20. Income Taxes

The components of income tax expense for 2015, 2014 and 2013, are as follows:

(in millions)	2015			2014			2013
Current income tax expense:
Federal	$	937		$	923		$	869
State and local		74			54			39
Foreign		395			258			307
Total net current income tax expense		1,406			1,235			1,215
Deferred income tax expense (benefit):
Federal		(13	)		(73	)		(68	)
State and local		(19	)		(9	)		13
Foreign		(124	)		(22	)		(138	)
Total net deferred income tax expense (benefit)		(156	)		(104	)		(193	)
Total income tax expense	$	1,250		$	1,131		$	1,022

Income tax expense has been based on the following components of income before taxes, less net income (loss) attributable to noncontrolling interests:

(in millions)	2015		2014		2013
Domestic	$	2,840	$	2,946	$	2,814
Foreign		1,755		1,479		1,140
Total	$	4,595	$	4,425	$	3,954

The foreign income before taxes includes countries that have statutory tax rates that are lower than the U.S. federal statutory tax rate of 35%, such as the United Kingdom, Channel Islands, Canada and the Netherlands.

A reconciliation of income tax expense with expected federal income tax expense computed at the applicable federal income tax rate of 35% is as follows:

(in millions)	2015			%			2014			%			2013			%
Statutory income tax expense	$	1,608			35	%	$	1,549			35	%	$	1,383			35	%
Increase (decrease) in income taxes resulting from:
State and local taxes (net of federal benefit)		42			1			51			1			39			1
Impact of foreign, state, and local tax rate changes on deferred taxes		(45	)		(1	)		(4	)		—			(69	)		(2	)
Effect of foreign tax rates		(385	)		(8	)		(434	)		(10	)		(329	)		(8	)
Other		30			—			(31	)		—			(2	)		—
Income tax expense	$	1,250			27	%	$	1,131			26	%	$	1,022			26	%

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 financial statements. These temporary differences result in taxable or deductible amounts in future years.

The components of deferred income tax assets and liabilities are shown below

	December 31,
(in millions)	2015			2014
Deferred income tax assets:
Compensation and benefits	$	372		$	323
Unrealized investment losses		114			157
Loss carryforwards		98			47
Foreign tax credit carryforwards		83			40
Other		235			253
Gross deferred tax assets		902			820
Less: deferred tax valuation allowances		(20	)		(29	)
Deferred tax assets net of valuation allowances		882			791
Deferred income tax liabilities:
Goodwill and acquired indefinite-lived intangibles		5,588			5,616
Acquired finite-lived intangibles		45			65
Other		80			89
Gross deferred tax liabilities		5,713			5,770
Net deferred tax (liabilities)	$	(4,831	)	$	(4,979	)

Deferred income tax assets and liabilities are recorded net when related to the same tax jurisdiction. At December 31, 2015, the Company recorded on the consolidated statement of financial condition deferred income tax assets, within other assets, and deferred income tax liabilities of $20 million and $4,851 million, respectively. At December 31, 2014, the Company recorded on the consolidated statement of financial condition deferred income tax assets, within other assets, and deferred income tax liabilities of $10 million and $4,989 million, respectively.

During 2015, tax legislation enacted in the United Kingdom and domestic state and local tax changes resulted in a $54 million net noncash benefit related to the revaluation of certain deferred income tax liabilities. During 2014, state and local tax changes resulted in a $4 million net noncash benefit related to the revaluation of certain deferred income tax liabilities.

At December 31, 2015 and 2014, the Company had available state net operating loss carryforwards of $1.5 billion and $1.2 billion, respectively, which will begin to expire in 2017. At December 31, 2015 and 2014, the Company had foreign net operating loss carryforwards of $135 million and $137 million, respectively, of which $6 million will begin to expire in 2017 and the balance will carry forward indefinitely. At December 31, 2015, the Company had foreign tax credit carryforwards for income tax purposes of $83 million which will begin to expire in 2023.

At December 31, 2015 and 2014, the Company had $20 million and $29 million of valuation allowances for deferred income tax assets, respectively, recorded on the consolidated statements of financial condition. The year-over-year decrease in the valuation allowance primarily related to the realization of tax loss carryforwards and certain foreign deferred income tax assets.

Goodwill recorded in connection with the Quellos Transaction has been reduced during the period by the amount of tax benefit realized from tax-deductible goodwill. See Note 9, Goodwill, for further discussion.

Current income taxes are recorded net on the consolidated statements of financial condition when related to the same tax jurisdiction. At December 31, 2015, the Company had current income taxes receivable and payable of $166 million and $79 million, respectively, recorded in other assets and accounts payable and accrued liabilities, respectively. At December 31, 2014, the Company had current income taxes receivable and payable of $117 million and $125 million, respectively, recorded in other assets and accounts payable and accrued liabilities, respectively.

The Company does not provide deferred taxes on the excess of the financial reporting over tax basis on its investments in foreign subsidiaries that are essentially permanent in duration. The excess totaled $4,734 million and $3,871 million at December 31, 2015 and 2014, respectively. The determination of the additional deferred income taxes on the excess has not been provided because it is not practicable due to the complexities associated with its hypothetical calculation.

The following tabular reconciliation presents the total amounts of gross unrecognized tax benefits:

	Year ended December 31,
(in millions)	2015			2014			2013
Balance at January 1	$	379		$	467		$	404
Additions for tax positions of prior years		39			21			11
Reductions for tax positions of prior years		(25	)		(24	)		(5	)
Additions based on tax positions related to current year		75			85			67
Lapse of statute of limitations		(2	)		(2	)		—
Settlements		—			(168	)		(12	)
Positions assumed in acquisitions		—			—			2
Balance at December 31	$	466		$	379		$	467

Included in the balance of unrecognized tax benefits at December 31, 2015, 2014 and 2013, respectively, are $320 million, $283 million and $304 million of tax benefits that, if recognized, would affect the effective tax rate.

The Company recognizes interest and penalties related to income tax matters as a component of income tax expense. Related to the unrecognized tax benefits noted above, the Company accrued interest and penalties of $12 million during 2015 and in total, as of December 31, 2015, had recognized a liability for interest and penalties of $56 million. The Company accrued interest and penalties of $(25) million during 2014 and in total, as of December 31, 2014, had recognized a liability for interest and penalties of $44 million. The Company accrued interest and penalties of $(1) million during 2013 and in total, as of December 31, 2013, had recognized a liability for interest and penalties of $68 million.

BlackRock is subject to U.S. federal income tax, state and local income tax, and foreign income tax in multiple jurisdictions. Tax years after 2009 remain open to U.S. federal income tax examination.

In June 2014, the IRS commenced its examination of BlackRock’s 2010 through 2012 tax years, and while the impact on the consolidated financial statements is undetermined, it is not expected to be material.

The Company is currently under audit in several state and local jurisdictions. The significant state and local income tax examinations are in New York State and New York City for tax years 2009 through 2011, and New Jersey for tax years 2007 through 2009. No state and local income tax audits cover years earlier than 2007. No state and local income tax audits are expected to result in an assessment material to BlackRock’s consolidated financial statements.

Her Majesty’s Revenue and Customs’ (“HMRC”) United Kingdom income tax audit for various U.K. BlackRock subsidiaries is in progress for tax years 2009 and forward. While the impact on the consolidated financial statements is undetermined, it is not expected to be material.

At December 31, 2015, it is reasonably possible the total amounts of unrecognized tax benefits will change within the next twelve months due to completion of tax authorities’ exams or the expiration of statues of limitations. Management estimates that the existing liability for uncertain tax positions could decrease by approximately $13 million to $33 million within the next twelve months.