INCOME TAXES

12 Months Ended

Dec. 31, 2017

23. Income Taxes

U.S. Tax Reform Overview

On December 22, 2017, the U.S. enacted Public Law 115-97, known informally as the Tax Cuts and Jobs Act (the Tax Act). The Tax Act reduces the statutory rate of U.S. federal corporate income tax to 21 percent and enacts numerous other changes impacting AIG and the insurance industry.

Changes specific to the insurance industry include the calculation of insurance tax reserves and related transition adjustments, amortization of specified policy acquisition expenses, treatment of separate account dividends received deductions, and computation of pro-ration adjustments. Provisions of the Tax Act with broader application include reductions or elimination of deductions for certain items, e.g., reductions to corporate dividends received deductions, disallowance of entertainment expenses, and limitations on the deduction of certain executive compensation costs. These provisions, generally, will result in an increase in AIG’s taxable income in the years beginning after December 31, 2017.

The SEC staff issued Staff Accounting Bulletin 118 (SAB 118), which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 addresses situations where accounting for certain income tax effects of the Tax Act under ASC 740 may be incomplete upon issuance of an entity’s financial statements and provides a one-year measurement period from the enactment date to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the following:

Income tax effects of those aspects of the Tax Act for which accounting under ASC 740 is complete
Provisional estimate of income tax effects of the Tax Act to the extent accounting is incomplete but a reasonable estimate is determinable
If a provisional estimate cannot be determined, ASC 740 should still be applied on the basis of tax law provisions that were in effect immediately before the enactment of the Tax Act.

Consistent with current income tax accounting requirements, we have remeasured our deferred tax assets and liabilities with reference to the statutory income tax rate of 21 percent and taking into consideration other provisions of the Tax Act. As of December 31, 2017, we had not fully completed our accounting for the tax effects of the Tax Act. Our provision for income taxes for the period ended December 31, 2017, is based in part on a reasonable estimate of the effects on existing deferred tax balances and of certain provisions of the Tax Act. To the extent a reasonable estimate of the impact of certain provisions was determinable, we recorded provisional estimates as a component of our provision for income taxes on continuing operations. To the extent a reasonable estimate of the impact of certain provisions was not determinable, we have not recorded any adjustments and have continued accounting for them in accordance with ASC 740 on the basis of the tax laws in effect before enactment of the Tax Act.

The Tax Act includes provisions for Global Intangible Low-Taxed Income (GILTI) under which taxes on foreign income are imposed on the excess of a deemed return on tangible assets of certain foreign subsidiaries and for Base Erosion and Anti-Abuse Tax (BEAT) under which taxes are imposed on certain base eroding payment to affiliated foreign companies. Consistent with accounting guidance, we will treat BEAT as an in period tax charge when incurred in future periods for which no deferred taxes need to be provided and have made an accounting policy election to treat GILTI taxes in a similar manner. Accordingly, no provision for income taxes related to GILTI or BEAT was recorded as of December 31, 2017.

For the period ended December 31, 2017, we recognized a provisional estimate of income tax effects of the Tax Act of $6.7 billion, including a tax charge of $6.7 billion attributable to the reduction in the U.S. corporate income tax rate and tax benefit of $38 million related to the deemed repatriation tax.

Tax effects for which a reasonable estimate can be determined

Deemed Repatriation Tax

The Tax Act requires companies to pay a one-time transition tax, net of tax credits related to applicable foreign taxes paid, on previously untaxed current and accumulated earnings and profits (E&P) of certain of our foreign subsidiaries. In the determination of the deemed repatriation tax, we reviewed estimated post-1986 E&P of certain material relevant foreign subsidiaries, and any related non-U.S. income tax paid on such earnings. Based on this analysis, we were able to determine a reasonable estimate and we have recorded a provisional estimate tax benefit of $38 million. While the IRS has issued some guidance on the calculation of the deemed repatriation tax, there are still certain aspects of the calculation that require further clarification. We are continuing to gather additional information to more precisely compute the amount of deemed repatriation tax.

