GLOBAL PAYMENTS INC

INCOME TAX

The income tax provision (benefit) for the year ended December 31, 2017, the 2016 fiscal transition period and the years ended May 31, 2016 and 2015 consisted of the following:



	Year Ended December 31,			Seven Months Ended December 31,			Year Ended May 31,
	2017			2016			2016			2015

	(in thousands)
Current income tax provision (benefit):
Federal	$	79,903		$	22,859		$	26,493		$	25,022
State	3,468			3,443			5,454			3,905
Foreign	67,851			42,681			56,689			(10,346		)
	151,222			68,983			88,636			18,581
Deferred income tax provision (benefit):
Federal	(266,869		)	(36,447		)	(18,205		)	14,822
State	9,678			(1,842		)	(3,620		)	3,606
Foreign	4,582			4,967			3,884			70,986
	(252,609		)	(33,322		)	(17,941		)	89,414
	$	(101,387	)	$	35,661		$	70,695		$	107,995

The income tax provision allocated to noncontrolling interests was $8.6 million for the year ended December 31, 2017, $4.4 million for the 2016 fiscal transition period and $7.3 million and $8.6 million for the years ended May 31, 2016 and 2015, respectively.

The following presents income (loss) before income taxes for the year ended December 31, 2017, the 2016 fiscal transition period and the years ended May 31, 2016 and 2015:



	Year Ended December 31,		Seven Months Ended December 31,			Year Ended May 31,
	2017		2016			2016		2015

	(in thousands)
United States	$	29,692	$	(55,279	)	$	59,876	$	135,901
Foreign	362,991		228,623			301,036		281,209
	$	392,683	$	173,344		$	360,912	$	417,110

On December 22, 2017, the United States enacted the 2017 U.S. Tax Act, which resulted in numerous changes, including a reduction in the U.S. federal tax rate from 35% to 21% effective January 1, 2018 and the transition of the U.S. federal tax system to a territorial regime. As part of this transition, the 2017 U.S. Tax Act imposed a one-time mandatory "transition" tax on foreign earnings not previously subjected to U.S. income tax, payable over eight years.

As of December 31, 2017, pursuant to guidance provided in SAB 118, we have not completed our accounting for the effects of the 2017 U.S. Tax Act; however, we have made a reasonable estimate of the effects on our existing deferred tax balances and the one-time transition tax. For these items, which are further described below, we have recognized a provisional net income tax benefit of $158.7 million, which is included as a component of income tax benefit in our consolidated statement of income for the year ended December 31, 2017. To the extent that any other provisions of the 2017 U.S. Tax Act are determined to affect our December 31, 2017 provision, we have not recorded provisional amounts.

We remeasured our U.S. deferred tax assets and liabilities based on the rates at which they are expected to reverse, which is now 21% instead of 35%. We are still analyzing certain aspects of the 2017 U.S. Tax Act and refining our calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts during the measurement period. The provisional income tax benefit recorded as a result of remeasuring our deferred tax assets and liabilities at the lower income tax rate was $222.4 million.

The one-time transition tax established by the 2017 U.S. Tax Act is based on our total post-1986 foreign earnings and profits, offset by allowable foreign tax credits. The transition tax rate applied to our foreign earnings is based on the amount of those earnings held in cash and cash equivalents, as well as other assets. We recorded a provisional income tax expense of $63.7 million for the transition tax on our previously deferred foreign earnings. We have not yet finalized our calculation of the post-1986 earnings and profits for our foreign subsidiaries, on which the transition tax is based. We are continuing to gather additional information to more precisely compute the amount of the transition tax.

Prior to the enactment of the 2017 U.S. Tax Act, the undistributed earnings of all foreign subsidiaries were considered to be indefinitely reinvested outside the United States (approximately $1.4 billion at December 31, 2016). As a result of the enactment of the 2017 U.S. Tax Act, our provisional position is that we now only consider approximately $60 million of our undistributed foreign earnings to be indefinitely reinvested outside the United States as of December 31, 2017. Because those earnings are considered to be indefinitely reinvested, no deferred income taxes have been provided thereon. If we were to make a distribution of any portion of those earnings in the form of dividends or otherwise, any such amounts would be subject to withholding taxes payable to various foreign jurisdictions; however, the amounts would not be subject to any additional U.S. income tax.

Our effective tax rates for periods presented differ from the federal statutory rate for the year ended December 31, 2017, the 2016 fiscal transition period and the years ended May 31, 2016 and 2015 as follows:



	Year Ended December 31,		Seven Months Ended December 31,		Year Ended May 31,
	2017		2016		2016		2015
Federal U.S. statutory rate	35.0	%	35.0	%	35.0	%	35.0	%
State income taxes, net of federal income tax benefit	1.9		0.6		0.4		1.1
Federal U.S. transition tax	16.2		—		—		—
Federal U.S. rate reduction	(55.6	)	—		—		—
Foreign income taxes (primarily U.K.)	(12.0	)	(12.6	)	(10.1	)	(8.5	)
Foreign interest income not subject to tax	(2.2	)	(2.3	)	(2.6	)	(1.8	)
Taxes on unremitted earnings	—		—		(3.5	)	—
Share-based compensation expense	(4.2	)	—		—		—
Valuation allowance	(3.2	)	—		—		—
Other	(1.7	)	(0.1	)	0.4		1.0
Effective tax rate attributable to Global Payments	(25.8	)	20.6		19.6		26.8
Effective tax rate allocated to noncontrolling interests	—		—		—		(0.9	)
Effective tax rate	(25.8	)%	20.6	%	19.6	%	25.9	%

