Income Taxes

12 Months Ended

Dec. 31, 2020

Income Tax Disclosure [Abstract]

Income Taxes

INCOME TAXES

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

(Millions)	2020		2019		2018
Current income tax expense:
U.S. federal	$	1,122	$	1,108	$	70
U.S. state and local	339		276		150
Non-U.S.	639		437		681
Total current income tax expense	2,100		1,821		901
Deferred income tax (benefit) expense:
U.S. federal	(931)		(58)		276
U.S. state and local	(119)		(31)		78
Non-U.S.	111		(62)		(54)
Total deferred income tax (benefit) expense	(939)		(151)		300
Total income tax expense	$	1,161	$	1,670	$	1,201

A reconciliation of the U.S. federal statutory rate of 21 percent as of December 31, 2020, 2019 and 2018, to our actual income tax rate was as follows:

	2020		2019		2018
U.S. statutory federal income tax rate	21.0	%	21.0	%	21.0	%
(Decrease) increase in taxes resulting from:
Tax-exempt income	(4.1)		(1.9)		(1.7)
State and local income taxes, net of federal benefit	3.7		2.8		2.8
Non-U.S. subsidiaries' earnings	2.4		(0.5)		(1.0)
Tax settlements(a)	(0.3)		(0.3)		(1.9)
U.S. Tax Act and related adjustments(b)	—		—		(4.3)
Valuation allowances	4.0		(0.2)		0.5
Other	0.3		(1.1)		(0.6)
Actual tax rates	27.0	%	19.8	%	14.8	%

(a)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.

(b)2018 included changes to the tax method of accounting for certain expenses and adjustments to the 2017 provisional Tax Act charge.

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)	2020		2019
Deferred tax assets:
Reserves not yet deducted for tax purposes	$	3,905	$	2,633
Employee compensation and benefits	383		365
Net operating loss and tax credit carryforwards	399		119
Other	765		417
Gross deferred tax assets	5,452		3,534
Valuation allowance	(418)		(66)
Deferred tax assets after valuation allowance	5,034		3,468
Deferred tax liabilities:
Intangibles and fixed assets	1,433		1,279
Deferred revenue	252		315
Deferred interest	148		162
Investment in joint ventures	135		122
Other	366		129
Gross deferred tax liabilities	2,334		2,007
Net deferred tax assets	$	2,700	$	1,461

The net operating loss and tax credit carryforward balance as of December 31, 2020, shown in the table above, is related to pre-tax U.S. federal and non-U.S. net operating loss (NOL) carryforwards of $140 million and $1.0 billion, respectively, and foreign tax credit (FTC) carryforwards of $100 million. If not utilized, certain U.S. federal and non-U.S. NOL carryforwards will expire between 2021 and 2037, whereas others have an unlimited carryforward period. The FTC carryforwards will expire between 2029 and 2030.

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 for both periods presented above are associated with certain non-U.S. deferred tax assets. In addition, the valuation allowances as of December 31, 2020 are also associated with FTC carryforwards.

Accumulated earnings of certain non-U.S. subsidiaries, which totaled approximately $1.0 billion as of December 31, 2020, 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, 2020, have not been provided on those earnings.

Net income taxes paid by us during 2020, 2019 and 2018, were approximately $2.2 billion, $1.7 billion and $2.0 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. We are currently under examination by the IRS for the 2017 and 2018 tax years.

The following table presents changes in unrecognized tax benefits:

(Millions)	2020		2019		2018
Balance, January 1	$	726	$	701	$	821
Increases:
Current year tax positions	57		66		152
Tax positions related to prior years	105		78		47
Effects of foreign currency translations	—		10		—
Decreases:
Tax positions related to prior years	(24)		(14)		(74)
Settlements with tax authorities(a)	(15)		(40)		(192)
Lapse of statute of limitations	(58)		(75)		(44)
Effects of foreign currency translations	(1)		—		(9)
Balance, December 31	$	790	$	726	$	701

(a)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 $0.8 billion, $0.7 billion and $0.7 billion for December 31, 2020, 2019 and 2018, respectively, are approximately $580 million, $623 million and $599 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 $130 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 $130 million of unrecognized tax benefits, approximately $110 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, 2020 and 2019, we recognized approximately $260 million and $5 million, respectively, in expenses for interest and penalties. For the year ended December 31, 2018, we recognized benefits of approximately $18 million, for interest and penalties.

We had approximately $350 million and $70 million accrued for the payment of interest and penalties as of December 31, 2020 and 2019, respectively.