Other Provisions

The Tax Act modified computations of insurance reserves for both life and general insurance companies. For life insurance companies, tax reserves are now computed with reference to NAIC reserves. For general insurance companies, the Tax Act extends the discount period for certain long-tail lines of business from 10 years to 24 years and increases the discount rate, replacing the applicable federal rate for a higher-yield corporate bond rate, and eliminates the election allowing companies to use their historical loss payment patterns for loss reserve discounting. Adjustments related to the differences in insurance reserves balances computed under the old tax law versus the Tax Act have to be taken into income over eight years by both life and general insurance companies. Accordingly, at December 31, 2017, these changes give rise to new deferred tax liabilities. We have recorded a provisional estimate of $1.9 billion with respect to such deferred tax liabilities. This increase in deferred tax liabilities is offset by an increase in the deferred tax asset related to insurance reserves as a result of applying the new provisions of the Tax Act.

Provisions Impacting Projections of Taxable Income and Valuation Allowance Considerations

Certain provisions of the Tax Act impact our projections of future taxable income used in analyzing realizability of our U.S. tax attribute deferred tax asset. As discussed above, there are specific insurance industry provisions, including changes in computations of insurance reserves, amortization of specified policy acquisition expenses, and treatment of separate account dividends received deduction. Provisional estimates have been included in our future taxable income projections for these insurance industry specific provisions to reflect application of the new tax law.

Because we have made provisional estimates related to the impact of certain aspects of the Tax Act on our future taxable income, corresponding determination of the need for a valuation allowance is also provisional. Generally, the Tax Act provisions result in an increase in our taxable income and, thus, accelerate utilization of our tax attribute deferred tax asset. Accordingly, we do not currently anticipate that our reliance on provisional estimates would have a material impact on our determination of the realizability of our deferred tax assets.

Tax effects for which no estimate can be determined

Our accounting for the following elements of the Tax Act is incomplete and we continued accounting for them in accordance with ASC 740 on the basis of the tax laws in effect before enactment of the Tax Act.

The Tax Act may affect the results in certain investments and partnerships in which we are a non-controlling interest owner. The information needed to determine a provisional estimate is not currently available (such as for interest deduction limitations in those entities and the changed definition of a U.S. Shareholder). Accordingly, no provisional estimates were recorded.

Due to minimal formal guidance issued from state and local jurisdictions, provisional estimates have not been recorded for the impact of any state and local corporate income tax implications of the Tax Act. Guidance from state and local jurisdictions is expected during 2018 and the impact, if any, will be recorded at the appropriate time.

EFFECTIVE TAX RATE

The following table presents income (loss) from continuing operations before income tax expense (benefit) by U.S. and foreign location in which such pre-tax income (loss) was earned or incurred

Years Ended December 31,
(in millions)		2017		2016		2015
U.S.	$	1,940	$	1,041	$	1,950
Foreign		(474)		(1,115)		1,331
Total	$	1,466	$	(74)	$	3,281

The following table presents the income tax expense (benefit) attributable to pre-tax income (loss) from continuing operations:

Years Ended December 31,
(in millions)		2017		2016		2015
Foreign and U.S. components of actual income tax expense:
Foreign:
Current	$	209	$	436	$	391
Deferred		25		(121)		(95)
U.S.:
Current		427		140		429
Deferred		6,865		(270)		334
Total	$	7,526	$	185	$	1,059

Our actual income tax (benefit) expense differs from the statutory U.S. federal amount computed by applying the federal income tax rate due to the following:

