Income Taxes

For financial reporting purposes, income before income taxes includes the following components:



For the Years Ended December 31,
(In millions of dollars)	2018			2017		2016
Income before income taxes:
U.S.	$	460		$	819	$	725
Other	1,784			1,824		1,755
	$	2,244		$	2,643	$	2,480

The expense for income taxes is comprised of:
Current –
U.S. Federal	$	82		$	313	$	208
Other national governments	449			388		366
U.S. state and local	82			36		43
	613			737		617
Deferred –
U.S. Federal	(30		)	286		26
Other national governments	(1		)	72		32
U.S. state and local	(8		)	38		10
	(39		)	396		68
Total income taxes	$	574		$	1,133	$	685

The significant components of deferred income tax assets and liabilities and their balance sheet classifications are as follows:



December 31,
(In millions of dollars)	2018		2017
Deferred tax assets:
Accrued expenses not currently deductible	$	526	$	369
Differences related to non-U.S. operations ^(a)	170		139
Accrued U.S. retirement benefits	406		394
Net operating losses ^(b)	48		67
Income currently recognized for tax	20		49
Other	16		31
	$	1,186	$	1,049



Deferred tax liabilities:
Differences related to non-U.S. operations	$	287	$	235
Depreciation and amortization	342		338
Accrued retirement & postretirement benefits - non-U.S. operations	171		172
Capitalized expenses currently recognized for tax	78		—
Other	49		16
	$	927	$	761


(a)	Net of valuation allowances of $21 million in 2018 and $18 million in 2017.


(b)	Net of valuation allowances of $45 million in 2018 and $11 million in 2017.



December 31,
(In millions of dollars)	2018		2017
Balance sheet classifications:
Deferred tax assets	$	680	$	669
Other liabilities	$	421	$	381

Taxes are not provided on the excess of the amount for financial reporting over the tax basis of investments in foreign subsidiaries that are essentially permanent in duration, which, at December 31, 2018, the Company estimates amounted to approximately $2.3 billion. The determination of the unrecognized deferred tax liability with respect to these investments is not practicable.

A reconciliation from the U.S. Federal statutory income tax rate to the Company’s effective income tax rate is shown below:



For the Years Ended December 31,	2018		2017		2016
U.S. Federal statutory rate	21.0	%	35.0	%	35.0	%
U.S. state and local income taxes—net of U.S. Federal income tax benefit	2.3		1.5		1.5
Differences related to non-U.S. operations	3.3		(8.6	)	(9.2	)
U.S. Tax Reform	(0.3	)	17.4		—
Equity compensation	(1.0	)	(2.6	)	—
Other	0.3		0.2		0.3
Effective tax rate	25.6	%	42.9	%	27.6	%

The Company’s consolidated effective tax rate was 25.6%, 42.9% and 27.6% in 2018, 2017 and 2016, respectively. The tax rate in 2017 and 2016 reflects foreign operations, which were generally taxed at rates lower than the U.S. statutory tax rate. The effective tax rate in 2017 reflects a provisional estimate of the impact of the enactment of the TCJA, as well as the impact of the required change in accounting for equity awards.

The TCJA provided for a transition to a new method of taxing non-U.S. based operations via a transition tax on undistributed earnings of non-U.S. subsidiaries. The Company recorded a provisional charge of $240 million in the fourth quarter of 2017 as an estimate of U.S. transition taxes and ancillary effects, including state taxes and foreign withholding taxes related to the change in permanent reinvestment status with respect to our pre-2018 foreign earnings. This transition tax is payable over eight years. The reduction of the U.S. corporate tax rate from 35% to 21% reduced the value of the U.S. deferred tax assets and liabilities; accordingly, a charge of $220 million was recorded. Adjustments during 2018 to the provisional estimates of transition taxes and U.S. deferred tax assets and liabilities decreased income tax expense by $5 million. These amounts are now final.

