Income Taxes
The components of pretax income for the years ended December 31, 2017, 2016 and 2015 are as follows (in millions):
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
United States | $ | 418 |
| | $ | 1,529 |
| | $ | 396 |
|
International | 1,858 |
| | 2,122 |
| | 2,010 |
|
| $ | 2,276 |
|
| $ | 3,651 |
|
| $ | 2,406 |
|
The provision (benefit) for income taxes is comprised of the following (in millions):
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Current: | | | | | |
Federal | $ | 1,426 |
| | $ | 689 |
| | $ | 363 |
|
State and local | (17 | ) | | 55 |
| | 22 |
|
Foreign | 150 |
| | 178 |
| | 106 |
|
| $ | 1,559 |
| | $ | 922 |
| | $ | 491 |
|
Deferred: | | | | | |
Federal | $ | 1,788 |
| | $ | 77 |
| | $ | (53 | ) |
State and local | 4 |
| | — |
| | (2 | ) |
Foreign | (63 | ) | | (4,633 | ) | | 23 |
|
| 1,729 |
| | (4,556 | ) | | (32 | ) |
| $ | 3,288 |
| | $ | (3,634 | ) | | $ | 459 |
|
The following is a reconciliation of the difference between the actual provision for income taxes and the provision computed by applying the federal statutory rate of 35% for 2017, 2016 and 2015 to income before income taxes (in millions):
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Provision at statutory rate | $ | 797 |
| | $ | 1,278 |
| | $ | 843 |
|
Foreign income taxed at different rates | (217 | ) | | (451 | ) | | (549 | ) |
Other taxes on foreign operation | 330 |
| | 105 |
| | 150 |
|
Stock-based compensation | (33 | ) | | 24 |
| | 23 |
|
State taxes, net of federal benefit | (13 | ) | | 55 |
| | 20 |
|
Research and other tax credits | (35 | ) | | (16 | ) | | (27 | ) |
Tax basis step-up resulting from realignment | (695 | ) | | (4,621 | ) | | — |
|
U.S. tax reform | 3,142 |
| | — |
| | — |
|
Other | 12 |
| | (8 | ) | | (1 | ) |
| $ | 3,288 |
|
| $ | (3,634 | ) |
| $ | 459 |
|
Deferred tax assets and liabilities are recognized for the future tax consequences of differences between the carrying amounts of assets and liabilities and their respective tax bases using enacted tax rates in effect for the year in which the differences are expected to be reversed. Significant deferred tax assets and liabilities consist of the following (in millions):
|
| | | | | | | |
| As of December 31, |
| 2017 | | 2016 |
Deferred tax assets: | | | |
Net operating loss, capital loss and credits | $ | 86 |
| | $ | 78 |
|
Accruals and allowances | 129 |
| | 222 |
|
Stock-based compensation | 40 |
| | 65 |
|
Amortizable tax basis in intangibles | 5,164 |
| | 4,621 |
|
Net deferred tax assets | 5,419 |
| | 4,986 |
|
Valuation allowance | (19 | ) | | (37 | ) |
| $ | 5,400 |
| | $ | 4,949 |
|
Deferred tax liabilities: | | | |
Unremitted foreign earnings | $ | (3,514 | ) | | $ | (1,578 | ) |
Acquisition-related intangibles | (24 | ) | | (29 | ) |
Depreciation and amortization | (89 | ) | | (158 | ) |
Available-for-sale securities | (4 | ) | | (29 | ) |
| (3,631 | ) | | (1,794 | ) |
| $ | 1,769 |
| | $ | 3,155 |
|
As of December 31, 2017, our federal, state and foreign net operating loss carryforwards for income tax purposes were approximately $15 million, $58 million and $106 million, respectively. The federal and state net operating loss carryforwards are subject to various limitations under Section 382 of the Internal Revenue Code and applicable state tax laws. If not utilized, the federal and state net operating loss carryforwards will both begin to expire in 2018. The carryforward periods on our foreign net operating loss carryforwards are as follows: $32 million do not expire, $16 million are subject to valuation allowance and begin to expire in 2019, and $58 million are not subject to valuation allowance but will begin to expire in 2024. As of December 31, 2017, state tax credit carryforwards for income tax purposes were approximately $106 million. Most of the state tax credits carry forward indefinitely.
As of December 31, 2017 and 2016, we maintained a valuation allowance with respect to certain of our deferred tax assets relating primarily to operating losses in certain non-U.S. jurisdictions that we believe are not likely to be realized.
On December 22, 2017, the Tax Cuts and Jobs Act (the “Act” or “U.S. tax reform”) was enacted. U.S. tax reform, among other things, reduces the U.S. federal income tax rate to 21% from 35% in 2018, institutes a dividends received deduction for foreign earnings with a related tax for the deemed repatriation of unremitted foreign earnings and creates a new U.S. minimum tax on earnings of foreign subsidiaries. We have not completed our accounting for the effects of the Act; however, we have made a reasonable estimate of those effects. Accordingly, we have recognized a provisional income tax charge of $3.1 billion, which is included as a component of the income tax provision on our consolidated statement of income.
Included in the provisional amount is $1.4 billion for the income tax on the deemed repatriation of unremitted foreign earnings. We have computed the amount based on information available to us; however, there is still uncertainty as to the application of the Act, in particular as it relates to state income taxes. Further, we have not yet completed our analysis of the components of the computation, including the amount of our foreign earnings subject to U.S. income tax, and the portion of our foreign earnings held in cash or other specified assets. We will elect to pay the liability for the deemed repatriation of foreign earnings in installments, as specified by the Act. Accordingly, as of December 31, 2017, $1.2 billion of our liability for deemed repatriation of foreign earnings was included in other liabilities on our consolidated balance sheet.