	2017						2016							2015
		Pre-Tax		Tax	Percent of			Pre-Tax		Tax		Percent of					Tax	Percent of
Years Ended December 31,		Income		Expense/	Pre-Tax			Income		Expense/		Pre-Tax			Pre-Tax		Expense/	Pre-Tax
(dollars in millions)		(Loss)		(Benefit)	Income (Loss)			(Loss)		(Benefit)	Income (Loss)				Income		(Benefit)	Income
U.S. federal income tax at statutory
rate	$	1,476	$	517	35.0	%	$	(159)	$	(56)		35.0	%	$	3,281	$	1,148	35.0	%
Adjustments:
Tax exempt interest				(111)	(7.5)					(178)		111.9					(195)	(5.9)
Uncertain tax positions				660	44.7					268		(168.6)					195	5.9
Reclassifications from accumulated
other comprehensive income				(184)	(12.5)					(132)		83.0					(127)	(3.9)
Dispositions of Subsidiaries				17	1.2					118		(74.2)					-	-
Tax Attribute Restoration				-	-					(164)		103.1					-	-
Non-controlling Interest				(7)	(0.5)					(81)		50.9					-	-
Non-deductible transfer pricing
charges				35	2.4					102		(64.2)					97	3.0
Dividends received deduction				(90)	(6.1)					(75)		47.2					(72)	(2.2)
Effect of foreign operations				69	4.7					234		(147.2)					(58)	(1.8)
Share-based compensation
payments excess tax deduction				(40)	(2.7)					-		-					-	-
State income taxes				(9)	(0.6)					23		(14.5)					34	1.0
Impact of Tax Act				6,687	453.0					-		-					-	-
Other				(58)	(3.9)					13		(8.2)					(73)	(2.2)
Effect of discontinued operations				3	0.2					35		(22.0)					-	-
Valuation allowance:
Continuing operations				43	2.9					83		(52.2)					110	3.4
Consolidated total amounts		1,476		7,532	510.3			(159)		190		(119.5)			3,281		1,059	32.3
Amounts attributable to discontinued
operations		10		6	60.0			(85)		5		(5.9)			-		-	-
Amounts attributable to continuing
operations	$	1,466	$	7,526	513.4	%	$	(74)	$	185		(250.0)	%	$	3,281	$	1,059	32.3	%

For the year ended December 31, 2017, the effective tax rate on income from continuing operations was not meaningful. The effective tax rate differs from the 2017 statutory tax rate of 35 percent primarily due to tax charges of $6.7 billion associated with the enactment of the Tax Act discussed above, $660 million of tax charges and related interest associated with increases in uncertain tax positions primarily related to cross border financing transactions and other open tax issues, $69 million associated with the effect of foreign operations, and $35 million of non-deductible transfer pricing charges, partially offset by tax benefits of $201 million of tax exempt income, $184 million of reclassifications from accumulated other comprehensive income to income from continuing operations related to the disposal of available for sale securities, and $40 million of excess tax deductions related to share based compensation payments recorded through the income statement in accordance with relevant accounting literature. Effect of foreign operations is primarily related to losses incurred in our European operations taxed at a statutory tax rate lower than 35 percent and other foreign taxes.

For the year ended December 31, 2016, the effective tax rate on loss from continuing operations was not meaningful. The effective tax rate on loss from continuing operations differs from the statutory tax rate of 35 percent primarily due to tax charges of $234 million associated with effect of foreign operations, $216 million of tax charges and related interest associated with increases in uncertain tax positions related to cross border financing transactions, $118 million related to disposition of subsidiaries, $102 million related to non-deductible transfer pricing charges, and $83 million related to increases in the deferred tax asset valuation allowances associated with U.S. federal and certain foreign jurisdictions, partially offset by tax benefits of $253 million of tax exempt income, $164 million associated with a portion of the U.S. Life Insurance companies capital loss carryforwards previously treated as expired that was restored and utilized, $116 million related to the impact of an agreement reached with the Internal Revenue Service (IRS) related to certain tax issues under audit, and $132 million of reclassifications from accumulated other comprehensive income to income from continuing operations related to the disposal of available for sale securities. Effect of foreign operations is primarily related to foreign exchange losses incurred by our foreign subsidiaries related to the weakening of the British pound following the Brexit vote taxed at a statutory tax rate lower than 35 percent.

