1.Define the GAAP effective tax rate.

2.What is Alphabet's GAAP effective tax rate in 206, 2017, 2018?

3.What is the major reason for why Alphabet's GAAP effective tax rate is above the top US statutory tax rate of 35% in 2017? Briefly explain this line item.

4.What is Alphabet's largest temporary difference in 2018?Did this increase or decrease deferred tax expense (ignoring the valuation allowance)?

Alphabet Inc. CONSOLIDATED STATEMENTS OF INCOME (In millions, except per share amounts) Year Ended December 31, 2016 2017 2018 Revenues S 90,272 $ 110,855 $ 136,819 Costs and expenses: Cost of revenues 35,138 45,583 59,549 Research and development 13,948 16,625 21,419 Sales and marketing 10,485 12,893 16,333 General and administrative 6,985 6,872 8,126 European Commission fines 0 2,736 5,071 Total costs and expenses 66,556 84,709 110,498 Income from operations 23,716 26,146 26,321 Other income (expense), net 434 1,047 8,592 Income before income taxes 24,150 27,193 34,913 Provision for income taxes 4.672 14,531 4,177 Net income 19,478 $ 12,662 $ 30,736 Basic net income per share of Class A and B common stock and Class C capital stock S 28.32 $ 18.27 $ 44.22 Diluted net income per share of Class A and B common stock and Class C capital stock S 27.85 $ 18.00 $ 43.70 See accompanying notes. 1Alphabet Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS (In millions) Year Ended December 31, 2016 2017 2018 Operating activities Net income S 19,478 $ 12,662 $ 30,736 Adjustments: Depreciation and impairment of property and equipment 5.267 6,103 8,164 Amortization and impairment of intangible assets 877 812 871 Stock-based compensation expense 6,703 7,679 9,353 Deferred income taxes (38) 258 778 (Gain) loss on debt and equity securities, net 73 37 (6,650) Other 376 294 (189) Changes in assets and liabilities, net of effects of acquisitions: Accounts receivable (2,578) (3,768) (2,169) Income taxes, net 3,125 8,211 (2.251 Other assets 312 (2,164) (1,207) Accounts payable 110 731 1,067 Accrued expenses and other liabilities 1,515 4,891 8,614 Accrued revenue share 593 955 483 Deferred revenue 223 390 371 Net cash provided by operating activities 36.036 37,091 47,971 Investing activities Purchases of property and equipment (10.212) (13,184) (25,139) Proceeds from disposals of property and equipment 240 99 98 Purchases of marketable securities (84,509) (92,195) (50,158) Maturities and sales of marketable securities 66.895 73.959 48.507 Purchases of non-marketable investments (1,109) (1,745 (2,073) Maturities and sales of non-marketable investments 494 533 1,752 Cash collateral related to securities lending (2.428) 0 Investments in reverse repurchase agreements 450 Acquisitions, net of cash acquired, and purchases of intangible assets (986) 287 (1,491) Proceeds from collection of notes receivable 0 1,419 0 Net cash used in investing activities (31,165) (31,401 (28,504) Financing activities Net payments related to stock-based award activities (3,304) (4,166) (4,993) Repurchases of capital stock (3,693) (4,846) (9,075) Proceeds from issuance of debt, net of costs 8,729 4,291 6,766 Repayments of debt (10,064) (4,377 6,827 Proceeds from sale of subsidiary shares 0 800 950 Net cash used in financing activities 8,332) 8,298) (13,179) Effect of exchange rate changes on cash and cash equivalents (170 405 (302) Net increase (decrease) in cash and cash equivalents (3,631) (2,203 5,986 Cash and cash equivalents at beginning of period 16,549 12,918 10,715 Cash and cash equivalents at end of period 12 918 5 10 715 $ 16,701 Supplemental disclosures of cash flow information Cash paid for taxes, net of refunds 1.643 $ 6,191 $ 5,671 Cash paid for interest, net of amounts capitalized 84 5 84 5 69 See accompanying notes. INAlphabet Inc. CONSOLIDATED BALANCE SHEETS In millions, except share amounts which are reflected in thousands, and par value per share amounts) member 31, 2017 December 31, 2018 Assets Current assets: Cash and cash equivalents 10,715 $ 16,701 Marketable securities 91.156 92 439 Total cash, cash equivalents, and marketable securities 101,871 109,140 Accounts receivable. net of allowance of $674 and $729 18,336 20,838 Income taxes receivable, net 369 355 Inventory 749 1,107 Other current assets 2.983 4,236 Total current assets 124,308 135,676 Non-marketable investments 7.813 13.859 Deferred income taxes 680 737 Property and equipment, net 42,383 59.719 Intangible assets, net 2,692 2,220 Goodwill 16,747 17.868 Other non-current assets 2.672 2.693 Total assets 197 295 5 232 792 Liabilities and Stockholders' Equity Current liabilities Accounts payable S 3,137 $ 4,378 Accrued compensation and benefits 4,581 6.839 Accrued expenses and other current liabilities 10,177 16.958 Accrued revenue share 3.975 4,592 Deferred revenue 1.432 1,784 Income taxes payable, net 881 Total current liabilities 24,183 14,620 Long-term debt 3,969 4,012 Deferred revenue, non-current 340 396 Income taxes payable, non-current 12.812 1,327 Deferred income taxes 430 1,264 Other long-term liabilities 3.059 3,545 Total liabilities 44,793 55,164 Commitments and