Income and Other Taxes

Income before income taxes (pre-tax income) from continuing operations was as follows:



	Year Ended December 31,
	2017		2016		2015
Domestic income	$	399	$	415	$	613
Foreign income	171		153		311
Income Before Income Taxes	$	570	$	568	$	924

Provision for income taxes from continuing operations were as follows:



	Year Ended December 31,
	2017			2016			2015
Federal Income Taxes
Current	$	7		$	(15	)	$	(225	)
Deferred⁽¹⁾	411			(4		)	300
Foreign Income Taxes
Current	62			71			73
Deferred	(21		)	(13		)	7
State Income Taxes
Current	13			15			(38		)
Deferred	9			8			76
Total Provision	$	481		$	62		$	193

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(1)	Includes $400 estimated impact of the Tax Cuts and Jobs Act (the "Tax Act").

A reconciliation of the U.S. federal statutory income tax rate to the consolidated effective income tax rate was as follows:



	Year Ended December 31,
	2017		2016		2015
U.S. federal statutory income tax rate	35.0	%	35.0	%	35.0	%
Nondeductible expenses	1.2	%	2.9	%	1.1	%
Effect of tax law changes	70.2	%	1.2	%	(1.0	)%
Change in valuation allowance for deferred tax assets	1.0	%	(1.4	)%	(1.6	)%
State taxes, net of federal benefit	2.3	%	3.0	%	2.2	%
Audit and other tax return adjustments	(8.0	)%	(4.1	)%	1.3	%
Tax-exempt income, credits and incentives	(2.9	)%	(4.0	)%	(1.8	)%
Foreign rate differential adjusted for U.S. taxation of foreign profits⁽¹⁾	(15.2	)%	(22.6	)%	(15.3	)%
Other	0.9	%	0.9	%	1.0	%
Effective Income Tax Rate	84.5	%	10.9	%	20.9	%

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(1)	The “U.S. taxation of foreign profits” represents the U.S. tax, net of foreign tax credits, associated with actual and deemed repatriations of earnings from our non-U.S. subsidiaries.

On a consolidated basis, including discontinued operations, we paid a total of $84, $130 and $138 in income taxes to federal, foreign and state jurisdictions during the three years ended December 31, 2017, respectively.

Total income tax expense (benefit) was allocated as follows:



	Year Ended December 31,
	2017			2016			2015
Pre-tax income	$	481		$	62		$	193
Discontinued operations⁽¹⁾	(12		)	(250		)	(134		)
Common shareholders' equity:
Changes in defined benefit plans	63			15			59
Stock option and incentive plans, net	—			—			(18		)
Cash flow hedges	5			(8		)	15
Translation adjustments	1			2			—
Total Income Tax Expense (Benefit)	$	538		$	(179	)	$	115

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(1)	Refer to Note 5 - Divestitures for additional information regarding discontinued operations.

Unrecognized Tax Benefits and Audit Resolutions

We recognize tax liabilities when, despite our belief that our tax return positions are supportable, we believe that certain positions may not be fully sustained upon review by tax authorities. Each period, we assess uncertain tax positions for recognition, measurement and effective settlement. Benefits from uncertain tax positions are measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon settlement - the more-likely-than-not recognition threshold. Where we have determined that our tax return filing position does not satisfy the more likely than not recognition threshold, we have recorded no tax benefits.

We are also subject to ongoing tax examinations in numerous jurisdictions due to the extensive geographical scope of our operations. Our ongoing assessments of the more-likely-than-not outcomes of the examinations and related tax positions require judgment and can increase or decrease our effective tax rate, as well as impact our operating results. The specific timing of when the resolution of each tax position will be reached is uncertain. As of December 31, 2017, we do not believe that there are any positions for which it is reasonably possible that the total amount of unrecognized tax benefits will significantly increase or decrease within the next 12 months.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:



	2017			2016			2015
Balance at January 1	$	165		$	222		$	207
Additions (Reductions) related to current year	1			(9		)	36
Additions related to prior years positions	10			—			—
Reductions related to prior years positions	(46		)	(31		)	(5		)
Settlements with taxing authorities⁽¹⁾	(5		)	—			(6		)
Reductions related to lapse of statute of limitations	(3		)	(2		)	(9		)
Currency	3			(2		)	(1		)
Tax Positions assumed in Conduent Separation	—			(13		)	—
Balance at December 31	$	125		$	165		$	222

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(1)	Majority of settlements did not result in the utilization of cash.

Included in the balances at December 31, 2017, 2016 and 2015 are $8, $5 and $9, respectively, of tax positions that are highly certain of realizability but for which there is uncertainty about the timing or that they may be reduced through an indirect benefit from other taxing jurisdictions. Because of the impact of deferred tax accounting, other than for the possible incurrence of interest and penalties, the disallowance of these positions would not affect the annual effective tax rate.

Within income tax expense, we recognize interest and penalties accrued on unrecognized tax benefits, as well as interest received from favorable settlements. We had $5, $10 and $2 accrued for the payment of interest and penalties associated with unrecognized tax benefits at December 31, 2017, 2016 and 2015, respectively.

In the U.S., we are no longer subject to U.S. federal income tax examinations for years before 2012. With respect to our major foreign jurisdictions, we are no longer subject to tax examinations by tax authorities for years before 2007.

Tax Cuts and Jobs Act (the "Tax Act")

On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was enacted in the U.S. The Tax Act significantly revises the U.S. corporate income tax system by, among other things, lowering the U.S. statutory corporate income tax rate from 35% to 21% and implementing a territorial tax system that includes a transition tax on deemed repatriated earnings of foreign subsidiaries.

