INCOME TAXES

The components of income before income taxes and the provision for income taxes were as follows:



(millions)	2018			2017			2016
Income before income taxes
United States	$	851		$	1,097		$	835
Foreign	478			560			99
	1,329			1,657			934
Income taxes
Currently payable
Federal	7			358			173
State	28			31			26
Foreign	99			79			60
	134			468			259
Deferred
Federal	109			(41		)	18
State	(59		)	8			6
Foreign	(3		)	(25		)	(48		)
	47			(58		)	(24		)
Total income taxes	$	181		$	410		$	235

The difference between the U.S. federal statutory tax rate and the Company’s effective income tax rate was:



	2018		2017		2016
U.S. statutory income tax rate	21.0	%	35.0	%	35.0	%
Foreign rates varying from U.S. statutory rate	(3.0	)	(6.7	)	(5.0	)
Excess tax benefits on share-based compensation	(0.3	)	(0.3	)	(3.7	)
State income taxes, net of federal benefit	1.5		1.4		2.4
Cost (benefit) of remitted and unremitted foreign earnings	0.7		0.1		0.1
Legal entity restructuring, deferred tax impact	(3.3	)	—		—
Discretionary pension contributions	(2.3	)	—		—
Net change in valuation allowance	2.0		(0.4	)	0.5
U.S. deduction for qualified production activities	—		(1.4	)	(2.8	)
Statutory rate changes, deferred tax impact	—		(9.0	)	(0.1	)
U.S. deemed repatriation tax	(1.2	)	10.4		—
Intangible property transfer	—		(2.4	)	—
Venezuela deconsolidation	—		—		1.8
Venezuela remeasurement	—		—		0.4
Other	(1.5	)	(1.9	)	(3.4	)
Effective income tax rate	13.6	%	24.8	%	25.2	%

As presented in the preceding table, the Company’s 2018 consolidated effective tax rate was 13.6%, as compared to 24.8% in 2017 and 25.2% in 2016.

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (Tax Act). The Tax Act makes broad and complex changes to the U.S. tax code which impacted our year ended December 30, 2017 including but not limited to, reducing the corporate tax rate from 35% to 21%, requiring a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries that may be electively paid over eight years, and accelerating first year expensing of certain capital expenditures.

Shortly after the Tax Act was enacted, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB 118), which provides guidance on accounting for the Tax Act’s impact. SAB 118 provided a measurement period, which in no case should extend beyond one year from the Tax Act enactment date, during which a company may complete the accounting for the impacts of the Tax Act under ASC Topic 740.

The Company's 2018 income tax provision includes an $11 million reduction to income tax expense due to changes in estimates related to the Tax Act. The reduction is primarily related to a $16 million reduction in the transition tax estimate and $5 million of additional tax associated primarily with the final assessment of changes in our indefinite reinvestment assertion and resulting tax.

The Company's 2017 year end income tax provision includes $8 million of net additional income tax expense during the quarter ended December 30, 2017, driven by the reduction in the U.S. corporate tax rate and the transition tax on foreign earnings.

Transition tax on foreign earnings: The transition tax is a tax on the previously untaxed accumulated and current earnings and profits of certain of our foreign subsidiaries. In order to determine the amount of the transition tax, the Company must determine, in addition to other factors, the amount of post-1986 earnings and profits (E&P) of the relevant subsidiaries, as well as the amount of non-U.S. income taxes paid on such earnings. E&P is similar to retained earnings of the subsidiary, but requires other adjustments to conform to U.S. tax rules. As of December 30, 2017, based on accumulated foreign earnings and profits of approximately $2.6 billion, which are primarily in Europe, the Company was able to make a reasonable estimate of the transition tax and recorded a transition tax obligation of $157 million, which the Company expects to elect to pay over eight years. In the third quarter of 2018, the Company recorded a $16 million reduction to the transition tax liability and tax expense based on updated estimates of E&P. During the fourth quarter of 2018, the Company, as part of completing its accounting under SAB 118, revised its estimate of the transition tax liability to $94 million, and recorded $47 million of tax reserves related to uncertainty in our interpretation of the statute and associated regulations.