For the year ended December 31, 2015, the effective tax rate on income from continuing operations was 32.3 percent. The effective tax rate on income from continuing operations differs from the statutory tax rate of 35 percent primarily due to tax benefits of $195 million associated with tax exempt interest income, $127 million related to reclassifications from accumulated other comprehensive income to income from continuing operations related to the disposal of available for sale securities, $58 million associated with the effect of foreign operations, and $109 million related to the partial completion of the IRS examination covering tax year 2006, partially offset by $324 million of tax charges and related interest associated with increases in uncertain tax positions related to cross border financing transactions, and $110 million related to increases in the deferred tax asset valuation allowances associated with certain foreign jurisdictions.

As a result of the Tax Act, the majority of accumulated foreign earnings that were previously untaxed will become subject to a one-time deemed repatriation tax. Going forward, certain foreign earnings of our foreign affiliates will be exempt from U.S. tax upon repatriation. Notwithstanding the changes, U.S. tax on foreign exchange gain or loss and certain non-U.S. withholding taxes will continue to be applicable upon future repatriations of foreign earnings.

For the year ended December 31, 2017, our repatriation assumptions with respect to certain operations in Canada, South Africa, as well as European and Asia Pacific regions remain unchanged and related foreign earnings remain indefinitely reinvested. Due to a change in the legal entity ownership through a contribution of certain affiliates to AIG International Holdings GmbH, our repatriation assumptions related to certain operations in the Far East, Latin America, Bermuda and Middle East region have changed and related foreign earnings are now considered to be indefinitely reinvested. These earnings relate to ongoing operations and have been reinvested in active business operations. Deferred taxes have been provided on earnings of non-U.S. affiliates whose earnings are not indefinitely reinvested.

The following table presents the components of the net deferred tax assets (liabilities):

December 31,
(in millions)		2017		2016
Deferred tax assets:
Losses and tax credit carryforwards	$	11,931	$	16,448
Basis differences on investments		2,133		4,985
Life policy reserves		1,996		3,040
Accruals not currently deductible, and other		532		1,128
Investments in foreign subsidiaries		159		103
Loss reserve discount		526		1,151
Loan loss and other reserves		34		39
Unearned premium reserve reduction		566		924
Fixed assets and intangible assets		442		478
Other		731		710
Employee benefits		601		1,171
Total deferred tax assets		19,651		30,177
Deferred tax liabilities:
Deferred policy acquisition costs		(2,313)		(3,790)
Unrealized gains related to available for sale debt securities		(2,151)		(2,844)
Total deferred tax liabilities		(4,464)		(6,634)
Net deferred tax assets before valuation allowance		15,187		23,543
Valuation allowance		(1,374)		(2,831)
Net deferred tax assets (liabilities)	$	13,813	$	20,712

The following table presents our U.S. consolidated income tax group tax losses and credits carryforwards as of December 31, 2017.

December 31, 2017				Tax	Expiration
(in millions)		Gross		Effected	Periods
Net operating loss carryforwards	$	35,592	$	7,474	2028-2037
Capital loss carryforwards		305		64	2022
Foreign tax credit carryforwards				4,481	2018-2022
Other carryforwards				1,154	Various
Total AIG U.S. consolidated income tax group tax losses and credits
carryforwards on a tax return basis				13,173
Unrecognized tax benefit				(2,543)
Total AIG U.S. consolidated income tax group tax losses and credits
carryforwards on a U.S. GAAP basis^*			$	10,630

* Includes other carryforwards, e.g. general business credits, of $118 million on a U.S. GAAP basis.

We have U.S. federal consolidated net operating loss and tax credit carryforwards of approximately $10.6 billion. The carryforward periods for our foreign tax credits begin to expire in 2019. As detailed in the Assessment of Deferred Tax Asset Valuation Allowance section of this footnote, we determined that it is more likely than not that our U.S. federal consolidated tax attribute carryforwards will be realized prior to their expiration.