During the fourth quarter 2017, we recorded an estimated non-cash provisional charge of $400 reflecting the impact associated with the provisions of the Tax Act based on currently available information.

Foreign tax effects: The deemed repatriation tax is based on total post-1986 earnings and profits (E&P) that have previously been deferred from U.S. income taxes. We recorded a provisional charge for our deemed repatriation tax of $165. We expect to utilize our existing foreign tax credit carryforwards to settle the estimated deemed repatriation tax. We have not yet completed our calculation of the total post-1986 foreign E&P for our foreign subsidiaries. Further, the deemed repatriation tax is based in part on the amount of those earnings held in cash and other specified assets. This amount may change when we fully develop and finalize the calculations of post-1986 foreign E&P previously deferred from U.S. income taxes and the amounts held in cash or other specified assets. In addition, clarifications in the law and further legislative guidance that may be issued could impact this calculation. Our estimated charge for the Tax Act also included a provisional charge of approximately $100 for other tax liabilities and adjustments resulting from our provisional estimate of the actual and anticipated distributions of our net accumulated foreign E&P. As a consequence of the Tax Act, we now provisionally no longer consider our foreign earnings indefinitely reinvested. This estimate is subject to refinement based on a final determination of the amount of our foreign earnings as well as the jurisdictions that will subject these earnings to tax.

Deferred tax assets and liabilities: We remeasured certain deferred tax assets and liabilities based on the new statutory income tax rate of 25%, inclusive of estimated state taxes. We recorded a provisional amount related to the remeasurement of our deferred tax balance of $135. However, we are still analyzing certain aspects of the Tax Act, evaluating the state tax implications, refining our calculations and assessing our position on various available elections, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts.

In summary, our estimated provisional charge incorporates assumptions made based on our current interpretation of the Tax Act as well as currently available information and may change, possibly materially, as we complete our analysis and receive additional clarification and implementation guidance. Changes in interpretations and assumptions, as well as actions we may take as a result of the Tax Act may also impact this estimated charge. In addition, certain tax positions will likely get finalized when we file our 2017 U.S. tax return, which will enable us to conclude whether any further adjustments are required to our net deferred tax balances in the U.S. as well as to the liability associated with the deemed repatriation tax. Any adjustments to these provisional amounts will be reported as a component of Income tax expense in the reporting period in which any such adjustments are determined. Further, the Company is in the process of analyzing the effects of new taxes due on certain foreign income, such as GILTI (global intangible low-taxed income), BEAT (base-erosion anti-abuse tax), FDII (foreign-derived intangible income) and limitations on interest expense deductions (if certain conditions apply) that are effective starting in 2018, and other provisions of the Tax Legislation. The Company has elected to account for GILTI as period costs if and when incurred pursuant to the exposure draft issued by the FASB in January 2018.

Deferred Income Taxes

As of December 31, 2016, we did not provide any deferred taxes on undistributed earnings of our foreign subsidiaries and other foreign investments carried at equity since such undistributed earnings were determined to be indefinitely reinvested and we did not have any plans to initiate an action that would precipitate a deferred tax impact. During the fourth quarter of 2017, we changed our intent with regard to the net accumulated earnings and profits of our foreign subsidiaries and other foreign investments carried at equity. The change was prompted by the Tax Act enacted in December 2017 as discussed above. In connection with this change, we provided an estimate for the transition tax on the deemed repatriated foreign earnings as well as an estimate for state and foreign taxes on future distributions of net accumulated foreign earnings and profits.

The tax effects of temporary differences that give rise to significant portions of the deferred taxes were as follows:



	December 31,
	2017			2016
Deferred Tax Assets
Research and development	$	143		$	289
Post-retirement medical benefits	183			276
Net operating losses	432			407
Operating reserves, accruals and deferrals	128			190
Tax credit carryforwards	646			751
Deferred and share-based compensation	43			76
Pension	308			660
Depreciation	106			8
Other	62			73
Subtotal	2,051			2,730
Valuation allowance	(435		)	(416		)
Total	$	1,616		$	2,314

Deferred Tax Liabilities
Unearned income and installment sales	$	344		$	633
Intangibles and goodwill	134			200
Unremitted earnings of foreign subsidiaries	140			9
Other	14			39
Total	$	632		$	881

Total Deferred Taxes, Net	$	984		$	1,433

The deferred tax assets for the respective periods were assessed for recoverability and, where applicable, a valuation allowance was recorded to reduce the total deferred tax asset to an amount that will, more-likely-than-not, be realized in the future. The net change in the total valuation allowance for the years ended December 31, 2017 and 2016 was an increase of $19 and $33, respectively. The valuation allowance relates primarily to certain net operating loss carryforwards, tax credit carryforwards and deductible temporary differences for which we have concluded it is more-likely-than-not that these items will not be realized in the ordinary course of operations.

Although realization is not assured, we have concluded that it is more-likely-than-not that the deferred tax assets, for which a valuation allowance was determined to be unnecessary, will be realized in the ordinary course of operations based on the available positive and negative evidence, including scheduling of deferred tax liabilities and projected income from operating activities. The amount of the net deferred tax assets considered realizable, however, could be reduced in the near term if actual future income or income tax rates are lower than estimated, or if there are differences in the timing or amount of future reversals of existing taxable or deductible temporary differences.

At December 31, 2017, we had tax credit carryforwards of $646 available to offset future income taxes, of which $23 are available to carryforward indefinitely while the remaining $623 will expire 2018 through 2038 if not utilized. We also had net operating loss carryforwards for income tax purposes of $0.8 billion that will expire 2018 through 2038, if not utilized, and $1.8 billion available to offset future taxable income indefinitely.