Arrow Electronics Inc

Income Taxes

The provision for income taxes for the years ended December 31 consists of the following:



	2017			2016			2015
Current:
Federal	$	119,883		$	45,314		$	82,532
State	(6,156		)	7,022			18,022
International	134,987			110,208			85,310
	248,714			162,544			185,864
Deferred:
Federal	31,168			29,973			12,127
State	13,534			7,161			(1,828		)
International	(6,290		)	(9,004		)	(4,466		)
	38,412			28,130			5,833
	$	287,126		$	190,674		$	191,697

The principal causes of the difference between the U.S. federal statutory tax rate of 35% and effective income tax rates for the years ended December 31 are as follows:



	2017			2016			2015
United States	$	115,850		$	235,256		$	281,579
International	578,438			480,141			410,604
Income before income taxes	$	694,288		$	715,397		$	692,183

Provision at statutory tax rate	$	243,001		$	250,389		$	242,264
State taxes, net of federal benefit	5,184			9,219			10,526
International effective tax rate differential	(88,444		)	(64,002		)	(56,132		)
Change in valuation allowance	1,408			7,174			(205		)
Other non-deductible expenses	12,700			3,516			3,530
Changes in tax accruals	(7,973		)	(3,679		)	(7,423		)
Tax credits	(8,170		)	(14,510		)	—
Tax Act's transition tax (a)	196,010			—			—
Tax Act's impact on deferred taxes (b)	(71,261		)	—			—
Other	4,671			2,567			(863		)
Provision for income taxes	$	287,126		$	190,674		$	191,697

On December 22, 2017, the U.S. government enacted comprehensive tax legislation (the “Tax Act”), which significantly revises the ongoing U.S. corporate income tax law by lowering the U.S. federal corporate income tax rate from 35% to 21%, implementing a territorial tax system, imposing one-time tax on foreign unremitted earnings and setting limitations on deductibility of certain costs (e.g., interest expense), among other things.

Due to the complexities involved in accounting for the recently enacted Tax Act, the U.S. Securities and Exchange Commission’s Staff Accounting Bulletin (“SAB”) 118 requires that the company include in its financial statements the reasonable estimate of the impact of the Tax Act on earnings to the extent such reasonable estimate has been determined. Accordingly, the company recorded the following reasonable estimates of the tax impact in its earnings for the year ended December 31, 2017.


(a)	For the year ended December 31, 2017, the company accrued a reasonable estimate of $196,010 of tax expense for the Tax Act’s one-time transition tax on the foreign subsidiaries’ accumulated, unremitted earnings going back to 1986.


(b)	For the year ended December 31, 2017, the company accrued $71,261 in provisional tax benefit related to the net change in deferred tax liabilities stemming from the Tax Act’s reduction of the U.S. federal tax rate from 35% to 21%, and disallowance of certain incentive based compensation tax deductibility under Internal Revenue Code Section 162(m).

The Tax Act also includes a provision to tax global intangible low-taxed income (“GILTI”) of foreign subsidiaries and a base erosion anti-abuse tax (“BEAT”) measure that taxes certain payments between a U.S. corporation and its subsidiaries. The company will be subject to the GILTI and BEAT provisions effective beginning January 1, 2018 and is in the process of analyzing their effects, including how to account for the GILTI provision from an accounting policy standpoint.

The final impact on the company from the Tax Act’s transition tax legislation may differ from the aforementioned reasonable estimate of $196,010 due to the complexity of calculating and supporting with primary evidence such U.S. tax attributes as accumulated foreign earnings and profits, foreign tax paid, and other tax components involved in foreign tax credit calculations for prior years back to 1986. Such differences could be material, due to, among other things, changes in interpretations of the Tax Act, future legislative action to address questions that arise because of the Tax Act, changes in accounting standards for income taxes or related interpretations in response to the Tax Act, or any updates or changes to estimates the company has utilized to calculate the transition tax's reasonable estimate.

Pursuant to the SAB118, the company is allowed a measurement period of up to one year after the enactment date of the Tax Act to finalize the recording of the related tax impacts. Accordingly, the company accrued the transition tax of $196,010 and a tax benefit related to the net change in deferred tax liabilities of $71,261 for 2017 based on the reasonable estimate guidance. The company will continue to calculate the impact of the U.S. Tax Act and will record any resulting tax adjustments during 2018. Additionally, the company will elect to pay the transition tax in installments over the period of 8 years, pursuant to the guidance of the new Internal Revenue Code Section 965.

