FACTSET RESEARCH SYSTEMS INC

17.

INCOME TAXES

Income tax expense is based on taxable income determined in accordance with current enacted laws and tax rates. Deferred income taxes are recorded for

the temporary differences between the financial statement and tax bases of assets and liabilities using currently enacted tax rates.

Provision for Income Taxes

The provision for income ta

xes is as follows:

	Y ears ended August 31,
(in thousands)	201 7			201 6			201 5
U.S. operations	$	218,650		$	353,434		$	263,411
Non-U.S. operations		125,662			107,559			70,343
Income before income taxes	$	344,312		$	460,993		$	333,754

U.S. operations	$	65,403		$	106,671		$	88,147
Non-U.S. operations		20,650			15,507			4,556
Total provision for income taxes	$	86,053		$	122,178		$	92,703
Effective tax rate		25.0	%		26.5	%		27.8	%

The components of the provision for income taxes consis

t of the following:

	Y ears ended August 31,
(in thousands)	201 7			201 6		201 5
Current
U.S. federal	$	58,057		$	97,703	$	82,885
U.S. state and local		5,659			4,917		4,419
Non-U.S.		17,458			15,030		6,368
Total current taxes	$	81,174			117,650	$	93,672

Deferred
U.S. federal	$	4,320		$	3,915	$	720
U.S. state and local		(77	)		136		123
Non-U.S.		636			477		(1,812	)
Total deferred taxes	$	4,879		$	4,528	$	(969	)
Total provision for income taxes	$	86,053		$	122,178	$	92,703

The provision for income taxes differs from the amount of income tax determined by applying the U.S. statutory federal income tax rate to income befo

re income taxes as a result of the following factors:

	Years e nded August 31,
(expressed as a percentage of income before income taxes)	201 7			201 6			201 5

Tax at U.S. Federal statutory tax rate		35.0	%		35.0	%		35.0	%
Increase (decrease) in taxes resulting from:
State and local taxes, net of U.S. federal income tax benefit		1.8			1.5			1.6
Foreign income at other than U.S. rates		(7.0	) (1)		(5.0	) (2)		(3.0	)
Domestic production activities deduction		(2.1	)		(1.5	)		(2.2	)
Income tax benefits from R&D tax credits		(3.3	)		(3.6	)		(2.7	)
Income tax benefits from foreign tax credits		(0.3	)		(0.2	)		(0.3	)
Other, net		0.9			0.3			(0.6	)
Effective tax rate		25.0	%		26.5	% (3)		27.8	% (4)

(

)

Includes

basis

point benefit as a result of

FactSet’s

global realignment.

Effective

September 1, 2016,

FactSet realigned certain aspects of its global operations from FactSet Research Systems Inc., its U.S. parent company, to FactSet UK Limited, a U.K. operating company, to better position the Company to serve its growing client base outside the U.S. This realignment allows the Company to further implement strategic corporate objectives and helps achieve operational and financial efficiencies, while complementing FactSet’s increasing global growth and reach.

(

)

Includes a portion of the gain from the sale of the Market Metrics business that was

not

taxable in the UK

(

)

The fiscal

2016

effective tax rate of

26.5%

includes income tax benefits of

$10.5

million primarily from the permanent reenactment of the U.S. Federal R&D Tax Credit (the “R&

D tax credit”) in

December 2015

, finalizing

the fiscal

2015

tax returns and other discrete items.

The reenactment of the R&D tax credit was retroactive to

January 1, 2015

and eliminates the yearly uncertainty surrounding the extension of the credit

(

)

The fiscal

2015

effective tax rate of

27.8%

includes

income tax benefits of

$8.8

million primarily from the reenactment of the R&

D tax credit

December 2014,

finalizing

the fiscal

2014

tax returns

and other discrete items

Deferred Tax Assets and Liabilities

The significant components of deferred tax assets that are recorded

within the Consolidated Balance Sheets were as follows:

	At August 31,
(in thousands)	201 7			201 6
Current
Receivable reserve	$	811		$	531
Deferred rent		1,321			1,022
Other		536			1,605
Net current deferred tax assets	$	2,668		$	3,158
Non-current
Depreciation on property, equipment and leasehold improvements	$	2,220		$	5,194
Deferred rent		10,294			9,626
Stock-based compensation		20,117			19,927
Purchased intangible assets, including acquired technology		(32,742	)		(24,645	)
Other		7,523			3,304
Net non-current deferred tax assets	$	7,412		$	13,406
Total deferred tax assets	$	10,080		$	16,564

The significant components of deferred tax liabilities that are recorded

within the Consolidated Balance Sheets were as follows:

	At August 31,
(in thousands)	201 7			201 6
Current
Other	$	2,382		$	291
Net current deferred tax liabilities	$	2,382		$	291
Non-current
Stock-based compensation	$	(815	)	$	—
Purchased intangible assets, including acquired technology		26,231			1,666
Other		(524	)		42
Net non-current deferred tax liabilities	$	24,892		$	1,708
Total deferred tax liabilities	$	27,274		$	1,999

U.S. income taxes have been provided on filing-basis undistributed foreign ea

rnings and profits of

$223.6

million as of

August 31, 2017,

as FactSet plans to permanently reinvest these amounts and use the earnings to fund non-U.S. operations and working capital needs as well as facilities overseas. These needs include, but are

not

limited to, capital expenditures and acquisitions intended to further FactSet’s global growth strategy. At each reporting period, FactSet assesses its position with regard to undistributed foreign earnings of its subsidiaries. To the extent that earnings can

longer be indefinitely reinvested, the Company will accrue the tax impact, if any, attributable to those earnings, including the impact of foreign tax credits, at such time. If such earnings are repatriated, additional tax expense

may

result, although the flexibility inherent in the U.S. Internal Revenue Code

may

permit the ultimate distribution to be tax-free depending on the nature of the distribution. Therefore the Company does

not

believe it is practicable to estimate, with reasonable accuracy, the hypothetical amount of the unrecognized deferred tax liability on its undistributed foreign earnings given the many factors and assumptions necessary to estimate the amount of the federal income tax that

may

be payable in the future on the undistributed earnings.

Unrecognized Tax Positions

Applicable accounting guidance prescribes a comprehensive model for the financial statement recognition, measurement, classification and disclosure of uncertain tax positions that a company has taken or expects to take

on a tax return. A company can recognize the financial effect of an income tax position only if it is more likely than

not

(greater than

50%

) that the tax position will prevail upon tax examination, based solely on the technical merits of the tax position. Otherwise,

benefit or expense can be recognized in the consolidated financial statements. The tax benefits recognized are measured based on the largest benefit that has a greater than

fifty

percent likelihood of being realized upon ultimate settlement. Additionally, companies are required to accrue interest on all tax exposures for which reserves have been established consistent with jurisdictional tax laws.

As of

August 31,

201

the Company had gross unrecognized tax benefits totaling

$11.5

million, including

$1.5

million of accrued interest, recorded as Taxes Payable (non-current) on the Consolidated Balance Sheet. As of

August 31, 2016,

the Company had gross unrecognized tax benefits totaling

$8.8

million, including

$1.3

million of accrued interest, recorded as Taxes Payable (non-current) on the Consolidated Balance Sheet. The Company recognizes interest and penalty charges related to unrecognized tax benefits as income tax expense, which is consistent with the recognition in prior reporting periods. The Company recognized interest charges of less than

$0.2

million in each of the fiscal years ended

August 31, 2017,

2016

and

2015,

respectively.

Unrecognized tax benefits represent tax positions taken on tax returns but

not

yet recognized in the consolid

ated financial statements. When applicable, the Company adjusts the previously recorded tax expense to reflect examination results when the position is ultimately settled. The Company regularly engages in discussions and negotiations with tax authorities regarding tax matters in various jurisdictions. It is reasonably possible that certain federal, foreign, and state tax matters

may

be concluded in the next

months. However, FactSet has

reason to believe that such audits will result in the payment of additional taxes and/or penalties that would have a material adverse effect on the Company’s results of operations or financial position, beyond current estimates. Any changes in accounting estimates resulting from new developments with respect to uncertain tax positions will be recorded as appropriate. The Company does

not

currently anticipate that the total amounts of unrecognized tax benefits will significantly change within the next

months.

The following table summarizes the changes in the balance of

gross unrecognized tax benefits:

(in thousands)
Unrecognized income tax benefits at August 31, 2014	$	5,501
Additions based on tax positions related to the current year		962
Additions for tax positions of prior years		1,122
Statute of limitations lapse		(809	)
Unrecognized income tax benefits at August 31, 2015	$	6,776
Additions based on tax positions related to the current year		1,779
Additions for tax positions of prior years		1,436
Statute of limitations lapse		(1,209	)
Unrecognized income tax benefits at August 31, 2016	$	8,782
Additions based on tax positions related to the current year		3,896
Additions for tax positions of prior years		628
Statute of limitations lapse		(1,822	)
Unrecognized income tax benefits at August 31, 201 7	$	11,484

In the normal course of business, the Company

’s tax filings are subject to audit by federal, state and foreign tax authorities. At

August 31, 2017,

the Company remained subject to examination in the following major tax jurisdictions for the tax years as indicated below:

Major Tax Jurisdictions	Open Tax Years
U.S.
Federal	201 4 through 2017
State (various)	2010 through 201 7

Europe
United Kingdom	201 4 through 2017
France	201 6 through 2017
Germany	2017