Assessment of Deferred Tax Asset Valuation Allowance

The evaluation of the recoverability of our deferred tax asset and the need for a valuation allowance requires us to weigh all positive and negative evidence to reach a conclusion that it is more likely than not that all or some portion of the deferred tax asset will not be realized. The weight given to the evidence is commensurate with the extent to which it can be objectively verified. The more negative evidence that exists, the more positive evidence is necessary and the more difficult it is to support a conclusion that a valuation allowance is not needed.

Our framework for assessing the recoverability of the deferred tax asset requires us to consider all available evidence, including:

the nature, frequency, and amount of cumulative financial reporting income and losses in recent years;
the sustainability of recent operating profitability of our subsidiaries;
the predictability of future operating profitability of the character necessary to realize the net deferred tax asset;
the carryforward period for the net operating loss, capital loss and foreign tax credit carryforwards, including the effect of reversing taxable temporary differences; and
prudent and feasible actions and tax planning strategies that would be implemented, if necessary, to protect against the loss of the deferred tax asset.

In performing our assessment of the recoverability of the deferred tax asset under this framework, we consider tax laws governing the utilization of the net operating loss, capital loss and foreign tax credit carryforwards in each applicable jurisdiction. Under U.S. tax law, a company generally must use its net operating loss carryforwards before it can use its foreign tax credit carryforwards, even though the carryforward period for the foreign tax credit is shorter than for the net operating loss. Our U.S. federal consolidated income tax group includes both life companies and non-life companies. While the U.S. taxable income of our non-life companies can be offset by the net operating loss carryforwards, only a portion (no more than 35 percent) of the U.S. taxable income of our life companies can be offset by those net operating loss carryforwards. The remaining tax liability of our life companies can be offset by the foreign tax credit carryforwards. Accordingly, we utilize both the net operating loss and foreign tax credit carryforwards concurrently which enables us to realize our tax attributes prior to expiration. As of December 31, 2017, based on all available evidence, it is more likely than not that the U.S. net operating loss and foreign tax credit carryforwards will be utilized prior to expiration and, thus, no valuation allowance has been established.

Estimates of future taxable income, including income generated from prudent and feasible actions and tax planning strategies could change in the near term, perhaps materially, which may require us to consider any potential impact to our assessment of the recoverability of the deferred tax asset. Such potential impact could be material to our consolidated financial condition or results of operations for an individual reporting period.

For the year ended December 31, 2017, recent changes in market conditions, including interest rate fluctuations, impacted the unrealized tax gains and losses in the U.S. life insurance companies’ available for sale securities portfolio, resulting in a deferred tax liability related to net unrealized tax capital gains. As of June 30, 2017, based on all available evidence, we concluded that the valuation allowance should be released. As a result, for the six-month period ended June 30, 2017, we released $468 million of valuation allowance associated with the unrealized tax losses in the U.S. life insurance companies’ available for sale securities portfolio, all of which was allocated to other comprehensive income. As of December 31, 2017, we continue to be in an overall unrealized tax gain position with respect to the U.S. life insurance companies’ available for sale securities portfolio and thus concluded no valuation allowance is necessary in the U.S. life insurance companies’ available for sale securities portfolio.

For the year ended December 31, 2017, recent changes in market conditions, including interest rate fluctuations, impacted the unrealized tax gains and losses in the U.S. non-life companies’ available for sale securities portfolio, resulting in a deferred tax liability related to net unrealized tax capital gains. As of June 30, 2017, based on all available evidence, we concluded that the valuation allowance should be released. As a result, for the six-month period ended June 30, 2017, we released $260 million of valuation allowance associated with the unrealized tax losses in the U.S. non-life companies’ available for sale securities portfolio, all of which was allocated to other comprehensive income. As of December 31, 2017, we continue to be in an overall unrealized tax gain position with respect to the U.S. non-life companies’ available for sale securities portfolio and thus concluded no valuation allowance is necessary in the U.S. non-life companies’ available for sale securities portfolio.