The company evaluates and establishes liabilities for uncertain tax positions that may be challenged by local tax authorities and that may not be fully sustained, despite the belief that the underlying tax positions are fully supportable. Uncertain tax positions are reviewed on an ongoing basis and are adjusted in light of changing facts and circumstances, including progress of tax audits, developments in case law and closing of statutes of limitations. Such adjustments are reflected in the tax provision as appropriate.

At December 31, 2017, the company had a liability for unrecognized tax position of $24,361. The timing of the resolution of these uncertain tax positions is dependent on the tax authorities' income tax examination processes. Material changes are not expected, however, it is possible that the amount of unrecognized tax benefits with respect to uncertain tax positions could increase or decrease during 2018. Currently, the company is unable to make a reasonable estimate of when tax cash settlement would occur and how it would impact the effective tax rate.

A reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended December 31 is as follows:



	2017			2016			2015
Balance at beginning of year	$	31,534		$	36,935		$	44,701
Additions based on tax positions taken during a prior period	2,342			2,356			2,568
Reductions based on tax positions taken during a prior period	(1,242		)	(6,305		)	(9,482		)
Additions based on tax positions taken during the current period	6,543			3,935			8,440
Reductions related to settlement of tax matters	(2,921		)	(2,795		)	(4,143		)
Reductions related to a lapse of applicable statute of limitations	(11,895		)	(2,592		)	(5,149		)
Balance at end of year	$	24,361		$	31,534		$	36,935

Interest costs related to unrecognized tax benefits are classified as a component of "Interest and other financing expense, net" in the company's consolidated statements of operations. In 2017, 2016, and 2015, the company recognized $(2,792), $(1,946), and $(3,247), respectively, of interest expense related to unrecognized tax benefits. At December 31, 2017 and 2016, the company had a liability for the payment of interest of $3,301 and $6,881, respectively, related to unrecognized tax benefits.

In many cases the company's uncertain tax positions are related to tax years that remain subject to examination by tax authorities. The following describes the open tax years, by major tax jurisdiction, as of December 31, 2017:



United States - Federal		2014 - present
United States - States		2007 - present
Germany (c)		2010 - present
Hong Kong		2010 - present
Italy (c)		2012 - present
Sweden		2012 - present
United Kingdom		2015 - present

Deferred income taxes are provided for the effects of temporary differences between the tax basis of an asset or liability and its reported amount in the consolidated balance sheets. These temporary differences result in taxable or deductible amounts in future years.

The deferred tax assets and liabilities consist of the following at December 31:



	2017			2016
Deferred tax assets:
Net operating loss carryforwards	$	113,327		$	102,710
Inventory adjustments	42,376			56,890
Allowance for doubtful accounts	12,368			14,526
Accrued expenses	28,229			40,179
Interest carryforward	15,964			19,073
Stock-based compensation awards	12,982			24,505
Other comprehensive income items	—			10,859
Integration and restructuring	6,726			2,970
Other	17,015			17,830
	248,987			289,542
Valuation allowance	(13,915		)	(15,323		)
Total deferred tax assets	$	235,072		$	274,219

Deferred tax liabilities:
Goodwill	$	(109,994	)	$	(142,541	)
Depreciation	(116,725		)	(94,838		)
Intangible assets	(18,760		)	(21,118		)
Other comprehensive income items	(5,542		)	—
Total deferred tax liabilities	$	(251,021	)	$	(258,497	)
Total net deferred tax assets (liabilities)	$	(15,949	)	$	15,722

At December 31, 2017, the company had international tax loss carryforwards of approximately $327,568, of which $9,787 have expiration dates ranging from 2018 to 2035, and the remaining $317,781 have no expiration date. Deferred tax assets related to these international tax loss carryforwards were $105,534 with a corresponding valuation allowance of $6,624.

At December 31, 2017, the company also had the U.S. Federal net operating loss carryforwards of approximately $11,940, which relate to acquired subsidiaries. These U.S. Federal net operating losses expire in various years beginning after 2027. The company has an agreement with the sellers of an acquired business to reimburse them for the company's utilization of certain U.S. Federal net operating loss carryforwards. Deferred tax assets include federal net operating loss carryforwards. The company also has certain state net operating loss carryforwards with corresponding valuation allowances.

Valuation allowances reflect the deferred tax benefits that management is uncertain of the ability to utilize in the future.

At December 31, 2017, cumulative undistributed earnings of foreign subsidiaries were approximately $3,200,000, for which no U.S. deferred income taxes were provided for, with the exception of the Tax Act's transition tax, due to the company's assertion to permanently reinvest such earnings in international operations.

Income taxes paid, net of income taxes refunded, amounted to $231,183, $190,109, and $182,668 in 2017, 2016, and 2015, respectively.