Income Taxes

U.S. Tax Reform:

On December 22, 2017, U.S. Tax Reform legislation was enacted by the federal government. The legislation significantly changed U.S. tax laws by, among other things, lowering the federal corporate tax rate from 35.0% to 21.0%, effective January 1, 2018 and imposing a one-time toll charge on deemed repatriated earnings of foreign subsidiaries as of December 30, 2017. In addition, there were many new provisions, including changes to bonus depreciation, revised deductions for executive compensation and interest expense, a tax on global intangible low-taxed income (“GILTI”), the base erosion anti-abuse tax (“BEAT”), and a deduction for foreign-derived intangible income (“FDII”). While the corporate tax rate reduction was effective January 1, 2018, we accounted for this anticipated rate change in 2017, the period of enactment.

Staff Accounting Bulletin No. 118 issued by the SEC in December 2017 provided us with up to one year to finalize accounting for the impacts of U.S. Tax Reform and allowed for provisional estimates when actual amounts could not be determined. As of December 30, 2017, we had made estimates of our deferred income tax benefit related to the corporate rate change, the toll charge, certain components of the revaluation of deferred tax assets and liabilities, including depreciation and executive compensation, and a change in our indefinite reinvestment assertion. In connection with U.S. Tax Reform, we reassessed our international investment assertion and no longer consider the historic earnings of our foreign subsidiaries as of December 30, 2017 to be indefinitely reinvested. We made an estimate of local country withholding taxes that would be owed when our historic earnings are distributed. Additionally, we elected to account for the tax on GILTI as a period cost and thus did not adjust any of the deferred tax assets and liabilities of our foreign subsidiaries for U.S. Tax Reform.

Our initial accounting for U.S. Tax Reform as of December 30, 2017 resulted in a net tax benefit of approximately $7.0 billion, including an estimate of our deferred income tax benefit of approximately $7.5 billion related to the corporate rate change, which was partially offset by an estimate of $312 million for the toll charge and approximately $125 million for other tax expenses, including a change in our indefinite reinvestment assertion. Related to our indefinite reinvestment assertion change, we had recorded an estimate of deferred tax liabilities of $96 million on approximately $1.2 billion of historic earnings as of December 30, 2017.

In the first quarter of 2018, we recorded a measurement period adjustment to reduce income tax expense and reduce deferred tax liabilities each by approximately $20 million. We also recorded insignificant measurement period adjustments in the second, third, and fourth quarters of 2018.

As of December 29, 2018, we had finalized our accounting for U.S. Tax Reform. The final impact (the majority of which was recorded in 2017, the period of enactment) was a net tax benefit of approximately $7.1 billion, including a deferred tax benefit of approximately $7.5 billion related to the corporate rate change, partially offset by tax expense of $224 million related to the toll charge and $120 million for other tax expenses, including the deferred tax liability recorded for changing our indefinite reinvestment assertion. Related to our indefinite reinvestment assertion change, we had a deferred tax liability of $111 million on approximately $1.2 billion of historic earnings as of December 30, 2017.

Additionally, we recorded a deferred tax liability of $33 million as of December 29, 2018 to reflect our investment in an Indian subsidiary that is no longer considered to be indefinitely reinvested. At the same time, we reversed $28 million of deferred tax liabilities related to local withholding tax obligations. As of December 29, 2018, we have recorded a deferred tax liability of $78 million on $1.2 billion of historic earnings related to local withholding taxes that will be owed when this cash is distributed.

We consider the unremitted current year earnings of certain international subsidiaries that impose local country taxes on dividends to be indefinitely reinvested. For those undistributed earnings considered to be indefinitely reinvested, our intent is to reinvest these funds in our international operations, and our current plans do not demonstrate a need to repatriate the accumulated earnings to fund our U.S. cash requirements. The amount of unrecognized deferred tax liabilities for local country withholding taxes that would be owed related to our current year earnings of certain international subsidiaries is approximately $20 million.

