MASTERCARD INC

Income Taxes

On December 22, 2017, in the U.S., the TCJA was enacted into law. The TCJA represents significant changes to the U.S. internal revenue code and, among other things:


•	lowers the corporate income tax rate from 35% to 21%


•	imposes a one-time deemed repatriation tax on accumulated foreign earnings (the “Transition Tax”)


•	provides for a 100% dividends received deduction on dividends from foreign affiliates


•	requires a current inclusion in U.S. federal taxable income of earnings of foreign affiliates that are determined to be global intangible low taxed income or “GILTI”


•	creates the base erosion anti-abuse tax, or “BEAT”


•	provides for an effective tax rate of 13.125% for certain income derived from outside of the U.S. (referred to as foreign derived intangible income or “FDII”)


•	introduces further limitations on the deductibility of executive compensation


•	permits 100% expensing of qualifying fixed assets acquired after September 27, 2017


•	limits the deductibility of interest expense in certain situations


•	eliminates the domestic production activities deduction

While the effective date of the law for most provisions is January 1, 2018, GAAP requires the resulting tax effects be accounted for in the reporting period of enactment. This includes the Transition Tax, the remeasurement of the Company’s net deferred tax asset balance in the U.S., the dilution of foreign tax credit benefits on the repatriation of current year foreign earnings and the recognition of a deferred tax liability resulting from the change in the Company’s indefinite reinvestment assertion for certain foreign affiliates. The impact of the TCJA is discussed further below. Also, on December 22, 2017, SEC staff issued Staff Accounting Bulletin No. 118 - Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”) which will allow registrants to record provisional amounts during a measurement period, which is not to extend beyond one year. Accordingly, amounts reflected below may require further adjustments due to evolving analysis and interpretations of law, including issuance by the Internal Revenue Service (the “IRS”) and The Department of Treasury (“Treasury”) of Notices, regulations and, potentially, direct discussions with Treasury, as well as interpretations of how accounting for income taxes should be applied to the TCJA.

The domestic and foreign components of income before income taxes for the years ended December 31 are as follows:



	2017		2016		2015
			(in millions)
United States	$	3,482	$	3,736	$	3,399
Foreign	3,040		1,910		1,559
Income before income taxes	$	6,522	$	5,646	$	4,958

The total income tax provision for the years ended December 31 is comprised of the following components:



	2017			2016			2015
				(in millions)
Current
Federal	$	1,704		$	1,074		$	677
State and local	65			36			45
Foreign	752			497			444
	2,521			1,607			1,166
Deferred
Federal	134			(6		)	4
State and local	1			(2		)	(3		)
Foreign	(49		)	(12		)	(17		)
	86			(20		)	(16		)
Income tax expense	$	2,607		$	1,587		$	1,150

As of December 31, 2017, a provisional amount of U.S. federal and state and local income taxes of $36 million has been provided on a substantial amount of the Company’s undistributed foreign earnings. This deferred tax charge has been established primarily on the estimated foreign exchange gain which will be recognized when such earnings are repatriated. The Company expects that foreign withholding taxes associated with these future repatriated earnings will not be material. Based upon the ongoing review of business requirements and capital needs of the Company’s non-U.S. subsidiaries, the Company believes a portion of these undistributed earnings that have already been subject to tax in the U.S. will be necessary to fund current and future growth of the related businesses and will remain indefinitely reinvested outside of the U.S. In 2018, the Company will complete its analysis of global working capital and cash needs to determine the amount it considers indefinitely reinvested. It will disclose such amount in the period in which such analysis is completed, as well as, if practicable, any potential tax cost that would arise if the amounts were remitted back to the U.S.

The provision for income taxes differs from the amount of income tax determined by applying the U.S. federal statutory income tax rate of 35% to pretax income for the years ended December 31, as a result of the following:



	2017					2016					2015
	Amount			Percent		Amount			Percent		Amount			Percent
	(in millions, except percentages)
Income before income taxes	$	6,522				$	5,646				$	4,958

Federal statutory tax	2,283			35.0	%	1,976			35.0	%	1,735			35.0	%
State tax effect, net of federal benefit	43			0.7	%	22			0.4	%	27			0.5	%
Foreign earnings	(380		)	(5.8	)%	(188		)	(3.3	)%	(144		)	(2.9	)%
Impact of foreign tax credits ¹	(27		)	(0.4	)%	(141		)	(2.5	)%	(281		)	(5.7	)%
Impact of settlements with tax authorities	—			—	%	—			—	%	(147		)	(2.9	)%
Transition Tax	629			9.6	%	—			—	%	—			—	%
Remeasurement of U.S. deferred taxes	157			2.4	%	—			—	%	—			—	%
Other, net	(98		)	(1.5	)%	(82		)	(1.5	)%	(40		)	(0.8	)%
Income tax expense	$	2,607		40.0	%	$	1,587		28.1	%	$	1,150		23.2	%

¹ Included within the impact of foreign tax credits are repatriation benefits of current year foreign earnings of $0 million, $116 million and $172 million, in addition to other foreign tax credit benefits which become eligible in the United States of $27 million, $25 million and $109 million for 2017, 2016 and 2015, respectively.

