EQUINIX INC

Income Taxes

Income (loss) before income taxes is attributable to the following geographic locations for the years ended December 31, (in thousands):



	2017		2016			2015
Domestic	$	148,500	$	215,010		$	123,153
Foreign	138,332		(55,151		)	87,845
Income from continuing operations before income taxes	$	286,832	$	159,859		$	210,998

The tax benefit (expenses) for income taxes consisted of the following components for the years ended December 31, (in thousands):



	2017			2016			2015
Current:
Federal	$	9,346		$	(16,365	)	$	(85,352	)
State and local	(849		)	(2,147		)	(3,984		)
Foreign	(109,032		)	(62,278		)	(27,090		)
Subtotal	(100,535		)	(80,790		)	(116,426		)
Deferred:
Federal	9,684			(11,184		)	87,801
State and local	2,018			(3,328		)	4,600
Foreign	34,983			49,851			801
Subtotal	46,685			35,339			93,202
Provision for income taxes	$	(53,850	)	$	(45,451	)	$	(23,224	)

State and foreign taxes not based on income are included in general and administrative expenses and the aggregate amounts were not significant for the years ended December 31, 2017, 2016 and 2015.

The fiscal 2017, 2016 and 2015 income tax expense differed from the amounts computed by applying the U.S. federal income tax rate of 35% to pre-tax income as a result of the following for the years ended December 31 (in thousands):



	2017			2016			2015
Federal tax at statutory rate	$	(100,391	)	$	(55,951	)	$	(73,849	)
State and local tax (expense) benefit	1,000			(4,895		)	945
Deferred tax assets generated in current year not benefited	(7,643		)	(6,246		)	(4,916		)
Foreign income tax rate differential	26,151			22,016			30,387
Non-deductible expenses	(2,629		)	(15,828		)	(14,252		)
Stock-based compensation expense	(616		)	(5,890		)	(3,922		)
Change in valuation allowance	(716		)	11,995			710
Foreign financing activities	1,319			(26,708		)	2,592
Loss on debt extinguishment	(1,604		)	(8,288		)	—
Gain on divestments	—			8,828			—
Uncertain tax positions reserve	(66		)	(9,371		)	(3,191		)
Tax adjustments related to REIT	41,973			45,060			45,823
Enactment of the US tax reform	(6,513		)	—			—
Other, net	(4,115		)	(173		)	(3,551		)
Total income tax expense	$	(53,850	)	$	(45,451	)	$	(23,224	)

Legislation commonly referred to as the Tax Cuts and Jobs Act ("TCJA"), which was signed into law on December 22, 2017, contains many significant changes to the existing U.S. federal income tax laws. Among other things, the TCJA reduces the U.S. corporate income tax rate from 35% to 21% effective January 1, 2018, limits the tax deductibility of interest expense, accelerates expensing of certain business assets and transitions the U.S. international taxation from a worldwide tax system to a territorial tax system by imposing a one-time mandatory repatriation of undistributed foreign earnings. As a result of the reduced corporate tax rate, the Company recognized an income tax expense of $6.5 million during the fourth quarter of 2017 as a provisional amount due to the remeasurement of the net deferred tax assets in the U.S. TRS. The Company is still analyzing the new tax legislation and assessing the impact. The Company will be able to conclude whether any adjustments are required to its net deferred tax asset balance in the U.S. when it files its 2017 U.S. federal tax return in the fourth quarter of 2018. Any adjustments to these provisional amounts will be reported as a component of tax expense (benefit) in the reporting period when such adjustments are determined.

The TCJA mandates a one-time deemed repatriation of undistributed foreign earnings, which will increase the Company’s 2017 taxable income, as well as its required REIT distribution. Based on the interpretation and guidance of the new tax legislation, the Company estimated a provisional amount of $195 million as the one-time mandatory repatriation of its cumulative foreign earnings that was not previously included in the U.S. taxable income. The Company has an option of including the entire amount in its 2017 taxable income or spreading the amount over 8 years in its taxable income. The Company has tentatively determined to include the entire amount in its 2017 taxable income. However, the final decision will be made upon the filing of its 2017 tax return in the fourth quarter of 2018. The Company believes the mandatory repatriation will result in no financial statement impact provided the Company satisfies its REIT distribution requirement.

As a result of the Company’s conversion to a REIT effective January 1, 2015, it is no longer the Company’s intent to indefinitely reinvest undistributed foreign earnings. However, no deferred tax liability has been recognized to account for this change because the expected recovery of the basis difference will not result in U.S. taxes in the post-REIT conversion periods due to the fact that none of its foreign subsidiaries is owned by a U.S. taxable REIT subsidiary and the withholding tax effect would be immaterial. As it continues to qualify as a REIT, the Company will not incur U.S. tax liability on the future repatriation of the foreign earnings and profits due to the zero tax rate that will apply provided the Company distributes 100% of its taxable income. During the fourth quarter of 2016, the Company repatriated approximately $63.7 million of foreign earnings from Singapore, which increased the taxable income for 2016 and was included in the REIT distribution for the year. There was no foreign withholding tax triggered by the repatriation. The Company continues to assess the foreign withholding tax impact of its current policy and does not believe the distribution of its foreign earnings would trigger any significant foreign withholding taxes, as a majority of the foreign jurisdictions where the Company operates does not impose withholding taxes on dividend distributions to a corporate U.S. parent.