Provision for/(Benefit from) Income Taxes:

Income/(loss) before income taxes and the provision for/(benefit from) income taxes, consisted of the following (in millions):



				As Restated
	December 29, 2018			December 30, 2017			December 31, 2016
Income/(loss) before income taxes:
United States	$	(10,305	)	$	3,811		$	3,271
International	(1,016		)	1,639			1,668
Total	$	(11,321	)	$	5,450		$	4,939

Provision for/(benefit from) income taxes:
Current:
U.S. federal	$	444		$	765		$	1,085
U.S. state and local	134			(47		)	82
International	322			295			238
	900			1,013			1,405
Deferred:
U.S. federal	(1,843		)	(6,590		)	(11		)
U.S. state and local	(121		)	97			(63		)
International	(3		)	(2		)	2
	(1,967		)	(6,495		)	(72		)
Total provision for/(benefit from) income taxes	$	(1,067	)	$	(5,482	)	$	1,333

Tax benefits related to the exercise of stock options and other equity instruments recorded directly to additional paid-in capital totaled $30 million in 2016. In the first quarter of 2017, we prospectively adopted ASU 2016-09. We now record tax benefits related to the exercise of stock options and other equity instruments within our tax provision, rather than within equity. Accordingly, we recognized a tax benefit in our statements of income of $12 million in 2018 and $22 million in 2017 related to tax benefits upon the exercise of stock options and other equity instruments.

Effective Tax Rate:

The effective tax rate on income/(loss) before income taxes differed from the U.S. federal statutory tax rate for the following reasons:



			As Restated
	December 29, 2018		December 30, 2017		December 31, 2016
U.S. federal statutory tax rate	21.0	%	35.0	%	35.0	%
Tax on income of foreign subsidiaries	3.4	%	(4.8	)%	(3.6	)%
Domestic manufacturing deduction	—	%	(1.5	)%	(2.0	)%
U.S. state and local income taxes, net of federal tax benefit	1.6	%	1.1	%	0.8	%
Tax exempt income	—	%	(0.7	)%	(3.4	)%
Deferred tax effect of statutory tax rate changes	(0.9	)%	0.3	%	(2.0	)%
Audit settlements and changes in uncertain tax positions	(0.3	)%	(0.2	)%	1.9	%
Venezuela nondeductible devaluation loss	(0.4	)%	—	%	0.3	%
U.S. Tax Reform discrete income tax benefit	0.5	%	(129.0	)%	—	%
Global intangible low-taxed income	(0.5	)%	—	%	—	%
Goodwill impairment	(15.1	)%	—	%	—	%
Wind-up of non-U.S. pension plans	(0.4	)%	—	%	—	%
Other	0.5	%	(0.8	)%	—	%
Effective tax rate	9.4	%	(100.6	)%	27.0	%

The provision for income taxes consists of provisions for federal, state, and foreign income taxes. We operate in an international environment; accordingly, the consolidated effective tax rate is a composite rate reflecting the earnings in various locations and the applicable tax rates. Additionally, the calculation of the percentage point impact of U.S. Tax Reform, tax exempt income, and other items on the effective tax rate shown in the table above are affected by income/(loss) before income taxes. Fluctuations in the amount of income generated across locations around the world could impact comparability of reconciling items between periods. Additionally, small movements in tax rates due to a change in tax law or a change in tax rates that causes us to revalue our deferred tax balances produces volatility in our effective tax rate.

The 2018 effective tax rate was lower, primarily due to a decrease in the U.S. federal statutory rate, non-deductible items (including goodwill impairments, nonmonetary currency devaluation losses, and the wind-up of non-U.S. pension plans), the impact of the federal tax on GILTI, and the revaluation of our deferred tax balances due to changes in state tax laws following U.S. Tax Reform, which were partially offset by the benefit from intangible asset impairment losses in the fourth quarter of 2018. See Note 10, Goodwill and Intangible Assets, for additional information related to our impairment losses in the fourth quarter of 2018.

The tax provision for the 2017 tax year benefited from U.S. Tax Reform enacted on December 22, 2017. The related income tax benefit of 129.0% in 2017 primarily reflects adjustments to our deferred tax positions for the lower federal income tax rate, partially offset by our provision for the one-time toll charge.

The tax provision for the 2016 tax year included a benefit related to the tax effect of statutory tax rate changes, including a benefit related to the impact on deferred taxes of a 10-basis-point reduction in the state tax rate and a 100-basis-point statutory rate reduction in the United Kingdom.