Prior to 2017, the Company considered most unremitted earnings of its non-U.S. subsidiaries, except amounts repatriated in the year earned, to be permanently reinvested and, accordingly, recorded no deferred U.S. income taxes on such earnings. As a result of the transition tax, the Company has begun repatriating most of the accumulated pre-2018 earnings that were previously intended to be permanently re-invested. We continue to evaluate our global investment and repatriation strategy in light of U.S. tax reform under the new quasi-territorial tax regime for future foreign earnings.

Valuation allowances had net increases of $36 million and $9 million in 2018 and 2017, respectively and a net decrease of $8 million in 2016. Adjustments of the beginning of the year balances of valuation allowances increased income tax expense by $1 million and $11 million in 2018 and 2017, respectively, and decreased income tax expense by $7 million in 2016. Approximately 53% of the Company’s net operating loss carryforwards expire from 2019 through 2037, and others are unlimited. The potential tax benefit from net operating loss carryforwards at the end of 2018 comprised federal, state and local, and non-U.S. tax benefits of $3 million, $42 million and $57 million, respectively, before reduction for valuation allowances.

The realization of deferred tax assets depends on generating future taxable income during the periods in which the tax benefits are deductible or creditable. Tax liabilities are determined and assessed jurisdictionally by legal entity or filing group. Certain taxing jurisdictions allow or require combined or consolidated tax filings. The Company assessed the realizability of its deferred tax assets. The Company considered all available evidence, including the existence of a recent history of losses, placing particular weight on evidence that could be objectively verified. A valuation allowance was recorded to reduce deferred tax assets to the amount that the Company believes is more likely than not to be realized.

Following is a reconciliation of the Company’s total gross unrecognized tax benefits for the years ended December 31, 2018, 2017 and 2016:



(In millions of dollars)	2018			2017			2016
Balance at January 1,	$	71		$	65		$	74
Additions, based on tax positions related to current year	6			1			2
Additions for tax positions of prior years	6			14			6
Reductions for tax positions of prior years	—			(6		)	(6		)
Settlements	(2		)	—			(7		)
Lapses in statutes of limitation	(3		)	(3		)	(4		)
Balance at December 31,	$	78		$	71		$	65

Of the total unrecognized tax benefits at December 31, 2018, 2017 and 2016, $64 million, $56 million and $53 million, respectively, represent the amount that, if recognized, would favorably affect the effective tax rate in any future periods. The total gross amount of accrued interest and penalties at December 31, 2018, 2017 and 2016, before any applicable federal benefit, was $15 million, $12 million and $11 million, respectively.

The Company is routinely examined by the jurisdictions in which it has significant operations. In the U.S. federal jurisdiction the Company participates in the Internal Revenue Service’s (IRS) Compliance Assurance Process (CAP), which is structured to conduct real-time compliance reviews. The IRS is currently examining the Company’s 2016 and 2017 tax returns and is performing a pre-filing review of 2018. In 2018, the Company settled its federal audit for the year 2015.

During 2018, New York State and New York City closed the examination of tax years 2007 through 2009. New York State and New York City have examinations underway for various entities covering the years 2009 through 2014. Outside the United States, there are ongoing examinations in Italy for the tax year 2015, Canada of tax years 2013 through 2016, and in Singapore for the tax years 2014 through 2016. During 2018, the United Kingdom concluded an examination of tax years 2014 and 2015, and an examination of year 2016 is ongoing. During 2018, examinations in Germany for the years 2009 through 2012, and in France for the years 2011 and 2012 were concluded. The Company regularly considers the likelihood of assessments in each of the taxing jurisdictions resulting from examinations. The Company has established liabilities for uncertain tax positions in relation to the potential assessments. The Company believes the resolution of tax matters will not have a material effect on the consolidated financial position of the Company, although a resolution of tax matters could have a material impact on the Company's net income or cash flows and on its effective tax rate in a particular future period. It is reasonably possible that the total amount of unrecognized tax benefits will decrease between zero and approximately $10 million within the next twelve months due to settlement of audits and expiration of statutes of limitation.