The types of temporary differences that give rise to significant portions of the Company’s deferred tax assets and liabilities are set out below as of December 31 (in thousands):



	2017			2016
Deferred tax assets:
Reserves and accruals	$	27,673		$	11,276
Stock-based compensation expense	1,960			1,752
Unrealized losses	10,768			—
Operating loss carryforwards	95,864			37,594
Others, net	—			5
Gross deferred tax assets	136,265			50,627
Valuation allowance	(84,573		)	(29,167		)
Total deferred tax assets, net	51,692			21,460
Deferred tax liabilities:
Property, plant and equipment	(65,825		)	(57,006		)
Unrealized gains	—			(7,832		)
Intangible assets	(172,123		)	(168,655		)
Total deferred tax liabilities	(237,948		)	(233,493		)
Net deferred tax liabilities	$	(186,256	)	$	(212,033	)

The tax basis of REIT assets, excluding investments in TRSs, is greater than the amounts reported for such assets in the accompanying consolidated balance sheet by approximately $1,390.1 million at December 31, 2017.

The Company's accounting for deferred taxes involves weighing positive and negative evidence concerning the realizability of the Company's deferred tax assets in each tax jurisdiction. After considering such evidence as the nature, frequency and severity of current and cumulative financial reporting losses, and the sources of future taxable income and tax planning strategies, management concluded that valuation allowances were required in certain foreign jurisdictions. A valuation allowance continues to be provided for the deferred tax assets, net of deferred tax liabilities, associated with the Company's operations in Brazil, Canada, and certain jurisdictions located in the Company’s EMEA and Asia-Pacific regions. The operations in these jurisdictions have a history of significant losses as of December 31, 2017. As such, management does not believe these operations have established a sustained history of profitability and that a valuation allowance is, therefore, necessary.

Changes in the valuation allowance for deferred tax assets for the years ended December 31, 2017, 2016 and 2015 are as follows (in thousands):



	2017		2016			2015
Beginning balance	$	29,167	$	29,894		$	27,181
Amounts from acquisitions	25,283		5,053			—
Amounts recognized into income	716		(11,995		)	(710		)
Current increase	28,431		6,557			4,513
Impact of foreign currency exchange	976		(342		)	(1,090		)
Ending balance	$	84,573	$	29,167		$	29,894

Federal and state tax laws, including California tax laws, impose substantial restrictions on the utilization of NOL and credit carryforwards in the event of an "ownership change" for tax purposes, as defined in Section 382 of the Internal Revenue Code. In 2003, the Company conducted an analysis to determine whether an ownership change had occurred due to significant stock transactions in each of the reporting years disclosed at that time. The analysis indicated that an ownership change occurred during fiscal year 2002, which resulted in an annual limitation of approximately $0.8 million for NOL carryforwards generated prior to 2003. Therefore, the Company substantially reduced its federal and state NOL carryforwards for the periods prior to 2003 to approximately $16.4 million.

The Company’s NOL carryforwards for federal, state and foreign tax purposes which expire, if not utilized, at various intervals from 2018, are outlined below (in thousands):



Expiration Date	Federal ⁽¹⁾		State ⁽¹⁾		Foreign		Total
2018	$	—	$	—	$	11,730	$	11,730
2019 to 2021	190,125		474		16,638		207,237
2022 to 2024	46,827		—		4,294		51,121
2025 to 2027	13,005		—		9,425		22,430
2031 to 2033	—		767		—		767
Thereafter	61,375		18,909		242,382		322,666
	$	311,332	$	20,150	$	284,469	$	615,951

__________________________


(1)	The total amount of NOL carryforwards that will not be available to offset the Company’s future taxable income after dividend paid deduction due to Section 382 limitations was $242.0 million, comprising $241.8 million of federal and $0.2 million of state.

The beginning and ending balances of the Company's unrecognized tax benefits are reconciled below for the years ended December 31 (in thousands):



	2017			2016			2015
Beginning balance	$	72,187		$	30,845		$	36,138
Gross increases related to prior year tax positions	6,095			570			—
Gross decreases related to prior year tax positions	—			—			(8,645		)
Gross increases related to current year tax positions	19,832			41,972			4,802
Decreases resulting from expiration of statute of limitation	(15,410		)	(826		)	(1,450		)
Decreases resulting from settlements	(314		)	(374		)	—
Ending balance	$	82,390		$	72,187		$	30,845

The Company recognizes interest and penalties related to unrecognized tax benefits within income tax benefit (expense) in the consolidated statements of operations. The Company has accrued $2.9 million and $4.4 million for interest and penalties as of December 31, 2017 and 2016, respectively.

The unrecognized tax benefits of $82.4 million as of December 31, 2017, if subsequently recognized, will affect the Company's effective tax rate favorably at the time when such a benefit is recognized.

Due to various tax years open for examination, it is reasonably possible that the balance of unrecognized tax benefits could significantly increase or decrease over the next 12 months as the Company may be subject to either examination by tax authorities or a lapse in statute of limitations. The Company is currently unable to estimate the range of possible adjustments to the balance of unrecognized tax benefits.

The Company's income tax returns for the years from 2014 through current remain open to examination by federal and state taxing authorities. In addition, the Company's tax years of 2005 through 2017 remain open and subject to examination by local tax authorities in certain foreign jurisdictions in which the Company has major operations.