INCOME TAXES

12 Months Ended

Nov. 03, 2019

INCOME TAXES

INCOME TAXES

9. INCOME TAXES

On December 22, 2017, the U.S. government enacted tax reform. The primary provisions of tax reform affecting the company in 2018 were a reduction to the corporate income tax rate from 35 percent to 21 percent and a transition from a worldwide corporate tax system to a primarily territorial tax system. The reduction in the corporate income tax rate required the company to remeasure its U.S. net deferred tax assets to the new corporate tax rate and the transition to a territorial tax system required payment of a one-time tax on the deemed repatriation of undistributed and previously untaxed non-U.S. earnings (repatriation tax). The repatriation tax was paid in 2019.

In 2019, the company was subject to additional provisions of the U.S. tax reform legislation. The company’s U.S. statutory corporate income tax rate was 21 percent and approximately 23.3 percent for 2019 and 2018, respectively. The main provisions of tax reform affecting the company in 2019 include a tax on global intangible low-taxed income (GILTI), a tax determined by base erosion and anti-abuse tax benefits (BEAT) for certain payments between a U.S. corporation and foreign subsidiaries, a limitation on the deductibility of certain executive compensation, a deduction for foreign derived intangible income (FDII), and interest expense limitations. The combined effects of these provisions did not have a significant effect on the 2019 provision for income taxes.

In 2019 and 2018, the company recorded discrete tax adjustments related to the remeasurement of the company’s net deferred tax assets to the new corporate income tax rate and for the repatriation tax.

The income tax expense (benefit) for the net deferred tax asset remeasurement and the repatriation tax adjustments in millions of dollars follow:

	Equipment		Financial
	Operations		Services		Total
2019
Net deferred tax asset remeasurement	$	1	$	5	$	6
Deemed earnings repatriation tax		(66)		(8)		(74)
Total discrete tax expense (benefit)	$	(65)	$	(3)	$	(68)
2018
Net deferred tax asset remeasurement	$	768	$	(354)	$	414
Deemed earnings repatriation tax		277		13		290
Total discrete tax expense (benefit)	$	1,045	$	(341)	$	704

Included in the equipment operations’ repatriation tax amount was an accrual of approximately $63 million for 2018, which was reduced to $31 million for 2019 for foreign withholding taxes on earnings of subsidiaries outside the U.S.

The repatriation tax expense is based on interpretations of existing laws, regulations, and certain assumptions. The company continues to analyze the repatriation tax provisions, and monitor legislative and regulatory developments.

The provision for income taxes by taxing jurisdiction and by significant component consisted of the following in millions of dollars:

	2019		2018		2017
Current:
U.S.:
Federal	$	545	$	(268)	$	360
State		72		123		48
Foreign		700		392		463
Total current		1,317		247		871
Deferred:
U.S.:
Federal		(345)		1,233		59
State		(26)		(40)		7
Foreign		(94)		287		34
Total deferred		(465)		1,480		100
Provision for income taxes	$	852	$	1,727	$	971

Based upon the location of the company’s operations, the consolidated income before income taxes in the U.S. in 2019, 2018, and 2017 was $2,166 million, $2,275 million, and $1,607 million, respectively, and in foreign countries was $1,922 million, $1,796 million, and $1,547 million, respectively. Certain foreign operations are branches or partnerships of Deere & Company and are subject to U.S. as well as foreign income tax regulations. The pretax income by location and the preceding analysis of the income tax provision by taxing jurisdiction are not directly related.

A comparison of the statutory and effective income tax provision and reasons for related differences in millions of dollars follow:

	2019		2018		2017
U.S. federal income tax provision at the U.S. statutory rate (2019 - 21 percent, 2018 - 23.3 percent, 2017 - 35 percent)	$	859	$	950	$	1,104
Increase (decrease) resulting from:
Net deferred tax asset remeasurement		6		414
Deemed earnings repatriation tax		(74)		290
Other effects of tax reform		(33)		42
Differences in taxability of foreign earnings		(94)		(92)		(83)
Valuation allowance on deferred taxes		28		50		89
Research and business tax credits		(85)		(43)		(63)
State and local income taxes, net of federal income tax benefit		47		59		37
Excess tax benefits on equity compensation		(40)		(49)		(30)
Tax rates on foreign earnings		183		44		(84)
Unrecognized tax benefits		(28)		30		9
Other—net		83		32		(8)
Provision for income taxes	$	852	$	1,727	$	971

At November 3, 2019, accumulated earnings in certain subsidiaries outside the U.S. totaled $2,608 million, of which a portion were subject to the repatriation tax in 2018, and are not subject to additional U.S. income tax. No provision for foreign withholding taxes has been made since these earnings are expected to remain indefinitely reinvested outside the U.S. Determination of the amount of a foreign withholding tax liability on these unremitted earnings is not practicable.