During the year ended December 31, 2017, we recognized a net increase of $43 million in our deferred tax asset valuation allowance associated with certain foreign jurisdictions, primarily attributable to current year activity.

During the year ended December 31, 2017, we recognized a $26 million decrease in our deferred tax asset valuation allowance associated with certain state jurisdictions, primarily as a result of the beneficial impact of tax law changes enacted in the third quarter of 2017. We also recognized a $634 million decrease in our deferred tax asset valuation allowance associated with certain state jurisdictions, primarily attributable to a corresponding reduction in state and local deferred tax assets.

The following table presents the net deferred tax assets (liabilities) at December 31, 2017 and 2016 on a U.S. GAAP basis:

December 31,
(in millions)		2017		2016
Net U.S. consolidated return group deferred tax assets	$	15,603	$	24,134
Net deferred tax assets (liabilities) in accumulated other comprehensive income		(2,070)		(2,384)
Valuation allowance		(86)		(874)
Subtotal		13,447		20,876
Net foreign, state and local deferred tax assets		1,874		2,413
Valuation allowance		(1,288)		(1,957)
Subtotal		586		456
Subtotal - Net U.S., foreign, state and local deferred tax assets		14,033		21,332
Net foreign, state and local deferred tax liabilities		(220)		(620)
Total AIG net deferred tax assets (liabilities)	$	13,813	$	20,712

Deferred Tax Asset Valuation Allowance of U.S. Consolidated FEDERAL Income Tax Group

At December 31, 2017 and 2016, our U.S. consolidated income tax group had net deferred tax assets after valuation allowance of $13.4 billion and $20.9 billion, respectively. At December 31, 2017 and 2016, our U.S. consolidated income tax group had valuation allowances of $86 million and $874 million, respectively.

Deferred Tax ASSET — Foreign, State and Local

At December 31, 2017 and 2016, we had net deferred tax assets (liabilities) of $366 million and $(164) million, respectively, related to foreign subsidiaries, state and local tax jurisdictions, and certain domestic subsidiaries that file separate tax returns.

At December 31, 2017 and 2016, we had deferred tax asset valuation allowances of $1.3 billion and $2.0 billion, respectively, related to foreign subsidiaries, state and local tax jurisdictions, and certain domestic subsidiaries that file separate tax returns. We maintained these valuation allowances following our conclusion that we could not demonstrate that it was more likely than not that the related deferred tax assets will be realized. This was primarily due to factors such as cumulative losses in recent years and the inability to demonstrate profits within the specific jurisdictions over the relevant carryforward periods.

Tax Examinations and Litigation

We file a consolidated U.S. federal income tax return with our eligible U.S. subsidiaries. Income earned by subsidiaries operating outside the U.S. is taxed, and income tax expense is recorded, based on applicable U.S. and foreign law.

The statute of limitations for all tax years prior to 2000 has expired for our consolidated federal income tax return. We are currently under examination for the tax years 2000 through 2010.

On March 20, 2008, we received a Statutory Notice of Deficiency (Notice) from the IRS for years 1997 to 1999. The Notice asserted that we owe additional taxes and penalties for these years primarily due to the disallowance of foreign tax credits associated with cross-border financing transactions. The transactions that are the subject of the Notice extend beyond the period covered by the Notice, and the IRS has administratively challenged the later periods. The IRS has also administratively challenged other cross-border transactions in later years. We have paid the assessed tax plus interest and penalties for 1997 to 1999. On February 26, 2009, we filed a complaint in the United States District Court for the Southern District of New York (Southern District) seeking a refund of approximately $306 million in taxes, interest and penalties paid with respect to the 1997 taxable year. We allege that the IRS improperly disallowed foreign tax credits and that our taxable income should be reduced as a result of the 2005 restatement of our consolidated financial statements.

