Income Taxes

12 Months Ended

Dec. 31, 2019

INCOME TAXES

The Tax Act, enacted on December 22, 2017, made broad and complex changes to the U.S. federal corporate income tax rules. Most notably, effective January 1, 2018, the Tax Act reduced the U.S. federal statutory corporate income tax rate from 35 percent to 21 percent, introduced a territorial tax system in which future dividends paid from earnings outside the United States to a U.S. corporation are not subject to U.S. federal taxation and imposed new U.S. federal corporate income taxes on certain foreign operations.

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


(Millions)	2019		2018		2017
Current income tax expense:
U.S. federal	$	1,108	$	70	$	3,408
U.S. state and local	276		150		259
Non-U.S.	437		681		387
Total current income tax expense	1,821		901		4,054
Deferred income tax (benefit) expense:
U.S. federal	(58)		276		544
U.S. state and local	(31)		78		(12)
Non-U.S.	(62)		(54)		91
Total deferred income tax (benefit) expense	(151)		300		623
Total income tax expense	$	1,670	$	1,201	$	4,677

A reconciliation of the U.S. federal statutory rate of 21 percent as of both December 31, 2019 and 2018, and 35 percent as of December 31, 2017, to our actual income tax rate was as follows:


	2019		2018		2017
U.S. statutory federal income tax rate	21.0	%	21.0	%	35.0	%
(Decrease) increase in taxes resulting from:
Tax-exempt income	(1.9)		(1.7)		(1.7)
State and local income taxes, net of federal benefit	2.8		2.8		2.3
Non-U.S. subsidiaries' earnings^(a)	(0.7)		(0.5)		(5.7)
Tax settlements^(b)	(0.3)		(1.9)		(0.7)
U.S. Tax Act^(c)	—		(1.1)		34.8
U.S. Tax Act - related adjustments^(d)	—		(3.2)		—
Other	(1.1)		(0.6)		(1.0)
Actual tax rates	19.8	%	14.8	%	63.0	%

(a)2017 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.

(b)2018 primarily included a settlement of the IRS examination for tax years 2008-2014, as well as the resolution of certain tax matters in various jurisdictions.

(d)Related 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.

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


(Millions)	2019		2018
Deferred tax assets:
Reserves not yet deducted for tax purposes	$	2,633	$	2,612
Employee compensation and benefits	365		360
Other	536		431
Gross deferred tax assets	3,534		3,403
Valuation allowance	(66)		(61)
Deferred tax assets after valuation allowance	3,468		3,342
Deferred tax liabilities:
Intangibles and fixed assets	1,279		1,083
Deferred revenue	315		435
Deferred interest	162		171
Investment in joint ventures	122		137
Other	129		210
Gross deferred tax liabilities	2,007		2,036
Net deferred tax assets	$	1,461	$	1,306

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, 2019 and 2018 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, 2019, 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, 2019, have not been provided on those earnings.

Net income taxes paid by us during 2019, 2018 and 2017, were approximately $1.7 billion, $2.0 billion and $1.4 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. Tax years from 2016 onwards are open for examination by the IRS.

The following table presents changes in unrecognized tax benefits:


(Millions)	2019		2018		2017
Balance, January 1	$	701	$	821	$	974
Increases:
Current year tax positions	66		152		200
Tax positions related to prior years	78		47		39
Effects of foreign currency translations	10		—		—
Decreases:
Tax positions related to prior years^(a)	(14)		(74)		(289)
Settlements with tax authorities^(b)	(40)		(192)		(77)
Lapse of statute of limitations	(75)		(44)		(26)
Effects of foreign currency translations	—		(9)		—
Balance, December 31	$	726	$	701	$	821

(a)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.

(b) 2018 included a settlement of the IRS examination for tax years 2008-2014 and the resolution of certain tax matters in various jurisdictions.

Included in the unrecognized tax benefits of $0.7 billion, $0.7 billion and $0.8 billion for December 31, 2019, 2018 and 2017, respectively, are approximately $623 million, $599 million and $723 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 $113 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 $113 million of unrecognized tax benefits, approximately $96 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, 2019, we recognized approximately $5 million in expenses for interest and penalties. For the years ended December 31, 2018 and 2017, we recognized benefits of approximately $18 million and $90 million, respectively, 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 $70 million and $65 million accrued for the payment of interest and penalties as of December 31, 2019 and 2018, respectively.