Deferred Income Tax Assets and Liabilities:

The tax effects of temporary differences and carryforwards that gave rise to deferred income tax assets and liabilities consisted of the following (in millions):



				As Restated
	December 29, 2018			December 30, 2017
Deferred income tax liabilities:
Intangible assets, net	$	11,571		$	13,567
Property, plant and equipment, net	735			676
Other	410			288
Deferred income tax liabilities	12,716			14,531
Deferred income tax assets:
Benefit plans	(172		)	(212		)
Other	(470		)	(422		)
Deferred income tax assets	(642		)	(634		)
Valuation allowance	81			80
Net deferred income tax liabilities	$	12,155		$	13,977

At December 29, 2018, deferred income tax liabilities excluded amounts classified as held for sale. See Note 5, Acquisitions and Divestitures, for additional information.

The decrease in deferred tax liabilities from December 30, 2017 to December 29, 2018 was primarily driven by intangible asset impairment losses recorded in the fourth quarter of 2018. See Note 10, Goodwill and Intangible Assets, for additional information.

At December 29, 2018, foreign operating loss carryforwards totaled $307 million. Of that amount, $26 million expire between 2019 and 2038; the other $281 million do not expire. We have recorded $86 million of deferred tax assets related to these foreign operating loss carryforwards. Deferred tax assets of $90 million have been recorded for U.S. state and local operating loss carryforwards. These losses expire between 2019 and 2038.

Uncertain Tax Positions:

At December 29, 2018, our unrecognized tax benefits for uncertain tax positions were $387 million. If we had recognized all of these benefits, the impact on our effective tax rate would have been $352 million. It is reasonably possible that our unrecognized tax benefits will decrease by as much as $54 million in the next 12 months primarily due to the progression of federal, state, and foreign audits in process. Our unrecognized tax benefits for uncertain tax positions are included in income taxes payable and other non-current liabilities on our consolidated balance sheets.

The changes in our unrecognized tax benefits were (in millions):



	December 29, 2018			December 30, 2017			December 31, 2016
Balance at the beginning of the period	$	408		$	389		$	353
Increases for tax positions of prior years	9			2			59
Decreases for tax positions of prior years	(81		)	(35		)	(18		)
Increases based on tax positions related to the current year	74			135			62
Decreases due to settlements with taxing authorities	(3		)	(59		)	(62		)
Decreases due to lapse of statute of limitations	(10		)	(24		)	(5		)
Reclassified to liabilities held for sale	(10		)	—			—
Balance at the end of the period	$	387		$	408		$	389

Our unrecognized tax benefits decreased during 2018 mainly as a result of audit settlements with federal, state, and foreign taxing authorities and statute of limitations expirations. Our unrecognized tax benefits increased during 2017 as a result of evaluating tax positions taken or expected to be taken on our federal, state, and foreign income tax returns.

In 2016, we reached an agreement with the IRS resolving all Kraft open matters related to the audits of taxable years 2012 through 2014. This settlement reduced our reserves for uncertain tax positions and resulted in a non-cash tax benefit of $42 million.

We include interest and penalties related to uncertain tax positions in our tax provision. Our provision for/(benefit from) income taxes included a $5 million expense in 2018, $24 million benefit in 2017, and $8 million expense in 2016 related to interest and penalties. Accrued interest and penalties were $62 million as of December 29, 2018 and $57 million as of December 30, 2017.

Other Income Tax Matters:

In the normal course of business, we are subject to examination by taxing authorities throughout the world, including such major jurisdictions as Australia, Canada, Italy, the Netherlands, the United Kingdom, and the United States. As of December 29, 2018, we have substantially concluded all national income tax matters through 2016 for the Netherlands, through 2014 for the United States, through 2012 for the United Kingdom, through 2011 for Australia, Canada, and Italy. We have substantially concluded all state income tax matters through 2007. Additionally, as of April 2019, we had substantially concluded all national income tax matters through 2015 for the United States.

We have a tax sharing agreement with Mondelēz International, Inc. (“Mondelēz International”), which generally provides that (i) we are liable for U.S. state income taxes and Canadian federal and provincial income taxes for Kraft periods prior to October 1, 2012 and (ii) Mondelēz International is responsible for U.S. federal income taxes and substantially all non-U.S. income taxes, excluding Canadian income taxes, for Kraft periods prior to October 1, 2012.

Kraft's U.S. operations were included in Mondelēz International's U.S. federal consolidated income tax returns for tax periods through October 1, 2012. In December 2016, Mondelēz International reached a final resolution on a U.S. federal income tax audit of the 2010-2012 tax years. As noted above, we are indemnified for U.S. federal income taxes related to these periods.