Income Taxes

12 Months Ended

Dec. 31, 2017

NOTE 21

Income Taxes

The Tax Act, enacted by the U.S. government on December 22, 2017, makes broad and complex changes to the U.S. tax code which will require time to interpret. The SEC issued Staff Accounting Bulletin No. 118 (SAB 118) in December, 2017, to provide guidance on accounting for the effects of the Tax Act. SAB 118 provides for a measurement period of up to one year from the Tax Act enactment date for companies to complete their assessment of and accounting for those effects of the Tax Act required under ASC 740 “Implementation Guidance on Accounting for Uncertainty in Income Taxes” to be reported in the period of enactment. Under SAB 118, a company must first reflect the income tax effects of the Tax Act for which the accounting is complete in the period of the date of enactment. To the extent the accounting for other income tax effects is incomplete, but a reasonable estimate can be determined, companies must record a provisional estimate to be included in their financial statements. For any income tax effect for which a reasonable estimate cannot be determined, an entity must continue to apply ASC 740 based on the provisions of the tax laws in effect immediately prior to the Tax Act being enacted until such time as a reasonable estimate can be determined.

The Company has recorded a discrete net charge of $2.6 billion in the period ended December 31, 2017 related to the Tax Act. For the reasons stated below, the Company requires additional time to complete its analysis of the impacts of the Tax Act and therefore its accounting for the Tax Act is provisional.

Impacts of Deemed Repatriation: The Tax Act imposed a one-time transition tax on unrepatriated post-1986 accumulated earnings and profits of certain foreign subsidiaries (E&P). To calculate this tax, the Company must determine the cumulative amount of E&P, as well as the amount of foreign taxes paid on such earnings. In addition, the Company made a decision to no longer assert that the accumulated post-1986 E&P of its non-U.S. subsidiaries that are subject to this one-time transition tax are intended to be permanently reinvested outside the United States. As a result, the Company recorded a deferred tax liability for the state income and foreign withholding tax consequences of any future cash dividends paid from such E&P. The Company has recorded reasonable estimates based on data available for both the deemed repatriation tax for 2017 of $1.7 billion and the deferred state income and foreign withholding taxes on potential future distributions of these earnings of $0.3 billion. Until the Company fully completes its analysis, the accounting for these items is provisional.

Remeasurement of Deferred Tax Assets and Liabilities: The Company has recorded a deferred charge of $0.6 billion related to the remeasurement of its U.S. federal net deferred tax assets for 2017. This charge reflects the change in the corporate tax rate from 35 percent to 21 percent, effective January 1, 2018, as well as other provisions of the Tax Act. Certain components of the remeasurement are reasonable estimates based on available information. Until the Company fully completes its analysis of all components, the accounting for the remeasurement of the Company’s net deferred tax assets is provisional.

The Company will complete its analysis of, and finalize its accounting for, these provisional estimates during the one-year measurement period as prescribed by SAB 118.

The components of income tax expense for the years ended December 31 included in the Consolidated Statements of Income were as follows:

(Millions)				2017		2016		2015
Current income tax expense:
	U.S. federal^(a)		$	3,408	$	2,179	$	2,107
	U.S. state and local			259		272		335
	Non-U.S.			386		342		416
		Total current income tax expense		4,053		2,793		2,858
Deferred income tax (benefit) expense:
	U.S. federal^(b)			541		(45)		(23)
	U.S. state and local			(7)		(8)		(5)
	Non-U.S.			91		(52)		(55)
		Total deferred income tax (benefit) expense		625		(105)		(83)
Total income tax expense			$	4,678	$	2,688	$	2,775

2017 includes a charge of $1.7 billion related to the Tax Act deemed repatriation tax on certain non-U.S. earnings.
2017 includes charges related to the Tax Act of $0.6 billion due to the remeasurement of certain federal net deferred tax assets to the lower federal tax rate of 21 percent and $0.3 billion due to deferred state income and foreign withholding tax consequences of future cash distributions from non-U.S. subsidiaries.

A reconciliation of the U.S. federal statutory rate of 35 percent as of December 31, 2017, to the Company’s actual income tax rate for the years ended December 31 on continuing operations was as follows:

			2017		2016		2015
U.S. statutory federal income tax rate			35.0	%	35.0	%	35.0	%
(Decrease) increase in taxes resulting from:
	Tax-exempt income		(1.7)		(1.7)		(1.7)
	State and local income taxes, net of federal benefit		2.3		2.7		2.8
	Non-U.S. subsidiaries' earnings^(a)		(5.7)		(2.0)		(1.8)
	Tax settlements^(b)		(0.7)		(0.6)		(0.2)
	Non deductible expenses^(c)		―		―		0.9
	U.S. Tax Act^(d)		34.8		―		―
	Other		(0.9)		(0.2)		―
		Actual tax rates	63.1	%	33.2	%	35.0	%

Results for all years primarily included tax benefits associated with the undistributed earnings of certain non-U.S. subsidiaries that were deemed to be reinvested indefinitely. In addition, 2017 included tax benefits of $156 million, which decreased the actual tax rate by 2.1 percent, related to the realization of certain foreign tax credits.
Relates to the resolution of tax matters in various jurisdictions.
Relates to the nondeductible portion of the Prepaid Services goodwill impairment in 2015.
Relates to the $2.6 billion charge for the impacts of the Tax Act.

