Income Taxes

12 Months Ended

Dec. 31, 2019

Note 12 - Income Taxes

The U.S. and foreign components of income (loss) before provision for (benefit from) income taxes for the years ended December 31, 2017, 2018 and 2019 are as follows (in millions):



	Year Ended December 31,
	2017			2018			2019
U.S.	$	(3,201	)	$	(2,726	)	$	(4,926	)
Foreign	(1,374		)	4,038			(3,507		)
Income (loss) before income taxes and loss from equity method investment	$	(4,575	)	$	1,312		$	(8,433	)

The components of the provision for (benefit from) income taxes for the years ended December 31, 2017, 2018 and 2019 are as follows (in millions):



	Year Ended December 31,
	2017			2018			2019
Current
Federal	$	—		$	13		$	1
State	—			15			—
Foreign	220			220			132
Total current tax expense	$	220		$	248		$	133
Deferred
Federal	(728		)	(159		)	(77		)
State	(5		)	7			8
Foreign	(29		)	187			(19		)
Total deferred tax expense (benefit)	(762		)	35			(88		)
Total provision for (benefit from) income taxes	$	(542	)	$	283		$	45

The following is a reconciliation of the statutory federal income tax rate to the Company’s effective tax rate for the years ended December 31, 2017, 2018 and 2019:



	Year Ended December 31,
	2017		2018		2019
Federal statutory income tax rate	35.0	%	21.0	%	21.0	%
State income tax expense	0.2		1.7		(0.1	)
Foreign rate differential	(14.4	)	29.6		(3.8	)
Foreign rate differential - gain on divestiture ⁽¹⁾	—		(83.1	)	—
Non-deductible expenses	(1.2	)	0.8		(1.3	)
Stock-based compensation	(0.2	)	(2.6	)	1.2
Interest on convertible notes	(2.8	)	15.1		(0.3	)
Gain on convertible notes	—		—		1.1
Federal research and development credits	2.0		(7.2	)	3.1
Deferred tax on foreign investments ⁽²⁾	—		51.4		—
Entity restructuring ⁽³⁾	—		(20.0	)	92.3
Change in unrecognized tax benefits	(0.9	)	9.9		(17.0	)
Valuation allowance	(21.8	)	4.9		(97.3	)
Impact of the Tax Act	15.8		—		—
Global Intangible Low-taxed Income	—		—		(1.6	)
Other interest	—		—		1.8
Other, net	0.1		0.1		0.4
Effective income tax rate	11.8	%	21.6	%	(0.5	)%

⁽¹⁾ The 2018 rate impact for “Foreign rate differential – gain on divestiture” was primarily driven by the gains on divestitures reported by subsidiaries in jurisdictions with statutory tax rates lower than the U.S. federal tax rate.

⁽²⁾The 2018 rate impact for “Deferred tax on foreign investments” was related to the following: a) deferred U.S. tax impact of income inclusion related to the gain on the eventual disposition of the shares underlying the Company’s investment in Didi and Grab, and b) deferred China tax impact on the eventual disposition of the shares underlying the Company’s investment in Didi.

⁽³⁾ The 2018 rate impact for “Entity restructuring” was related to a transaction that resulted in the repatriation of assets from a foreign subsidiary to a domestic subsidiary. As a result of the repatriation, the deferred tax assets were recalculated at the U.S. statutory tax rate, resulting in a total deferred tax benefit of $275 million. The rate differential between the foreign subsidiary and the United States resulted in this deferred tax benefit.

The 2019 rate impact for “Entity restructuring” is related to a series of transactions resulting in changes to the Company’s international legal structure, including a redomiciliation of a subsidiary to the Netherlands and a transfer of certain intellectual property rights among wholly owned subsidiaries, primarily to align its evolving operations. The redomiciliation resulted in a step-up in the tax basis of intellectual property rights and a correlated increase in foreign deferred tax assets in an amount of $6.4 billion, net of a reserve for uncertain tax positions of $1.4 billion (refer to the 2019 rate impact for “Change in unrecognized tax benefits”). Based on available objective evidence, management believes it is not more-likely-than-not that these additional foreign deferred tax assets will be realizable as of December 31, 2019 and, therefore, are offset by a full valuation allowance (refer to the 2019 rate impact for “Valuation allowance”) to the extent not offset by reserves for uncertain tax positions. The corresponding deferred tax asset and valuation allowance balance are included in the “Fixed assets and intangible assets” and “Valuation allowance” lines, respectively, in the table below.

The components of deferred tax assets and liabilities as of December 31, 2018 and 2019 are as follows (in millions):



	As of December 31,
	2018			2019
Deferred tax assets
Net operating loss carryforwards	$	1,147		$	2,789
Research and development credits	285			587
Stock-based compensation	24			241
Accruals and reserves	226			197
Accrued legal	102			65
Fixed assets and intangible assets	435			6,361
Investment in partnership	—			331
Lease liability	—			438
Other	22			221
Total deferred tax assets	2,241			11,230
Less: Valuation allowance	(1,294		)	(9,855		)
Total deferred tax assets, net of valuation allowance	947			1,375
Deferred tax liabilities
Indefinite lived deferred tax liability ⁽¹⁾	1,986			1,984
ROU assets	—			366
Other	3			2
Total deferred tax liabilities	1,989			2,352
Net deferred tax liabilities	$	1,042		$	977

⁽¹⁾ The $2.0 billion indefinite-lived deferred tax liability represents the deferred U.S. and foreign income tax expense, which will be incurred upon the eventual disposition of the shares underlying the Company’s investments in Didi and Grab. The current year tax expense and any subsequent changes in the recognition or measurement of this deferred tax liability will be recorded in continuing operations.

