INCOME TAXES

12 Months Ended

Dec. 31, 2018

The components of income tax expense (benefit) applicable to pretax earnings for the years ended December 31 were as follows:



(In millions)	Foreign				U.S.				Total
2018:
Current		$	771			$	608			$	1,379
Deferred		93				(409		)		(316		)
Total income tax expense		$	864			$	199			$	1,063
2017:
Current		$	722			$	(91	)		$	631
Deferred		(24		)		(1,193		)		(1,217		)
Total income tax expense		$	698			$	(1,284	)		$	(586	)
2016:
Current		$	650			$	234			$	884
Deferred		136				388				524
Total income tax expense		$	786			$	622			$	1,408

The Japan income tax rate for the fiscal year 2016 was 28.8%. The rate was reduced to 28.2% for the fiscal year 2017 and was further reduced to 28.0% for the fiscal year 2018.

For the United States, the Tax Cuts and Jobs Act (Tax Act) was signed into law on December 22, 2017. Effective January 1, 2018, the Tax Act imposed a broad number of changes in tax law, including the permanent reduction of the U.S. federal statutory corporate income tax rate from 35% to 21%.

In accordance with Staff Accounting Bulletin 118 (SAB 118) issued by the U.S. Securities and Exchange Commission in December 2017, the Company recorded provisional amounts for certain items for which the income tax accounting was not complete. As of the enactment date, the Company estimated provisional amounts for its deferred taxes, including related valuation allowance, resulting in a reduction of its deferred tax assets (DTAs) by approximately $1.0 billion and its deferred tax liabilities (DTLs) by $2.9 billion, for a net DTL reduction of approximately $1.9 billion. The provisions of ASC 740-10, Income Taxes, require that the effects of changes in tax law on deferred taxes be recognized as a component of the income tax provision in the period the tax rate change was enacted. Therefore, the $1.9 billion provisional amount of net DTL reduction was recorded in the fourth quarter of 2017 as a reduction in the “Income tax expense, Deferred” line item of the Company’s consolidated statement of earnings.

In 2018, the Company recorded additional income tax expense of $.4 million resulting from a decrease in the SAB 118 provisional estimate related to Japan deferred tax balances. No further adjustment was made to the SAB 118 provisional estimate related to the valuation allowance. As of December 31, 2018, the Company has completed its accounting for the Tax Act in accordance with SAB 118.

Income tax expense in the accompanying statements of earnings varies from the amount computed by applying the expected U.S. tax rate of 21% in 2018 and 35% in 2017 and 2016 to pretax earnings. The principal reasons for the differences and the related tax effects for the years ended December 31 were as follows:



(In millions)	2018				2017				2016
Income taxes based on U.S. statutory rates		$	836			$	1,406			$	1,424
Foreign rate differential		220				0				0
Write-down of U.S. deferred tax liabilities for tax reform change		0				(1,933		)		0
Utilization of foreign tax credit		(3		)		(27		)		(30		)
Nondeductible expenses		21				10				8
Other, net		(11		)		(42		)		6
Income tax expense		$	1,063			$	(586	)		$	1,408

Total income tax expense for the years ended December 31 was allocated as follows:



(In millions)	2018				2017				2016
Statements of earnings		$	1,063			$	(586	)		$	1,408
Other comprehensive income (loss):
Unrealized foreign currency translation gains (losses) during period		10				52				70
Unrealized gains (losses) on investment securities:
Unrealized holding gains (losses) on investment securities during period		(787		)		575				962
Reclassification adjustment for realized (gains) losses on investment securities included in net earnings		(12		)		1				18
Unrealized gains (losses) on derivatives during period		0				0				1
Pension liability adjustment during period		(8		)		3				(16		)
Total income tax expense (benefit) related to items of other comprehensive income (loss)		(797		)		631				1,035
Additional paid-in capital (exercise of stock options)		0				0				(10		)
Total income taxes		$	266			$	45			$	2,433

The income tax effects of the temporary differences that gave rise to deferred income tax assets and liabilities as of December 31 were as follows:



(In millions)	2018				2017
Deferred income tax liabilities:
Deferred policy acquisition costs		$	3,404			$	3,285
Unrealized gains and other basis differences on investments		1,307				2,882
Premiums receivable		149				104
Policy benefit reserves		3,828				3,557
Total deferred income tax liabilities		8,688				9,828
Deferred income tax assets:
Unfunded retirement benefits		8				8
Other accrued expenses		40				141
Policy and contract claims		775				870
Foreign currency loss on Aflac Japan		38				67
Deferred compensation		163				155
Capital loss carryforwards		5				0
Depreciation		119				114
Anticipatory foreign tax credit		4,040				4,504
Deferred foreign tax credit		591				0
Other		150				57
Total deferred income tax assets before valuation allowance		5,929				5,916
Valuation allowance		(738		)		(657		)
Total deferred income tax assets after valuation allowance		5,191				5,259
Net deferred income tax liability		3,497				4,569
Current income tax liability		523				176
Total income tax liability		$	4,020			$	4,745

The application of U.S. GAAP requires the Company to evaluate the recoverability of deferred tax assets and establish a valuation allowance if necessary to reduce the deferred tax asset to an amount that is more likely than not expected to be realized. As noted above, the Company has determined a $577 million valuation allowance against its anticipatory foreign tax credit is necessary. The anticipatory foreign tax credit represents the foreign tax credit the Company will generate from the reversal of Japan deferred tax liabilities in the future. The Company has also determined a $161 million valuation allowance against its deferred foreign tax credits is necessary. Deferred foreign tax credits are foreign tax credits generated in the current tax year by the Japanese life company, but are unable to be utilized until 2019

due to Japan's current tax year not closing until March 31, 2019. Based upon a review of the Company's anticipated future taxable income, and including all other available evidence, both positive and negative, the Company's management has concluded that, notwithstanding the items noted above, it is more likely than not that all other deferred tax assets will be realized.

Under U.S. income tax rules, only 35% of non-life operating losses can be offset against life insurance taxable income each year. For current U.S. income tax purposes, as of December 31, 2018, there were non-life operating loss carryforwards of $21 million available to offset against future taxable income. The Company has capital loss carryforwards of $22 million available to offset capital gains, of which $4 million expires in 2021 and $18 million expires in 2023.

The Company files federal income tax returns in the United States and Japan as well as state or prefecture income tax returns in various jurisdictions in the two countries. The Company is currently under audit by the State of Georgia for tax years 2014-2016. There are currently no other open Federal, State, or local U.S. income tax audits. U.S. federal income tax returns for years before 2015 are no longer subject to examination. Japan corporate income tax returns for years before 2017 are no longer subject to examination. Management believes it has established adequate tax liabilities and final resolution of all open audits is not expected to have a material impact on the Company's consolidated financial statements.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows for the years ended December 31:



(In millions)	2018		2017
Balance, beginning of year	$	14	$	294
Additions for tax positions of prior years	1		0
Reductions for tax positions of prior years	0		(280		)
Balance, end of year	$	15	$	14

Included in the balance of the liability for unrecognized tax benefits at December 31, 2018, are $14 million of tax positions for which the ultimate deductibility is highly certain, but for which there is uncertainty about the timing of such deductibility, compared with $13 million at December 31, 2017. Because of the impact of deferred tax accounting, other than interest and penalties, the disallowance of the shorter deductibility period would not affect the annual effective tax rate, but would accelerate the payment of cash to the taxing authority to an earlier period. The Company has accrued approximately $1 million as of December 31, 2018, for permanent uncertainties, which if reversed would not have a material effect on the annual effective rate.

The Company recognizes accrued interest and penalties related to unrecognized tax benefits in income tax expense. The Company recognized approximately $1 million in interest and penalties in 2018, compared with $1 million in 2017 and $13 million in 2016. The Company has accrued approximately $2 million for the payment of interest and penalties as of December 31, 2018, compared with $2 million a year ago.

As of December 31, 2018, there were no material uncertain tax positions for which the total amounts of unrecognized tax benefits will significantly increase or decrease within the next 12 months.