The Company records a deferred income tax (benefit) provision when there are differences between assets and liabilities measured for financial reporting and for income tax return purposes. These temporary differences result in taxable or deductible amounts in future years and are measured using the tax rates and laws that will be in effect when such differences are expected to reverse. In particular, the 2017 balances were reduced to reflect the remeasurement of certain federal net deferred tax assets due to the enacted lower federal tax rate of 21 percent.

The significant components of deferred tax assets and liabilities as of December 31 are reflected in the following table:

(Millions)				2017		2016
Deferred tax assets:
	Reserves not yet deducted for tax purposes		$	2,724	$	3,889
	Employee compensation and benefits			403		595
	Other			409		592
		Gross deferred tax assets		3,536		5,076
		Valuation allowance		(46)		(54)
		Deferred tax assets after valuation allowance		3,490		5,022
Deferred tax liabilities:
	Intangibles and fixed assets			1,057		1,691
	Deferred revenue			306		441
	Deferred interest			183		305
	Investment in joint ventures			137		209
	Other			259		121
		Gross deferred tax liabilities		1,942		2,767
Net deferred tax assets			$	1,548	$	2,255

A valuation allowance is established when management determines that it is more likely than not that all or some portion of the benefit of the deferred tax assets will not be realized. The valuation allowances as of December 31, 2017 and 2016 are associated with net operating losses and other deferred tax assets in certain non-U.S. operations of the Company.

Net income taxes paid by the Company during 2017, 2016 and 2015, were approximately $1.4 billion, $3.0 billion and $3.4 billion, respectively. These amounts include estimated tax payments and cash settlements relating to prior tax years.

The Company is subject to the income tax laws of the United States, its states and municipalities and those of the foreign jurisdictions in which the Company operates. These tax laws are complex, and the manner in which they apply to the taxpayer’s facts is sometimes open to interpretation. Given these inherent complexities, the Company must make judgments in assessing the likelihood that a tax position will be sustained upon examination by the taxing authorities based on the technical merits of the tax position. A tax position is recognized only when, based on management’s judgment regarding the application of income tax laws, it is more likely than not that the tax position will be sustained upon examination. The amount of benefit recognized for financial reporting purposes is based on management’s best judgment of the largest amount of benefit that is more likely than not to be realized on ultimate settlement with the taxing authority given the facts, circumstances and information available at the reporting date. The Company adjusts the level of unrecognized tax benefits when there is new information available to assess the likelihood of the outcome.

The Company is under continuous examination by the Internal Revenue Service (IRS) and tax authorities in other countries and states in which the Company has significant business operations. The tax years under examination and open for examination vary by jurisdiction. In February 2017, the Company received notification that all matters outstanding with the IRS for tax years 1997-2007 were resolved. The resolution of such matters did not have a material impact on the Company’s effective tax rate. The Company is currently under examination with the IRS for tax years 2008 through 2014.

The following table presents changes in unrecognized tax benefits:

(Millions)			2017		2016		2015
Balance, January 1		$	974	$	870	$	909
Increases:
	Current year tax positions		200		167		81
	Tax positions related to prior years		39		117		177
Decreases:
	Tax positions related to prior years^(a)		(289)		(81)		(256)
	Settlements with tax authorities		(77)		(76)		(15)
	Lapse of statute of limitations		(26)		(22)		(26)
	Effects of foreign currency translations		―		(1)		―
Balance, December 31		$	821	$	974	$	870

Decrease due to the resolution with the IRS of an uncertain tax position in January 2017, which resulted in the recognition of $289 million in AOCI.

Included in the unrecognized tax benefits of $0.8 billion, $1.0 billion and $0.9 billion for December 31, 2017, 2016 and 2015, respectively, are approximately $723 million, $516 million and $502 million, respectively, that, if recognized, would favorably affect the effective tax rate in a future period.

The Company believes it is reasonably possible that its unrecognized tax benefits could decrease within the next 12 months by as much as $324 million, principally as a result of potential resolutions of prior years’ tax items with various taxing authorities. The prior years’ tax items include unrecognized tax benefits relating to the deductibility of certain expenses or losses and the attribution of taxable income to a particular jurisdiction or jurisdictions. Of the $324 million of unrecognized tax benefits, approximately $295 million relates to amounts that, if recognized, would impact the effective tax rate in a future period.

Interest and penalties relating to unrecognized tax benefits are reported in the income tax provision. For the year ended December 31, 2017 the Company recognized a benefit of approximately $90 million for interest and penalties. For the years ended December 31, 2016 and 2015, the Company recognized approximately $9 million and $38 million, respectively, in expenses for interest and penalties. The interest expense benefit in 2017 includes approximately $56 million related to the resolution of an uncertain tax position with the IRS in January 2017, which had no net impact on the income tax provision.

The Company had approximately $83 million and $173 million accrued for the payment of interest and penalties as of December 31, 2017 and 2016, respectively.

During the year ended December 31, 2017, the Company filed a request with the IRS for a change in the method of accounting for certain expenditures. If approved, the Company will claim approximately $2.6 billion of additional tax deductions on its 2017 U.S. tax return and record a tax benefit of approximately $360 million. Such benefit has not yet been reported by the Company, as affirmative consent of the IRS is required to make the change.