Income Taxes

12 Months Ended

Dec. 31, 2018

NOTE 21

Income Taxes

The Tax Act, enacted by the U.S. government on December 22, 2017, made broad and complex changes to the U.S. tax code which required 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.

In 2017, we recorded a net discrete tax charge of $2.6 billion related to the Tax Act that was accounted for as a provisional estimate under SAB 118. We have completed our assessment of and accounting for the Tax Act, and recorded a net discrete tax benefit of $0.1 billion in the current period which represents the final adjustment to our 2017 provisional estimate, which is further explained below.

Impacts of Deemed Repatriation: In 2017, we recorded a provisional tax charge of $1.7 billion related to the one-time transition tax on unrepatriated post-1986 accumulated earnings and profits (E&P) of certain foreign subsidiaries. We have completed our assessment of the transition tax, which resulted in no material change to our original estimate of $1.7 billion. We also recorded a provisional deferred tax liability of $0.3 billion to account for the state income and foreign withholding tax on potential future cash dividends paid from such E&P. We have completed our assessment and reduced the deferred tax liability for state income and foreign withholding taxes related to certain foreign subsidiaries, which resulted in a discrete tax benefit adjustment of $0.1 billion to our original provisional estimate.

Remeasurement of Deferred Tax Assets and Liabilities: In 2017, we recorded a provisional deferred tax charge of $0.6 billion related to the remeasurement of our U.S. federal net deferred tax assets to reflect the change in the corporate tax rate from 35 percent to 21 percent, as well as other provisions of the Tax Act. We have completed our assessment of the remeasurement of deferred tax assets and liabilities, which resulted in no material change to our original estimate.

The global intangible low tax income (GILTI) provisions of the Tax Act impose a minimum tax on foreign income in excess of a deemed return on tangible assets. We have elected to account for GILTI as a current period expense when incurred.

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

(Millions)				2018		2017		2016
Current income tax expense:
	U.S. federal		$	70	$	3,408	$	2,180
	U.S. state and local			150		259		272
	Non-U.S.			681		387		340
		Total current income tax expense		901		4,054		2,792
Deferred income tax (benefit) expense:
	U.S. federal			276		544		(63)
	U.S. state and local			78		(12)		(10)
	Non-U.S.			(54)		91		(52)
		Total deferred income tax (benefit) expense		300		623		(125)
Total income tax expense			$	1,201	$	4,677	$	2,667

A reconciliation of the U.S. federal statutory rate of 21 percent as of December 31, 2018, and 35 percent as of both December 31, 2017 and 2016, to our actual income tax rate on continuing operations was as follows:

			2018		2017		2016
U.S. statutory federal income tax rate			21.0	%	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		2.8		2.3		2.7
	Non-U.S. subsidiaries' earnings^(a)		(0.5)		(5.7)		(2.0)
	Tax settlements^(b)		(1.9)		(0.7)		(0.6)
	U.S. Tax Act^(c)		(1.1)		34.8		―
	U.S. Tax Act - related adjustments^(d)		(3.2)		―		―
	Other		(0.6)		(1.0)		(0.2)
		Actual tax rates	14.8	%	63.0	%	33.2	%

Results for 2017 and 2016 primarily included tax benefits associated with the undistributed earnings of certain non-U.S. subsidiaries that were previously 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.
Results for 2018 relate to the settlement of the IRS examination for tax years 2008-2014, as well as the resolution of certain tax matters in various jurisdictions.
Relates to the $2.6 billion provisional charge for the impacts of the Tax Act in 2017 and the adjustments thereto in 2018.
Relates to changes to the tax method of accounting for certain expenses.

We record 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)				2018		2017
Deferred tax assets:
	Reserves not yet deducted for tax purposes		$	2,612	$	2,724
	Employee compensation and benefits			360		403
	Other			431		409
		Gross deferred tax assets		3,403		3,536
		Valuation allowance		(61)		(46)
		Deferred tax assets after valuation allowance		3,342		3,490
Deferred tax liabilities:
	Intangibles and fixed assets			1,083		1,057
	Deferred revenue			435		306
	Deferred interest			171		183
	Investment in joint ventures			137		137
	Other			210		269
		Gross deferred tax liabilities		2,036		1,952
Net deferred tax assets			$	1,306	$	1,538

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, 2018 and 2017 are associated with net operating losses and other deferred tax assets in certain non-U.S. operations.

Accumulated earnings of certain non-U.S. subsidiaries, which totaled approximately $0.7 billion as of December 31, 2018, are intended to be permanently reinvested outside the U.S. We do not provide for state income and foreign withholding taxes on foreign earnings intended to be permanently reinvested outside the U.S. Accordingly, state income and foreign withholding taxes, which would have aggregated to approximately $0.1 billion as of December 31, 2018, have not been provided on those earnings.

Net income taxes paid by us during 2018, 2017 and 2016, were approximately $2.0 billion, $1.4 billion and $3.0 billion, respectively. These amounts include estimated tax payments and cash settlements relating to prior tax years.

We are subject to the income tax laws of the United States, its states and municipalities and those of the foreign jurisdictions in which we operate. 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, we 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. We adjust the level of unrecognized tax benefits when there is new information available to assess the likelihood of the outcome.

We are under continuous examination by the Internal Revenue Service (IRS) and tax authorities in other countries and states in which we have significant business operations. The tax years under examination and open for examination vary by jurisdiction. In 2018 we settled our US federal income tax audits for tax years 2008-2014, and the statute of limitations for these years remain open through 2019. Tax years from 2015 onwards are open for examination by the IRS.

The following table presents changes in unrecognized tax benefits:

(Millions)			2018		2017		2016
Balance, January 1		$	821	$	974	$	870
Increases:
	Current year tax positions		152		200		167
	Tax positions related to prior years		47		39		117
Decreases:
	Tax positions related to prior years^(a)		(74)		(289)		(81)
	Settlements with tax authorities^(b)		(192)		(77)		(76)
	Lapse of statute of limitations		(44)		(26)		(22)
	Effects of foreign currency translations		(9)		―		(1)
Balance, December 31		$	701	$	821	$	974

Decrease in 2017 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.
2018 relates to the settlement of the IRS examination for tax years 2008-2014, as well as the resolution of certain tax matters in various jurisdictions.

Included in the unrecognized tax benefits of $0.7 billion, $0.8 billion and $1.0 billion for December 31, 2018, 2017 and 2016, respectively, are approximately $599 million, $723 million and $516 million, respectively, that, if recognized, would favorably affect the effective tax rate in a future period.

We believe it is reasonably possible that our unrecognized tax benefits could decrease within the next 12 months by as much as $151 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 $151 million of unrecognized tax benefits, approximately $127 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 years ended December 31, 2018 and 2017, we recognized benefits of approximately $18 million and $90 million, respectively, for interest and penalties. For the year ended December 31, 2016, we recognized approximately $9 million 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.

We had approximately $65 million and $83 million accrued for the payment of interest and penalties as of December 31, 2018 and 2017, respectively.