as follows for the years ended December 31:
|
| | | | | | | | |
| | 2017 | | 2016 |
| | (in millions) |
Balance, beginning of year | | $ | 151 |
| | $ | 139 |
|
Additions based on tax positions related to the current year | | 17 |
| | 11 |
|
Additions for tax positions of prior years | | 2 |
| | 19 |
|
Additions for tax positions of acquired subsidiaries | | — |
| | — |
|
Reductions for tax positions due to lapse of statutes of limitations | | (41 | ) | | (15 | ) |
Reductions for tax positions of prior years | | (32 | ) | | (1 | ) |
Settlements | | — |
| | — |
|
Foreign currency exchange movement | | — |
| | (2 | ) |
Balance, end of year | | $ | 97 |
| | $ | 151 |
|
At December 31, 2017, the unrecognized income tax benefits would affect our effective income tax rate, if recognized. While the Company believes uncertain tax positions may be settled or resolved within the next twelve months, it is difficult to estimate the income tax impact of these potential resolutions at this time. We recognize accrued interest and any penalties associated with uncertain tax positions as part of our provision for income taxes. The total amount of accrued interest and penalties at December 31, 2017 and 2016 was approximately $8 million and $7 million, respectively, and relates to U.S. and foreign tax matters. The amounts of interest and penalties recorded in the provision for income taxes in 2017, 2016 and 2015 were immaterial.