Income and Other Taxes

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



	Year Ended December 31,
	2018		2017		2016
Domestic income	$	380	$	399	$	415
Foreign income	218		171		153
Income before Income Taxes and Equity Income	$	598	$	570	$	568

Provisions for income taxes from continuing operations were as follows:



	Year Ended December 31,
	2018			2017			2016
Federal Income Taxes
Current	$	45		$	7		$	(15	)
Deferred	83			411			(4		)
Foreign Income Taxes
Current	46			62			71
Deferred	57			(21		)	(13		)
State Income Taxes
Current	31			13			15
Deferred	(5		)	9			8
Total Provision	$	257		$	481		$	62

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,
	2018		2017		2016
U.S. federal statutory income tax rate	21.0	%	35.0	%	35.0	%
Nondeductible expenses	3.4	%	1.2	%	2.9	%
Effect of tax law changes	13.3	%	70.2	%	1.2	%
Change in valuation allowance for deferred tax assets	0.5	%	1.0	%	(1.4	)%
State taxes, net of federal benefit	2.4	%	2.3	%	3.0	%
Audit and other tax return adjustments	(2.0	)%	(8.0	)%	(4.1	)%
Tax-exempt income, credits and incentives	(2.0	)%	(2.9	)%	(4.0	)%
Foreign rate differential adjusted for U.S. taxation of foreign profits⁽¹⁾	4.4	%	(15.2	)%	(22.6	)%
Other	2.0	%	0.8	%	0.9	%
Effective Income Tax Rate	43.0	%	84.4	%	10.9	%

_____________


(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 $80, $84 and $130 in income taxes to federal, foreign and state jurisdictions during the three years ended December 31, 2018, respectively.

Total income tax expense (benefit) was allocated to the following items:



	Year Ended December 31,
	2018			2017			2016
Pre-tax income	$	257		$	481		$	62
Discontinued operations⁽¹⁾	—			(12		)	(250		)
Common shareholders' equity:
Changes in defined benefit plans	131			63			15
Cash flow hedges	5			5			(8		)
Translation adjustments	(9		)	1			2
Retained Earnings⁽²⁾	36			—			—
Total Income Tax Expense (Benefit)	$	420		$	538		$	(179	)

_____________


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


(2)	Refer to Note 2 - Revenue for additional information regarding our adoption of ASU 2014-09.

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, 2018, 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:



	2018			2017			2016
Balance at January 1	$	125		$	165		$	222
Additions (Reductions) related to current year	2			1			(9		)
Additions related to prior years positions	3			10			—
Reductions related to prior years positions	(13		)	(46		)	(31		)
Settlements with taxing authorities⁽¹⁾	(6		)	(5		)	—
Reductions related to lapse of statute of limitations	(3		)	(3		)	(2		)
Currency	—			3			(2		)
Tax Positions assumed in Conduent Separation	—			—			(13		)
Balance at December 31	$	108		$	125		$	165

_____________


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

Included in the balances at December 31, 2018, 2017 and 2016 are $8, $8 and $5, 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 $2, $5 and $10 accrued for the payment of interest and penalties associated with unrecognized tax benefits at December 31, 2018, 2017 and 2016, 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 2011.

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

On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was enacted. 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 one-time transition tax on deemed repatriated earnings of foreign subsidiaries.

During 2017, we recorded an estimated non-cash provisional charge of $400 reflecting our provisional estimated impact associated with the provisions of the Tax Act based on currently available information. Our estimated charge incorporated assumptions made based on our interpretation of the Tax Act as well as information available at that time and was subject to change, possibly materially, as we completed our analysis and received additional clarification and implementation guidance. During 2018, we adjusted our provisional estimate by an additional charge of $89 reflecting certain positions taken on our filed 2017 income tax return as well as consideration of additional guidance from the U.S. Treasury and Internal Revenue Service (IRS). The adjustments include changes to the determination of the one-time deemed repatriation tax as well as additional remeasurement of our U.S. deferred tax assets and liabilities to the lower enacted statutory tax rate. The total charge of $489 reflects our current estimate of the impact of the Tax Act and may change in the future based on new guidance being issued or changes in our expected filing positions. The $489 charge included the following components:

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 an estimated charge for our deemed repatriation tax of $195. We expect to utilize our existing foreign tax credit carryforwards to settle the estimated deemed repatriation tax. Our estimated charge for the Tax Act also included a charge of $99 for other tax liabilities and adjustments resulting from our estimate of the actual and anticipated distributions of our net accumulated foreign E&P. As a consequence of the Tax Act, we now no longer consider our post 1986 E&P indefinitely reinvested. On January 15, 2019, the IRS finalized regulations that govern the repatriation tax. We are in the process of analyzing the impacts of these regulations on our financial statements.

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 an estimated amount related to the remeasurement of our deferred tax balance of approximately $195.

In addition, effective January 1, 2018, we became subject to various provisions of the Tax Act including computations related to Global Intangible Low Taxed Income ("GILTI"), Foreign Derived Intangible Income ("FDII"), Base Erosion and Anti-Abuse Tax ("BEAT"), and IRC Section 163(j) interest limitation (Interest Limitation). Accordingly, our 2018 effective tax rate includes the impacts for these items, which was approximately $15 on a full year basis. The estimates for these additional provisions of the Tax Act were made based on our current interpretation of the Tax Act as well as currently available information and may change as we receive additional clarification and implementation guidance.

Deferred Income Taxes

We completed our analysis of the impacts of U.S. tax reform in the fourth quarter of 2018. Accordingly, we have recognized the tax consequences of our estimated deemed repatriated foreign earnings based on post-1986 E&P and management has no specific plans to indefinitely reinvest these foreign earnings as of the balance sheet date. However, we have not provided deferred taxes on our undistributed pre-1987 E&P of approximately $1.5 billion as such undistributed earnings have been determined to be indefinitely reinvested and we currently do not plan to initiate any action that would precipitate a deferred tax impact. Additionally, we have also not provided deferred taxes on the outside basis differences in our investments in foreign subsidiaries that are unrelated to undistributed earnings. These basis differences are also indefinitely reinvested. A determination of the unrecognized deferred taxes related to these components is not practicable.

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



	December 31,
	2018			2017
Deferred Tax Assets
Research and development	$	252		$	143
Post-retirement medical benefits	99			183
Net operating losses	389			432
Operating reserves, accruals and deferrals	138			128
Tax credit carryforwards	254			646
Deferred and share-based compensation	32			43
Pension	266			308
Depreciation	90			106
Other	46			62
Subtotal	1,566			2,051
Valuation allowance	(397		)	(435		)
Total	$	1,169		$	1,616

Deferred Tax Liabilities
Unearned income and installment sales	$	291		$	344
Intangibles and goodwill	129			134
Unremitted earnings of foreign subsidiaries	59			140
Other	1			14
Total	$	480		$	632

Total Deferred Taxes, Net	$	689		$	984

Reconciliation to the Consolidated Balance Sheets
Deferred tax assets	$	740		$	1,026
Deferred tax liabilities⁽¹⁾	(51		)	(42		)
Total Deferred Taxes, Net	$	689		$	984

_____________


(1)	Represents the deferred tax liabilities recorded in Other long-term liabilities - refer to Note 13 - Supplementary Financial Information.

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, 2018, 2017 and 2016 was a decrease of $38, an increase of $19 and an increase of $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, 2018, we had tax credit carryforwards of $254 available to offset future income taxes, of which $1 are available to carryforward indefinitely while the remaining $253 will expire 2019 through 2039 if not utilized. We also had net operating loss carryforwards for income tax purposes of $517 that will expire 2019 through 2039, if not utilized, and $1.7 billion available to offset future taxable income indefinitely.