INCOME TAXES
The company is subject to regulation under a wide variety of U.S., federal, state and foreign tax laws and regulations. Income before income taxes and the income tax provision consisted of the following for the years ended December 31:
|
| | | | | | | | | | | | |
(in millions) | | 2017 | | 2016 | | 2015 |
Income before income taxes: | | | | | | |
Domestic | | $ | 2,464.2 |
| | $ | 2,221.8 |
| | $ | 1,927.3 |
|
Foreign | | 62.1 |
| | 65.8 |
| | 29.5 |
|
Total | | $ | 2,526.3 |
| | $ | 2,287.6 |
| | $ | 1,956.8 |
|
Income tax provision: | | | | | | |
Current: | | | | | | |
Federal | | $ | 783.7 |
| | $ | 684.4 |
| | $ | 554.5 |
|
State | | 85.7 |
| | 118.6 |
| | 81.0 |
|
Foreign | | 39.1 |
| | 33.5 |
| | 11.0 |
|
Total | | 908.5 |
| | 836.5 |
| | 646.5 |
|
Deferred: | | | | | | |
Federal | | (2,576.3 | ) | | (95.4 | ) | | 75.6 |
|
State | | 130.8 |
| | 10.0 |
| | (12.0 | ) |
Foreign | | (0.1 | ) | | 2.4 |
| | (0.3 | ) |
Total | | (2,445.6 | ) | | (83.0 | ) | | 63.3 |
|
Total Income Tax Provision (Benefit) | | $ | (1,537.1 | ) | | $ | 753.5 |
| | $ | 709.8 |
|
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the 2017 Tax Act). The 2017 Tax Act establishes new tax laws that will affect 2018 and after, including a reduction in the U.S. federal corporate income tax rate from 35% to 21%. The 2017 Tax Act makes broad and complex changes to the U.S. tax code including, but not limited to, the repeal of the IRC Section 199 domestic production activities deduction in 2018 and accelerated depreciation that allows for full expensing of qualified property beginning in the fourth quarter of 2017.
On December 22, 2017, the SEC staff issued a staff accounting bulletin that provides guidance on accounting for the tax effects of the 2017 Tax Act. The guidance provides a measurement period that should not extend beyond one year from the 2017 Tax Act enactment date for companies to complete the accounting for income taxes related to changes associated with the 2017 Tax Act. According to the staff accounting bulletin, entities must recognize the impact in the financial statements for the activities that they have completed the work to understand the impact as a result of the tax reform law. For those activities which have not completed, the company would include provisional amounts if a reasonable estimate is available.
As a result of the reduction of the federal corporate income tax rate, the company has revalued its net deferred tax liability, excluding after tax credits, as of December 31, 2017. Based on this revaluation and other impacts of the 2017 Tax Act, the company has recognized a net tax benefit of $2.6 billion, which was recorded as a reduction to income tax expense for the year ended December 31, 2017. The company has recognized provisional adjustments but management has not completed its accounting for income tax effects for certain elements of the 2017 Tax Act, principally due to the accelerated depreciation that will allow for full expensing of qualified property.
Reconciliation of the statutory U.S. federal income tax rate to the effective tax rate is as follows:
|
| | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
Statutory U.S. federal tax rate | | 35.0 | % | | 35.0 | % | | 35.0 | % |
State taxes, net of federal benefit | | 2.1 |
| | 3.7 |
| | 3.0 |
|
Domestic production activities deduction | | (1.0 | ) | | (1.3 | ) | | (1.3 | ) |
Increase (decrease) in domestic valuation allowance | | (0.1 | ) | | (4.7 | ) | | 0.1 |
|
Impact of revised state and local apportionment estimates | | 3.1 |
| | 0.5 |
| | (0.7 | ) |
Reclassification of accumulated other comprehensive income | | 3.5 |
| | — |
| | — |
|
Impact of 2017 Tax Act | | (101.6 | ) | | — |
| | — |
|
Other, net | | (1.8 | ) | | (0.3 | ) | | 0.2 |
|
Effective Tax Expense (Benefit) Rate | | (60.8 | )% | | 32.9 | % | | 36.3 | % |
In 2017, the effective rate was lower than the statutory tax rate due to the remeasurement of the deferred tax liabilities as a result of the 2017 Tax Act. This decrease was partially offset by an increase in the state apportionment impact of the Illinois income tax rate change on deferred tax liabilities as well as the reclassification of income tax expense from accumulated other comprehensive income related to the disposal of BM&FBOVESPA shares.