Effective Income Tax Rate

The effective income tax rates for the years ended December 31, 2017, 2016 and 2015 were 40.0%, 28.1% and 23.2%, respectively. The effective income tax rate for 2017 was higher than the effective income tax rate for 2016 primarily due to additional tax expense of $873 million attributable to the TCJA, which includes provisional amounts of $825 million related to the Transition Tax, the remeasurement of the Company’s net deferred tax asset balance in the U.S. and the recognition of a deferred tax liability related to a change in assertion regarding the indefinite reinvestment of a substantial amount of the Company’s foreign earnings, as well as $48 million due to a foregone foreign tax credit benefit on current year repatriations. In addition, the Company’s effective income tax rate versus the prior year was impacted by a more favorable geographic mix of taxable earnings in 2017, partially offset by a lower U.S. foreign tax credit benefit.

There are provisional current and noncurrent components of the Company’s liability for the Transition Tax. The Transition Tax will be paid over 8 annual installments commencing April 15, 2018. Approximately $52 million and $577 million of the total amount due is recorded in other current liabilities and other liabilities, respectively, on the consolidated balance sheet at December 31, 2017. Under the TCJA, for purposes of IRS examination of the Transition Tax, the statute of limitations is extended to six years.

Consistent with SAB 118, the Company was able to make reasonable estimates and has incorporated provisional amounts for the impact of the Transition Tax. This tax is on previously untaxed accumulated and current earnings and profits of the Company’s foreign subsidiaries. To compute the tax, the Company must determine the amount of post-1986 earnings and profits of relevant subsidiaries, as well as the amount of non-U.S. income taxes paid on such earnings. The Company was able to make reasonable estimates and has recorded provisional amounts of $629 million related to the Transition Tax, $157 million charge for the remeasurement of the Company’s net deferred tax asset in the U.S. and $36 million related to the change in assertion regarding the indefinite reinvestment of foreign earnings. However, these amounts may require further adjustments during the measurement period due to evolving analysis and interpretations of law, including issuance by the IRS and Treasury of Notices and regulations, and, potentially, direct discussions with Treasury, as well as interpretations of how accounting for income taxes should be applied.

The effective income tax rate for 2016 was higher than the effective income tax rate for 2015 primarily due to benefits associated with the impact of settlements with tax authorities in multiple jurisdictions in 2015, the lapping of a discrete benefit relating to certain foreign taxes that became eligible to be claimed as credits in the United States in 2015, and a higher U.S. foreign tax credit benefit associated with the repatriation of current year foreign earnings in 2015. These items were partially offset by a more favorable geographic mix of taxable earnings in 2016.

During 2014, the Company implemented an initiative to better align its legal entity and tax structure with its operational footprint outside of the U.S. This initiative resulted in a one-time taxable gain in Belgium relating to the transfer of intellectual property to a related foreign entity in the United Kingdom. Management believes this improved alignment has resulted in greater flexibility and efficiency with regard to the global deployment of cash, as well as ongoing benefits in the Company’s effective income tax rate. The Company recorded a deferred charge related to the income tax expense on intercompany profits that resulted from the transfer. The tax associated with the transfer is deferred and amortized utilizing a 25-year life. This deferred charge is included in other current assets and other assets on the consolidated balance sheet at December 31, 2017 in the amounts of $17 million and $352 million, respectively. The comparable amounts included in other current assets and other assets were $15 million and $325 million, respectively, at December 31, 2016, with the difference driven by changes in foreign exchange rates and current period amortization.

In October 2016, the FASB issued accounting guidance to simplify the accounting for income tax consequences of intra-entity transfers of assets other than inventory. Under this guidance, companies will be required to recognize the income tax consequences of an intra-entity asset transfer when the transfer occurs. The guidance must be applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the period of adoption. The Company will adopt this accounting guidance on January 1, 2018. The aforementioned deferred charge of $369 million at December 31, 2017, will be written off to retained earnings as a component of the cumulative-effect adjustment. In addition, deferred taxes will also be a component of the cumulative-effect adjustment whereby the Company expects to record a $186 million deferred tax asset in this regard. See Note 1 (Summary of Significant Accounting Policies) for additional information related to this guidance.

In 2010, in connection with the expansion of the Company’s operations in the Asia Pacific, Middle East and Africa region, the Company’s subsidiary in Singapore, Mastercard Asia Pacific Pte. Ltd. (“MAPPL”) received an incentive grant from the Singapore Ministry of Finance. The incentive had provided MAPPL with, among other benefits, a reduced income tax rate for the 10-year period commencing January 1, 2010 on taxable income in excess of a base amount. The Company continued to explore business opportunities in this region, resulting in an expansion of the incentives being granted by the Ministry of Finance, including a further reduction to the income tax rate on taxable income in excess of a revised fixed base amount commencing July 1, 2011 and continuing through December 31, 2025. Without the incentive grant, MAPPL would have been subject to the statutory income tax rate on its earnings. For 2017, 2016 and 2015, the impact of the incentive grant received from the Ministry of Finance resulted in a reduction of MAPPL’s income tax liability of $104 million, or $0.10 per diluted share, $49 million, or $0.04 per diluted share, and $47 million, or $0.04 per diluted share, respectively.