Deferred income taxes are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax laws and rates. Deferred income taxes as of December 31, 2017 and 2016 reflect the effect of temporary differences between the amounts of assets and liabilities for financial accounting and income tax purposes. As of December 31, 2017 and 2016, principal components of deferred tax items were as follows:



	2017			2016

	(in thousands)
Deferred income tax assets:
Basis difference - U.K. business	$	8,961		$	11,145
Domestic net operating loss carryforwards	17,228			12,723
Foreign income tax credit carryforwards	—			7,140
Foreign net operating loss carryforwards	3,819			2,559
Share-based compensation expense	7,856			11,656
Accrued expenses	34,582			54,030
Other	18,502			9,101
	90,948			108,354
Less valuation allowance	(16,550		)	(16,611		)
	74,398			91,743
Deferred tax liabilities:
Acquired intangibles	410,563			663,922
Property and equipment	77,481			86,548
Other	10,087			1,956
	498,131			752,426
Net deferred income tax liability	$	(423,733	)	$	(660,683	)

The net deferred income taxes reflected on our consolidated balance sheets as of December 31, 2017 and 2016 are as follows:



	2017			2016

	(in thousands)
Noncurrent deferred income tax asset	$	13,146		$	15,789
Noncurrent deferred income tax liability	(436,879		)	(676,472		)
	$	(423,733	)	$	(660,683	)

A valuation allowance is provided against deferred tax assets when it is more likely than not that some portion or all of the deferred tax assets will not be realized. Changes to our valuation allowance during the year ended December 31, 2017, the 2016 fiscal transition period and the years ended May 31, 2016 and 2015 are summarized below (in thousands):



Balance at May 31, 2014	$	(7,199	)
Utilization of foreign net operating loss carryforwards	3,387
Other	(11		)
Balance at May 31, 2015	(3,823		)
Allowance for foreign income tax credit carryforward	(7,140		)
Allowance for domestic net operating loss carryforwards	(4,474		)
Allowance for domestic net unrealized capital loss	(1,526		)
Release of allowance of domestic capital loss carryforward	1,746
Other	98
Balance at May 31, 2016	(15,119		)
Allowance for domestic net operating loss carryforwards	(1,504		)
Release of allowance of domestic net unrealized capital loss	12
Balance at December 31, 2016	(16,611		)
Allowance for foreign net operating loss carryforwards	(6,469		)
Allowance for domestic net operating loss carryforwards	(3,793		)
Allowance for state credit carryforwards	(685		)
Rate change on domestic net operating loss and capital loss carryforwards	3,868
Utilization of foreign income tax credit carryforward	7,140
Balance at December 31, 2017	$	(16,550	)

The increase in the valuation allowance related to net operating loss carryforwards of $10.3 million for the year ended December 31, 2017 relates primarily to carryforward assets recorded as part of the acquisition of ACTIVE Network. The increase in the valuation allowance related to domestic net operating loss carryforwards of $1.5 million and $4.5 million for the 2016 fiscal transition period and the year ended May 31, 2016, respectively, relates to acquired carryforwards from the merger with Heartland.

Foreign net operating loss carryforwards of $43.2 million and domestic net operating loss carryforwards of $28.9 million at December 31, 2017 will expire between December 31, 2026 and December 31, 2037 if not utilized.

We conduct business globally and file income tax returns in the domestic federal jurisdiction and various state and foreign jurisdictions. In the normal course of business, we are subject to examination by taxing authorities around the world. We are no longer subjected to state income tax examinations for years ended on or before May 31, 2008, U.S. federal income tax examinations for years ended on or before December 31, 2013 and U.K. federal income tax examinations for years ended on or before May 31, 2014.

A reconciliation of the beginning and ending amounts of unrecognized income tax benefits, excluding penalties and interest, for the year ended December 31, 2017, the 2016 fiscal transition period and the years ended May 31, 2016 and 2015 is as follows:



	Year Ended December 31,			Seven Months Ended December 31,			Year Ended May 31,
	2017			2016			2016			2015

	(in thousands)
Balance at the beginning of the year	$	17,916		$	7,803		$	2,559		$	67,576
Additions based on income tax positions related to the current year	7,537			4,626			287			6,311
Additions related to acquisition	13,061			6,149			6,151			—
Additions for income tax positions of prior years	411			247			753			512
Effect of foreign currency fluctuations on income tax positions	27			(3		)	2			(5,713		)
Reductions for income tax positions of prior years	(7,285		)	(906		)	(123		)	(32		)
Settlements with income tax authorities	(449		)	—			(1,826		)	(504		)
Changes in judgment regarding tax position	—			—			—			(65,591		)
Balance at the end of the year	$	31,218		$	17,916		$	7,803		$	2,559

As of December 31, 2017, the total amount of gross unrecognized income tax benefits that, if recognized, would affect the provision for income taxes is $24.1 million.