The remaining provisional amount of $1.7 billion is for the deferred income tax effects of the Act on our U.S. and foreign subsidiaries, primarily the impact of the new U.S. minimum tax on earnings of foreign subsidiaries, partially
offset by the reversal of our existing deferred tax liability associated with repatriation of unremitted foreign earnings. In addition, the provisional amount includes the remeasurement of certain U.S. deferred tax assets and liabilities, foreign withholding taxes and other outside basis differences. We have computed the amount based on information available to us, including our expectation that existing foreign basis differences will affect the amount of U.S. minimum tax upon reversal; however, there is still uncertainty as to the application of the Act. We have not yet completed our analysis of the components of the tax computation, including a complete reconciliation of the book and tax bases in our foreign subsidiaries. As we complete our analysis of U.S. tax reform in 2018, we may make adjustments to the provisional amounts, which may materially impact our provision for income taxes from continuing operations in the period in which the adjustments are made.
During the fourth quarter of 2016, we began the process of realigning our legal structure, subsequent to the distribution of PayPal Holdings, Inc., to better reflect how we manage and operate our platforms. We consider many factors in effecting this realignment, including foreign exchange exposures, long-term cash flows and cash needs of our platforms, capital allocation considerations and the associated tax effects. As a result, we achieved a substantial step-up in the tax basis of the intangible assets in our foreign eBay platforms in 2016. The step-up in tax basis of our foreign eBay platforms resulted from our election to terminate an existing tax ruling and finalize a new agreement with the foreign tax authority. In the fourth quarter of 2016, we recognized a tax benefit of $4.6 billion, which represented the income tax effect of this step-up in tax basis. During the first half of 2017, we recognized a noncash income tax charge of $376 million caused by the foreign exchange remeasurement of the associated deferred tax asset. In the first quarter of 2017, we achieved a step-up in the tax basis of the intangible assets in our foreign Classifieds platforms as a result of voluntary domiciling our Classifieds intangible assets into a new jurisdiction and recognized a tax benefit of $695 million.
As a result of the realignment, we no longer benefit from tax rulings previously concluded in several different jurisdictions. Without the benefit of the rulings, the noncash tax impacts of the realignment in our foreign eBay and Classifieds platforms have increased our income tax rate in certain foreign jurisdictions, most significantly Switzerland. The higher rate results from eBay being subject to a higher enacted tax rate for the foreseeable future.
While we experienced a higher tax rate, the realignment allows us to achieve certain foreign cash tax benefits due to the step-up in tax basis achieved in certain foreign jurisdictions. We expect these cash tax benefits to remain consistent, subject to the performance of our foreign platforms, for a period in excess of 10 years. The realignment is expected to extend into 2018 and primarily impact our international entities. However, U.S. tax reform and the new U.S. minimum tax on foreign earnings will reduce our expected consolidated cash tax benefits.
The following table reflects changes in unrecognized tax benefits for the years ended December 31, 2017, 2016 and 2015 (in millions):
|
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
Gross amounts of unrecognized tax benefits as of the beginning of the period | $ | 458 |
| | $ | 440 |
| | $ | 367 |
|
Increases related to prior period tax positions | 37 |
| | 24 |
| | 36 |
|
Decreases related to prior period tax positions | (28 | ) | | (20 | ) | | (8 | ) |
Increases related to current period tax positions | 58 |
| | 47 |
| | 51 |
|
Settlements | (38 | ) | | (33 | ) | | (6 | ) |
Gross amounts of unrecognized tax benefits as of the end of the period | $ | 487 |
| | $ | 458 |
| | $ | 440 |
|
Included within our gross amounts of unrecognized tax benefits of $487 million as of December 31, 2017 is $100 million of unrecognized tax benefits indemnified by PayPal. If the remaining balance of unrecognized tax benefits were realized in a future period, it would result in a tax benefit of $420 million. Of this amount, approximately $95 million of unrecognized tax benefit is indemnified by PayPal and a corresponding receivable would be reduced upon a future realization. As of December 31, 2017, our liabilities for unrecognized tax benefits were included in other liabilities on our consolidated balance sheet.
We recognize interest and/or penalties related to uncertain tax positions in income tax expense. In 2017, $3 million was included in tax expense for interest and penalties. The amount of interest and penalties accrued as of December 31, 2017 and 2016 was approximately $43 million and $54 million, respectively.
We are subject to both direct and indirect taxation in the U.S. and various states and foreign jurisdictions. We are under examination by certain tax authorities for the 2008 to 2013 tax years. We believe that adequate amounts have been reserved for any adjustments that may ultimately result from these or other examinations. The material jurisdictions where we are subject to potential examination by tax authorities for tax years after 2007 include, among others, the U.S. (Federal and California), Germany, Korea, Israel, Switzerland, United Kingdom and Canada.
Although the timing of the resolution and/or closure of audits is highly uncertain, it is reasonably possible that the balance of gross unrecognized tax benefits could significantly change in the next 12 months. However, given the number of years remaining subject to examination and the number of matters being examined, we are unable to estimate the full range of possible adjustments to the balance of gross unrecognized tax benefits.
On July 27, 2015, in Altera Corp. v. Commissioner, the U.S. Tax Court issued an opinion invalidating the regulations relating to the treatment of stock-based compensation expense in an intercompany cost-sharing arrangement. A final decision was issued by the Tax Court in December 2015. The IRS is appealing the decision and filed its arguments opposing the Tax Court decision in June 2016. Due to the uncertainty surrounding the status of the current regulations, questions related to the scope of potential benefits or obligations, and the risk of the Tax Court’s decision being overturned upon appeal, we have not recorded any benefit or expense as of December 31, 2017. We will continue to monitor ongoing developments and potential impacts to our consolidated financial statements.