Indefinite reinvestment assertion: Prior to the Tax Act, we treated a significant portion of our undistributed foreign earnings as indefinitely reinvested. In light of the Tax Act, which included a new territorial tax regime, as of the period ended December 30, 2017, Management determined that the Company would analyze its global capital structure and working capital strategy and considered the indefinite reinvestment assertion to be provisional under SAB 118. In the fourth quarter of 2018, we finished analyzing our global capital structure and working capital strategy and determined that $2.4 billion of foreign earnings as of December 30, 2017 were no longer considered to be indefinitely invested. Accordingly, income tax expense of approximately $5 million was recorded in the fourth quarter of 2018. We have completed the assessment and accounting under SAB 118 for our indefinite investment assertion.

Reduction in U.S. Corporate Tax Rate: The tax provision as of December 30, 2017, included a tax benefit of $149 million for the remeasurement of certain deferred tax assets and liabilities to reflect the corporate income tax rate reduction impact to the Company's net deferred tax balances. The accounting for the reduction in the U.S. Corporate Tax rate was considered complete in the fourth quarter of 2017.

The Tax Act also created a new requirement that certain income earned by foreign subsidiaries, known as global intangible low-tax income (GILTI), must be included in the gross income of their U.S. shareholder. During the fourth quarter of 2018, the Company elected to treat the tax effect of GILTI as a current-period expense when incurred.

In conjunction with SAB 118, we have completed the accounting for the Tax Act in the fourth quarter 2018.

The 2018 effective income tax rate benefited from the reduction of the U.S. corporate tax rate as well as a $11 million reduction of income tax expense due to changes in estimates related to the Tax Act, the impact of discretionary pension contributions totaling $250 million in 2018, which were designated as 2017 tax year contributions, and a $44 million discrete tax benefit as a result of the remeasurement of deferred taxes following a legal entity restructuring. As of December 29, 2018, approximately $700 million of unremitted earnings were considered indefinitely reinvested. The unrecognized deferred tax liability for these earnings is estimated at approximately $20 million. However, this estimate could change based on the manner in which the outside basis difference associated with these earnings reverses.

The 2017 effective income tax rate benefited from a deferred tax benefit of $39 million resulting from intercompany transfers of intellectual property under the application of the newly adopted standard. See discussion regarding the adoption of ASU 2016-16, Intra-Entity Transfers of Assets Other Than Inventory, in Note 1.

The 2016 effective income tax rate benefited from excess tax benefits from share-based compensation totaling $36 million for federal, state, and foreign income taxes. During 2016, as described in Note 16, the Company deconsolidated its Venezuelan operations resulting in a pre-tax charge of $72 million with no significant associated tax benefit.

Management monitors the Company’s ability to utilize certain future tax deductions, operating losses and tax credit carryforwards, prior to expiration. Changes resulting from management’s assessment will result in impacts to deferred tax assets and the corresponding impacts on the effective income tax rate. Valuation allowances were recorded to reduce deferred tax assets to an amount that will, more likely than not, be realized in the future. The total tax benefit of carryforwards at year-end 2018 and 2017 were $270 million and $239 million, respectively, with related valuation allowances at year-end 2018 and 2017 of $166 million and $153 million, respectively. Of the total carryforwards at year-end 2018, substantially all will expire after 2022.

The following table provides an analysis of the Company’s deferred tax assets and liabilities as of year-end 2018 and 2017. Deferred tax liabilities increased in 2018 due primarily to the additional investment and consolidation of Multipro resulting in a deferred tax liability of $253 million.