Contingencies (Note 9) Stockholders' equity. Convertible preferred stock, $0.001 par value per share, 100,000 shares authorized; no shares issued and outstanding Class A and Class B common stock, and Class C capital stock and additional paid-in capital, $0.001 par value per share: 15,000,000 shares authorized (Class A 9,000,000, Class B 3.000,000, Class C 3,000,000); 694,783 (Class A 298 470, Class B 46,972, Class C 349,341) and 695,556 (Class A 299,242, Class B 46,636, Class C 349,678) shares issued and outstanding 40,247 45 049 Accumulated other comprehensive loss (992) (2,306) Retained earnings 113.247 134.885 Total stockholders equity 152.502 177.628 Total liabilities and stockholders' equity 197.295 232.792 See accompanying notesNote 13. Income Taxes Income from continuing operations before income taxes included income from domestic operations of $12.0 billion, $10.7 billion, and $15.8 billion for the years ended December 31, 2016, 2017, and 2018, respectively, and income from foreign operations of $12.1 bilion, $16.5 billion, and $19.1 billion for the years ended December 31, 2016, 2017, and 2018, respectively The provision for income taxes consists of the following (in millions): Year Ended December 31 2016 2017 2018 Current: Federal and state S 3.826 5 12,608 5 2,153 Foreign 966 1,746 1,251 Total 4.792 14.354 3.404 Deferred: Federal and state (70) 220 907 Foreign (50) (43) (134) Total (120) 177 773 Provision for income taxes 4.672 $ 14,531 5 4,177 The Tax Act enacted on December 22, 2017 introduced significant changes to U.S. income tax law. Effective 2018, the Tax Act reduced the U.S. statutory tax rate from 35% to 21% and created new taxes on certain foreign- sourced eamings and certain related-party payments. 4Due to the timing of the enactment and the complexity involved in applying the provisions of the Tax Act, we made reasonable estimates of the effects and recorded provisional amounts in our consolidated financial statements as of December 31, 2017. As we collected and prepared necessary data, and interpreted the additional guidance issued by the U.S. Treasury Department, the IRS, and other standard-setting bodies, we made adjustments, over the course of the year, to the provisional amounts including refinements to deferred taxes. The accounting for the tax effects of the Tax Act has been completed as of December 31, 2018. One-time transition tax The Tax Act required us to pay U.S. income taxes on accumulated foreign subsidiary earnings not previously subject to U.S. income tax at a rate of 15.5% to the extent of foreign cash and certain other net current assets and 8% on the remaining earnings. We recorded a provisional amount for our one-time transitional tax liability and income tax expense of $10.2 billion as of December 31, 2017. Deferred tax effects Due to the change in the statutory tax rate from the Tax Act, we remeasured our deferred taxes as of December 31, 2017 to reflect the reduced rate that will apply in future periods when these deferred taxes are settled or realized. We recognized a deferred tax benefit of 5376 million to reflect the reduced U.S. tax rate and other effects of the Tax Act as of December 31, 2017. The reconciliation of federal statutory income tax rate to our effective income tax rate is as follows: Year Ended December 31, 2016 2017 2018 U.S. federal statutory tax rate 35.0% 35.0% 21.0% Foreign income taxed at different rates (11.0) (14.2) (4.9) Effect of the Tax Act One-time transition tax 0.0 37.6 (0.1) Deferred tax effects (1.4) (1.2) Federal research credit (2.0) (1.8) (2.4) Stock-based compensation expense (3.4) (4.5) (2.2) European Commission fine 0.0 3.5 3.1 Deferred tax asset valuation allowance 0.1 09 (2.0) Other adjustments 06 (1.7 0.7 Effective tax rate 19.3% 53.49% 12.0% Our effective tax rate for each of the years presented was affected by earnings realized in foreign jurisdictions with statutory tax rates lower than the federal statutory tax rate. Substantially all of the income from foreign operations was earned by an Irish subsidiary. Beginning in 2018, earnings realized in foreign jurisdictions are subject to U.S. tax in accordance with the Tax Act.Deferred Income Taxes Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. We recorded a provisional adjustment to our U.S. deferred income taxes as of December 31, 2017 to reflect the reduction in the U.S. statutory tax rate from 35% to 21% resulting from the Tax Act. Significant components of our deferred tax assets and liabilities are as follows (in millions) As of December 31, 2017 2018 Deferred tax assets: Stock-based compensation expense 251 $ 291 Accrued employee benefits 285 387 Accruals and reserves not currently deductible 717 1,062 Tax credits 1,187 1.979 Basis difference in investment in Arris 849 657 Prepaid cost sharing 498 597 Net operating losses 320 557 Othe 244 251 Total deferred tax assets 4,351 5,/81 Valuation allowance (2,531) (2,817) Total deferred tax assets net of valuation allowance 1,820 2,964 Deferred tax Mabilities. Property and equipment (551) [1,382) Identified intangibles (419) (229 Renewable energy investments (531) (500) Investment gains/losses (22) (1,143) Other (47) (237 Total deferred tax liabilities (1,570) (3,491) Net deferred tax assets (liabilities) 250 $ (527) As of December 31, 2018, our federal and state net operating loss carryforwards for income tax purposes were approximately $1.2 billion and $1.4 billion, respectively. If not utilized, the federal net operating loss carryforwards will begin to expire in 2021 and the state net operating loss carryforwards will begin to expire in 2019. It is more likely than not that certain federal net operating loss carryforwards and our state net operating loss carryforwards will not be realized; therefore, we have recorded a valuation allowance against them. The net operating loss carryforwards are subject to various annual limitations under the tax laws of the different jurisdictions. Our foreign net operating loss carryforwards for income tax purposes were $950 milion that will begin to expire in 2021. As of December 31, 2018, our California research and development credit carryforwards for income tax purposes were approximately $2.4 billion that can be carried over indefinitely. We believe the state tax credit is not likely to be realized. As of December 31, 2018, we aluation alowance with respect to California deferred tax assets, certain federal net operating losses, a ertain foreign net operating los at we believe are not likely to be realized. Due to gains from equity securities nce against the deferred tax asset for the book-to-tax basis difference in our inv zed in 2018, we rele received from the sale of the Motorola Home business to Arris in 2013. We continue to re ion allowance quarterly and if future evidence allows for a partial or full release of the valuation all . a tax be efit will be recorded accordingly. For further information on the unrealized lies recognized in other income (expenses), see Note 1. 6Uncertain Tax Positions The following table summarizes the activity related to our gross unrecognized tax benefits from January 1, 2016 to December 31, 2018 (in millions) 2016 2017 2018 Beginning gross unrecognized tax benefits 4, 167 5 5.393 $ 4,696 Increases related to prior year tax positions 899 685 321 Decreases related to prior year tax positions (157) (257) (623 Decreases related to settlement with tax authorities (196) (1,875) (191) Increases related to current year tax positions 680 750 449 Ending gross unrecognized tax benefits 5,393 S 4,696 $ 4,652 The total amount of gross unrecognized tax benefits was $5.4 bilion, $4.7 billion, and $4.7 billion as of December 31, 2016, 2017, and 2018, respectively, of which, $4.3 billion, $3.0 billion, and $2 9 billion, if recognized, would affect our effective tax rate, respectively. The decrease in gross unrecognized tax benefits in 2017 was primarily as a result of the resolution of a multi-year U.S. audit. As of December 31, 2017 and 2018, we had accrued $362 million and $490 million in interest and penalties in provision for income taxes, respectively. We file income tax returns in the U.S. federal jurisdiction and in many state and foreign jurisdictions, our two major tax jurisdictions are the U.S. federal and Ireland. We are subject to the continuous examination of our income tax returns by the IRS and other tax authorities. The IRS is currently examining our 2013 through 2015 tax returns. We have also received tax assessments in multiple foreign jurisdictions asserting transfer pricing adjustments or permanent establishment. We continue to defend any and all such claims as presented. Our 2016 and 2017 tax years remain subject to examination by the IRS for U.S. federal tax purposes, and our 2011 through 2017 tax years remain subject to examination by the appropriate governmental agencies for Irish tax purposes. There are other ongoing audits in various other jurisdictions that are not material to our financial statements. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. We continue to monitor the progress of ongoing discussions with tax authorities and the effect, if any. of the exper of the statute of limitations in various taxing jurisdictions. We believe that an adequate provision has be made for any adjustments that may result from tax examinations. However, the outcome of tax audits cannot be predicted with certainty. If any issues addressed in our tax audits are resolved in a manner not consistent with management's expectations, we could be required to adjust our provision for income taxes in the period such resolution occurs. Although the timing of resolution, settlement, and closure of audits is not certain, it is reasonably possible that certain U.S. federal and non-U.S. tax audits may be concluded within the next 12 months, which could significantly increase or decrease the balance of our gross unrecognized tax benefits. We estimate that our unrecognized tax benefits as of December 31, 2018 could possibly decrease by approximately $600 million in the next 12 months. Positions that may be resolved include various U.S. and non-U.S. matters. 7