Deferred Taxes

Deferred tax assets and liabilities represent the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities. The components of deferred tax assets and liabilities at December 31 are as follows:



	2017			2016
	(in millions)
Deferred Tax Assets
Accrued liabilities	$	158		$	174
Compensation and benefits	127			273
State taxes and other credits	28			41
Net operating and capital losses	105			81
Unrealized gain/loss - 2015 Euro Notes	48			—
Recoverable basis of deconsolidated entities	35			—
Other items	83			79
Less: Valuation allowance	(91		)	(91		)
Total Deferred Tax Assets	493			557

Deferred Tax Liabilities
Prepaid expenses and other accruals	48			46
Intangible assets	151			105
Property, plant and equipment	83			155
Unrealized gain/loss - 2015 Euro Notes	—			7
Previously taxed earnings and profits	36			—
Other items	31			18
Total Deferred Tax Liabilities	349			331

Net Deferred Tax Assets	$	144		$	226

As a result of the TCJA, the December 31, 2017 deferred tax balance has been reduced by $157 million during 2017 through the provisional remeasurement of the U.S. deferred tax assets and liabilities.

Both the 2017 and 2016 valuation allowances relate primarily to the Company’s ability to recognize tax benefits associated with certain foreign net operating losses. The net activity related to the valuation allowance balance at December 31, 2017 from the December 31, 2016 balance is attributable to an increase from additional foreign losses offset by a reduction, due to remeasurement of the deferred tax attribute, for capital loss and capital asset impairments in the United States. The recognition of the foreign losses is dependent upon the future taxable income in such jurisdictions and the ability under tax law in these jurisdictions to utilize net operating losses following a change in control. The recognition of losses with regard to capital loss and impairments is dependent upon the recognition of future capital gains in the United States.

A reconciliation of the beginning and ending balance for the Company’s unrecognized tax benefits for the years ended December 31, is as follows:



	2017			2016			2015
	(in millions)
Beginning balance	$	169		$	181		$	364
Additions:
Current year tax positions	21			20			20
Prior year tax positions	9			13			10
Reductions:
Prior year tax positions	(1		)	(28		)	(151		)
Settlements with tax authorities	(4		)	(2		)	(53		)
Expired statute of limitations	(11		)	(15		)	(9		)
Ending balance	$	183		$	169		$	181

The entire unrecognized tax benefit of $183 million, if recognized, would reduce the effective tax rate. During 2015, there was a reduction to the balance of the Company’s unrecognized tax benefits. This was primarily due to settlements with tax authorities in multiple jurisdictions. Further, the information gained related to these matters was considered in measuring uncertain tax benefits recognized for the periods subsequent to the periods settled.

The Company is subject to tax in the United States, Belgium, Singapore, the United Kingdom and various other foreign jurisdictions, as well as state and local jurisdictions. Uncertain tax positions are reviewed on an ongoing basis and are adjusted after considering facts and circumstances, including progress of tax audits, developments in case law and closing of statutes of limitation. Within the next twelve months, the Company believes that the resolution of certain federal, foreign and state and local examinations are reasonably possible and that a change in estimate, reducing unrecognized tax benefits, may occur. While such a change may be significant, it is not possible to provide a range of the potential change until the examinations progress further or the related statutes of limitation expire. The Company has effectively settled its U.S. federal income tax obligations through 2008, with the exception of transfer pricing issues which are settled through 2011. With limited exception, the Company is no longer subject to state and local or foreign examinations by tax authorities for years before 2010.

It is the Company’s policy to account for interest expense related to income tax matters as interest expense in its consolidated statement of operations, and to include penalties related to income tax matters in the income tax provision. The Company recorded tax-related interest expense of $1 million in 2017 and tax-related interest income of $4 million and $3 million in 2016 and 2015, respectively, in its consolidated statement of operations. At December 31, 2017 and 2016, the Company had a net income tax-related interest payable of $10 million and $9 million, respectively, in its consolidated balance sheet. At December 31, 2017 and 2016, the amounts the Company had recognized for penalties payable in its consolidated balance sheet were not material.

Other Impacts of the TCJA

As mentioned above, the TCJA imposes significant changes to U.S. tax law. The Company expects to pay a marginal amount of GILTI. However, in accordance with FASB guidance, the Company’s policy will be to recognize GILTI in the period it arises and it will not recognize a deferred charge with regard to GILTI. The Company does not expect to be subject to the BEAT. The Company expects to recognize income in the U.S. that will qualify as FDII and be taxed at the lower 13.125% effective tax rate. The Company will be eligible to expense qualifying fixed assets acquired after September 27, 2017, will be impacted by the additional limitations imposed on the deductibility of executive compensation, and does not expect to be impacted by the limitations placed on the deductibility of interest expense. Finally, the Company will lose its domestic production activities deduction.