	Deferred tax assets						Deferred tax liabilities
(millions)	2018			2017			2018		2017
U.S. state income taxes	$	—		$	—		$	19	$	48
Advertising and promotion-related	11			22			—		—
Wages and payroll taxes	20			26			—		—
Inventory valuation	14			20			—		—
Employee benefits	132			154			—		—
Operating loss, credit and other carryforwards	270			239			—		—
Hedging transactions	10			42			—		—
Depreciation and asset disposals	—			—			220		208
Trademarks and other intangibles	—			—			613		332
Deferred compensation	20			25			—		—
Stock options	31			33			—		—
Other	26			71			—		—
	534			632			852		588
Less valuation allowance	(166		)	(153		)	—		—
Total deferred taxes	$	368		$	479		$	852	$	588
Net deferred tax asset (liability)	$	(484	)	$	(109	)
Classified in balance sheet as:
Other assets	$	246		$	246
Other liabilities	(730		)	(355		)
Net deferred tax asset (liability)	$	(484	)	$	(109	)

The change in valuation allowance reducing deferred tax assets was:



(millions)	2018			2017			2016
Balance at beginning of year	$	153		$	131		$	63
Additions charged to income tax expense (a)	29			35			70
Reductions credited to income tax expense	(1		)	(28		)	(4		)
Currency translation adjustments	(15		)	15			2
Balance at end of year	$	166		$	153		$	131

(a) During 2017, the Company increased deferred tax assets by $15 million related to a foreign loss carryforward related to the acquisition of a majority ownership interest in a natural, bio-organic certified breakfast company. The entire adjustment of $15 million was offset by a corresponding valuation allowance because it is not expected to be used in the future. During 2016, the Company increased its deferred tax assets by $34 million relating to a revision of 2014 foreign loss carryforwards. The entire adjustment of $34 million was offset by a corresponding adjustment in the valuation allowance because it is not expected to be used in the future. These adjustments are not considered material to the previously issued or current year financial statements. Also during 2016, the Company increased its deferred tax assets by $26 million related to a foreign loss carryforward. The entire amount was offset by a corresponding valuation allowance because it is not expected to be used in the future.

Uncertain tax positions

The Company is subject to federal income taxes in the U.S. as well as various state, local, and foreign jurisdictions. The Company’s 2018 provision for U.S. federal income taxes represents approximately 65% of the Company’s consolidated income tax provision. The Company was chosen to participate in the Internal Revenue Service (IRS) Compliance Assurance Program (CAP) beginning with the 2008 tax year. As a result, with limited exceptions, the Company is no longer subject to U.S. federal examinations by the IRS for years prior to 2018. The Company is under examination for income and non-income tax filings in various state and foreign jurisdictions.

As of December 29, 2018, the Company has classified $12 million of unrecognized tax benefits as a current liability. Management’s estimate of reasonably possible changes in unrecognized tax benefits during the next twelve months is comprised of the current liability balance expected to be settled within one year, offset by approximately $4 million of projected additions related primarily to ongoing intercompany transfer pricing activity. Management is currently unaware of any issues under review that could result in significant additional payments, accruals, or other material deviation in this estimate.

Following is a reconciliation of the Company’s total gross unrecognized tax benefits as of the years ended December 29, 2018, December 30, 2017 and December 31, 2016. For the 2018 year, approximately $86 million represents the amount that, if recognized, would affect the Company’s effective income tax rate in future periods.



(millions)	2018			2017			2016
Balance at beginning of year	$	60		$	63		$	73
Tax positions related to current year:
Additions (a)	51			6			6
Tax positions related to prior years:
Additions	4			5			1
Reductions	(13		)	(8		)	(14		)
Settlements	(4		)	(4		)	1
Lapses in statutes of limitation	(1		)	(2		)	(4		)
Balance at end of year	$	97		$	60		$	63

(a) During the fourth quarter of 2018, the Company recorded, as part of its final estimate under SAB 118, $47 million of tax reserves related to uncertainty in our interpretation of the statute and associated regulations.

For the year ended December 29, 2018, the Company paid tax-related interest totaling $2 million and recognized $3 million of tax-related interest increasing the accrual balance to $22 million at year end. For the year ended December 30, 2017, the Company recognized $2 million of tax-related interest resulting in an accrual balance of $21 million at year-end. For the year ended December 31, 2016, the Company recognized $2 million of tax-related interest resulting in an accrual balance of $19 million at year-end.