We also filed an administrative refund claim on September 9, 2010 for our 1998 and 1999 tax years.

On August 1, 2012, we filed a motion for partial summary judgment related to the disallowance of foreign tax credits associated with cross border financing transactions in the Southern District of New York. The Southern District of New York denied our summary judgment motion and upon AIG’s appeal, the U.S. Court of Appeals for the Second Circuit (the Second Circuit) affirmed the denial. AIG’s petition for certiorari to the U.S. Supreme Court from the decision of the Second Circuit was denied on March 7, 2016. As a result, the case has been remanded back to the Southern District of New York for a jury trial.

In January 2018, the parties reached non-binding agreements in principle on issues presented in the dispute and are currently reviewing the computations reflecting the settlement terms. The resolution is not final and is subject to various reviews. The litigation has been stayed pending the outcome of the review process. We can provide no assurance regarding the outcome of any such litigation or whether binding compromised settlements with the parties will ultimately be reached. We currently believe that we have adequate reserves for the potential liabilities that may result from these matters.

Accounting For Uncertainty in Income Taxes

The following table presents a reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits:

Years Ended December 31,
(in millions)		2017		2016		2015
Gross unrecognized tax benefits, beginning of year	$	4,530	$	4,331	$	4,395
Increases in tax positions for prior years		210		235		162
Decreases in tax positions for prior years		(33)		(39)		(209)
Increases in tax positions for current year		-		3		-
Lapse in statute of limitations		-		-		(4)
Settlements		-		-		(13)
Activity of discontinued operations		-		-		-
Gross unrecognized tax benefits, end of year	$	4,707	$	4,530	$	4,331

At December 31, 2017, 2016 and 2015, our unrecognized tax benefits, excluding interest and penalties, were $4.7 billion, $4.5 billion and $4.3 billion, respectively. The activity for the year includes increases for amounts associated with cross border financing transactions and the impact of settlement discussions with the IRS related to certain other open tax issues unrelated to the cross border financing transactions. With respect to cross border financing transactions, the increase is the result of consideration of recent court decisions upholding the disallowance of foreign tax credits claimed by other corporate entities not affiliated with AIG in addition to the agreement reached in the fourth quarter of 2017 by the parties in the cross border financing dispute to pursue a potential settlement.

At December 31, 2017, 2016 and 2015, our unrecognized tax benefits related to tax positions that, if recognized, would not affect the effective tax rate because they relate to such factors as the timing, rather than the permissibility, of the deduction were $28 million, $66 million and $115 million, respectively. Accordingly, at December 31, 2017, 2016 and 2015, the amounts of unrecognized tax benefits that, if recognized, would favorably affect the effective tax rate were $4.7 billion, $4.4 billion and $4.2 billion, respectively.

Interest and penalties related to unrecognized tax benefits are recognized in income tax expense. At December 31, 2017, 2016, and 2015, we had accrued liabilities of $2.0 billion, $1.2 billion, and $1.2 billion, respectively, for the payment of interest (net of the federal benefit) and penalties. For the years ended December 31, 2017, 2016, and 2015, we accrued expense of $776 million, $26 million and $156 million, respectively, for the payment of interest and penalties. The current year activity is primarily related to a decrease in the expected federal benefit of interest due to the U.S. corporate tax rate reduction and to an increase in interest and penalties associated with cross border financing transactions.

We believe it is reasonably possible that our unrecognized tax benefits could decrease within the next 12 months by as much as $3.9 billion, principally as a result of potential resolutions or settlements of prior years’ tax items. The prior years’ tax items include unrecognized tax benefits related to the deductibility of certain expenses and matters related to cross border financing transactions.

Listed below are the tax years that remain subject to examination by major tax jurisdictions:

At December 31, 2017	Open Tax Years
Major Tax Jurisdiction
United States	2000-2016
Australia	2013-2016
France	2015-2016
Japan	2011-2016
Korea	2012-2016
Singapore	2012-2016
United Kingdom	2015-2016