Based on available evidence, management believes it is not more-likely-than-not that the net U.S., India, and Netherlands deferred tax assets will be fully realizable. In these jurisdictions, the Company has recorded a valuation allowance against net deferred tax assets. The Company regularly reviews the deferred tax assets for recoverability based on historical taxable income, projected future taxable income, the expected timing of the reversals of existing taxable temporary differences and tax planning strategies by jurisdiction. The Company’s judgment regarding future profitability may change due to many factors, including future market conditions and the ability to successfully execute the business plans and/or tax planning strategies. Should there be a change in the ability to recover deferred tax assets, the Company’s income tax provision would increase or decrease in the period in which the assessment is changed. The Company had a valuation allowance against net deferred tax assets of $1.3 billion and $9.9 billion as of December 31, 2018 and 2019, respectively. For the year ended December 31, 2019, the increase in valuation allowance was primarily attributable to a step-up in the tax basis of intellectual property rights, an increase in U.S. federal, state and Netherlands deferred tax assets resulting from the loss from operations, and tax credits generated during the year.

The indefinite carryforward period for net operating losses ("NOLs") means that indefinite-lived deferred tax liabilities can be considered as support for realization of deferred tax assets including post December 31, 2017 net operating loss carryovers, which can affect the need to record or maintain a valuation allowance for deferred tax assets. At December 31, 2018 and 2019, the Company realized approximately $920 million and $979 million, respectively, of its U.S. federal and state deferred tax assets as a result of its indefinite-lived deferred tax liabilities being used as a source of income.

As of December 31, 2019, the Company had U.S. federal NOL carryforwards of $2.9 billion that begin to expire in 2031 and $5.9 billion that have an unlimited carryover period. As of December 31, 2019, the Company had U.S. state NOL carryforwards of $7.3 billion that begin to expire in 2020 and $1.0 billion that have an unlimited carryover period. As of December 31, 2019, the Company had foreign NOL carryforwards of $2.6 billion that begin to expire in 2024 and $77 million that have an unlimited carryover period.

The Company also had U.S. federal research tax credit carryforwards of $490 million that begin to expire in 2031. The Company had state research tax credit carryforwards of $10 million that begin to expire in 2033 and $262 million that have an unlimited carryover period.

In the event the Company experiences an ownership change within the meaning of Section 382 of the Internal Revenue Code (“IRC”), the Company’s ability to utilize net operating losses, tax credits and other tax attributes may be limited. The most recent analysis of the

Company’s historical ownership changes was completed through December 31, 2019. Based on the analysis, the Company does not anticipate a current limitation on the tax attributes.

The following table reflects changes in gross unrecognized tax benefits (in millions):



	Year Ended December 31,
	2017			2018			2019
Unrecognized tax benefits at beginning of year	$	179		$	221		$	394
Gross increases - current year tax positions	52			57			1,566
Gross increases - prior year tax positions	44			128			16
Gross decreases - prior year tax positions	(54		)	(12		)	(36		)
Gross decreases - settlements with tax authorities	—			—			(143		)
Unrecognized tax benefits at end of year	$	221		$	394		$	1,797

As of December 31, 2019, approximately $68 million of unrecognized tax benefits, if recognized, would impact the effective tax rate. The remaining $1.7 billion of the unrecognized tax benefits would not impact the effective tax rate due to the valuation allowance against certain deferred tax assets.

During 2019, the Company settled the IRS audit for the tax years 2013 and 2014. The settlement resulted in a reduction of unrecognized tax benefits of $123 million, which did not affect the effective tax rate, as these unrecognized tax benefits decreased deferred tax assets that were subject to a full valuation allowance.

The Company recognizes accrued interest and penalties related to unrecognized tax benefits within the provision for income taxes in the consolidated statements of operations. The amount of interest and penalties accrued as of December 31, 2018 and 2019 was $17 million and $10 million, respectively.

Although the timing of the resolution and/or closure of audits is highly uncertain, the Company does not expect any material changes to its unrecognized tax benefits within the next 12 months. Given the number of years remaining subject to examination and the number of matters being examined, the Company is unable to estimate the full range of possible adjustments to the balance of gross unrecognized tax benefits.

The Company is subject to taxation in the U.S. and various state and foreign jurisdictions. The Company is currently under various state and other foreign income tax examinations. The Company believes that adequate amounts have been reserved in these jurisdictions. To the extent the Company has tax attribute carryforwards, the tax years in which the attribute was generated may still be adjusted upon examination by the federal, state or foreign tax authorities to the extent utilized in a future period.

As of December 31, 2019, the open tax years for the Company’s major tax jurisdictions are as follows:



Jurisdiction		Tax Years
U.S. Federal		2011 - 2019
U.S. States		2010 - 2019
Brazil		2014 - 2019
Netherlands		2013 - 2019
United Kingdom		2014 - 2019
Australia		2015 - 2019
India		2012 - 2019

In 2019, the Company reevaluated its indefinite reinvestment assertion with regards to accumulated foreign earnings of certain foreign subsidiaries and concluded that it intends to indefinitely reinvest approximately $250 million. The amount of potential unrecognized deferred tax liability with respect to such unremitted earnings is not material. Due to the one-time transition tax and the imposition of the GILTI provisions, all previously unremitted earnings will no longer be subject to U.S. federal income tax; however, there could be U.S. state and/or foreign withholding taxes upon distribution of such unremitted earnings.