Deferred income taxes arise because there are certain items that are treated differently for financial accounting than for income tax reporting purposes. An analysis of the deferred income tax assets and liabilities at November 3, 2019 and October 28, 2018 in millions of dollars follows:

	2019				2018
	Deferred		Deferred		Deferred		Deferred
	Tax		Tax		Tax		Tax
	Assets		Liabilities		Assets		Liabilities
OPEB liabilities	$	1,015			$	984
Lease transactions			$	599			$	850
Tax loss and tax credit carryforwards		781				713
Accrual for sales allowances		518				464
Tax over book depreciation				339				357
Goodwill and other intangible assets				378				458
Pension liability - net		186				45
Allowance for credit losses		70				115
Accrual for employee benefits		207				72
Share-based compensation		68				58
Deferred compensation		39				35
Undistributed foreign earnings								6
Foreign unrealized losses		8				10
Other items		367		311		346		261
Less valuation allowances		(661)				(658)
Deferred income tax assets and liabilities	$	2,598	$	1,627	$	2,184	$	1,932

Deere & Company files a consolidated federal income tax return in the U.S., which includes the wholly-owned financial services subsidiaries. These subsidiaries account for income taxes generally as if they filed separate income tax returns, with a modification for realizability of certain tax benefits.

At November 3, 2019, tax loss and tax credit carryforwards of $781 million were available with $319 million expiring from 2020 through 2039 and $462 million with an indefinite carryforward period.

A reconciliation of the total amounts of unrecognized tax benefits at November 3, 2019, October 28, 2018, and October 29, 2017 in millions of dollars follows:

	2019		2018		2017
Beginning of year balance	$	279	$	221	$	198
Increases to tax positions taken during the current year		30		36		35
Increases to tax positions taken during prior years		357		62		13
Decreases to tax positions taken during prior years		(30)		(39)		(17)
Decreases due to lapse of statute of limitations		(6)		(15)		(11)
Acquisitions*				31
Settlements		(75)		(5)		(1)
Foreign exchange		(2)		(12)		4
End of year balance	$	553	$	279	$	221

*       See Note 4.

The amount of unrecognized tax benefits at November 3, 2019 and October 28, 2018 that would affect the effective tax rate if the tax benefits were recognized was $153 million and $128 million, respectively. The increase from 2018 primarily relates to the interpretation of a recently issued repatriation tax regulation for companies that do not have a calendar fiscal year end. The increase was partially offset by the settlement of U.S. income tax positions related to the 2008 through 2014 tax years. The remaining liability was related to tax positions for which there are offsetting tax receivables, or the uncertainty was only related to timing. The company expects that any reasonably possible change in the amounts of unrecognized tax benefits in the next twelve months would not be significant.

The company files its tax returns according to the tax laws of the jurisdictions in which it operates, which includes the U.S. federal jurisdiction and various state and foreign jurisdictions. The U.S. Internal Revenue Service (IRS) has completed the examination of the company’s federal income tax returns for periods prior to 2015. The years 2015, 2016, and 2017 federal income tax return are currently under examination. Various state and foreign income tax returns, including major tax jurisdictions in Argentina, Australia, Brazil, Canada, China, Finland, France, Germany, India, Mexico, Russia, Singapore, and Spain also remain subject to examination by taxing authorities.

The company’s policy is to recognize interest related to income taxes in interest expense and interest income and recognize penalties in selling, administrative and general expenses. During 2019, 2018, and 2017, the total amount of expense from interest and penalties was $13 million, $23 million, and $6 million and the interest income was $25 million, $12 million, and $6 million, respectively. At November 3, 2019 and October 28, 2018, the

liability for accrued interest and penalties totaled $76 million and $90 million, respectively, and the receivable for interest was $4 million and none, respectively.