In 2016, the effective rate was lower than the statutory tax rate largely due to the release of the valuation allowances related to the sale of BM&FBOVESPA shares. The decrease was partially offset by an increase in state tax expense and the state apportionment impact on deferred tax liabilities.
In 2015, the effective rate was higher than the statutory tax rate primarily due to the impact of state and local income taxes. The effective rate was primarily reduced by the Section 199 Domestic Productions Activities Deduction (Section 199 deduction) and the impact of state and local apportionment factors in deferred tax expense. The Section 199 deduction is related to certain activities performed by the company's electronic platform.
At December 31, deferred income tax assets (liabilities) consisted of the following:
|
| | | | | | | | |
(in millions) | | 2017 | | 2016 |
Deferred Income Tax Assets: | | | | |
Net operating losses | | $ | 13.0 |
| | $ | 18.8 |
|
Property | | 5.5 |
| | 31.4 |
|
Accrued expenses, compensation and other | | 37.2 |
| | 119.0 |
|
Subtotal | | 55.7 |
| | 169.2 |
|
Valuation allowance | | (11.2 | ) | | (14.9 | ) |
Total deferred income tax assets | | 44.5 |
| | 154.3 |
|
Deferred Income Tax Liabilities: | | | | |
Purchased intangible assets | | (4,902.2 | ) | | (7,445.3 | ) |
Total deferred income tax liabilities | | (4,902.2 | ) | | (7,445.3 | ) |
Net Deferred Income Tax Liabilities | | $ | (4,857.7 | ) | | $ | (7,291.0 | ) |
A valuation allowance is recorded when it is more-likely-than-not that some portion or all of the deferred income tax assets may not be realized. The ultimate realization of the deferred income tax assets depends on the ability to generate sufficient taxable income of the appropriate character in the future and in the appropriate taxing jurisdictions.
At December 31, 2017 and 2016, the company had domestic and foreign income tax loss carry forwards of $73.3 million and $96.8 million, respectively. These amounts primarily related to losses from the acquisition of Swapstream Limited and its affiliates, the acquisition of Pivot, Inc., losses incurred in the operation of various foreign entities and capital losses from the sales of securities. At December 31, 2016, the company also had a net built-in, unrealized capital gain of $19.3 million. At December 31, 2017 and 2016, the company determined that it was not more-likely-than-not that deferred income tax assets related to the acquisition of Swapstream Limited and its affiliates and other deferred income tax assets created from the start-up of various foreign operations will be fully realized. As a result, valuation allowances of $11.2 million and $14.9 million were recorded at December 31, 2017 and 2016, respectively.
The following is a summary of the company’s unrecognized tax benefits:
|
| | | | | | | | | | | | |
(in millions) | | 2017 | | 2016 | | 2015 |
Gross unrecognized tax benefits | | $ | 308.8 |
| | $ | 252.1 |
| | $ | 206.9 |
|
Unrecognized tax benefits, net of tax impacts in other jurisdictions | | 276.0 |
| | 216.1 |
| | 179.6 |
|
Unrecognized interest and penalties related to uncertain tax positions | | 34.0 |
| | 32.7 |
| | 19.5 |
|
Interest and penalties recognized in the consolidated statements of income | | 1.3 |
| | 13.2 |
| | 8.6 |
|
The company does not believe it is reasonably possible that within the next twelve months, unrecognized tax benefits will change by a significant amount.
A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows: |
| | | | | | | | | | | | |
(in millions) | | 2017 | | 2016 | | 2015 |
Balance at January 1 | | $ | 252.1 |
| | $ | 206.9 |
| | $ | 187.6 |
|
Additions based on tax positions related to the current year | | 41.8 |
| | 29.6 |
| | 20.4 |
|
Additions for tax positions of prior years | | 47.7 |
| | 18.5 |
| | 2.7 |
|
Reductions for tax positions of prior years | | (8.7 | ) | | (2.8 | ) | | (3.8 | ) |
Reductions resulting from the lapse of statutes of limitations | | (2.1 | ) | | (0.1 | ) | | — |
|
Settlements with taxing authorities | | (22.0 | ) | | — |
| | — |
|
Balance at December 31 | | $ | 308.8 |
| | $ | 252.1 |
| | $ | 206.9 |
|
The company is subject to U.S. federal income tax as well as income taxes in Illinois and multiple other state, local and foreign jurisdictions. As of December 31, 2017, substantially all federal and state income tax matters had been concluded through 2007 and 2006, respectively.