Income Taxes

12 Months Ended

Dec. 31, 2019

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



For the Years Ended December 31,
(In millions of dollars)	2019			2018			2017
Income before income taxes:
U.S.	$	657		$	460		$	819
Other	1,782			1,784			1,824
	$	2,439		$	2,244		$	2,643

The expense (benefit) for income taxes is comprised of:
Current –
U.S. Federal	$	70		$	82		$	313
Other national governments	455			449			388
U.S. state and local	57			82			36
	582			613			737
Deferred –
U.S. Federal	69			(30		)	286
Other national governments	(16		)	(1		)	72
U.S. state and local	31			(8		)	38
	84			(39		)	396
Total income taxes	$	666		$	574		$	1,133

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



December 31,
(In millions of dollars)	2019		2018
Deferred tax assets:
Accrued expenses not currently deductible	$	492	$	526
Differences related to non-U.S. operations ^(a)	324		170
Accrued U.S. retirement benefits	438		406
Net operating losses ^(b)	70		48
Income currently recognized for tax	19		20
Other	27		16
	$	1,370	$	1,186



Deferred tax liabilities:
Differences related to non-U.S. operations	$	400	$	287
Depreciation and amortization	594		342
Accrued retirement & postretirement benefits - non-U.S. operations	151		171
Capitalized expenses currently recognized for tax	77		78
Other	37		49
	$	1,259	$	927


(a)	Net of valuation allowances of $54 million in 2019 and $21 million in 2018.


(b)	Net of valuation allowances of $72 million in 2019 and $45 million in 2018.



December 31,
(In millions of dollars)	2019		2018
Balance sheet classifications:
Deferred tax assets	$	676	$	680
Other liabilities	$	565	$	421

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, 2019, the Company estimates amounted to approximately $1.8 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,	2019		2018		2017
U.S. Federal statutory rate	21.0	%	21.0	%	35.0	%
U.S. state and local income taxes—net of U.S. Federal income tax benefit	3.0		2.3		1.5
Differences related to non-U.S. operations	3.0		3.3		(8.6	)
U.S. Tax Reform	—		(0.3	)	17.4
Equity compensation	(1.3	)	(1.0	)	(2.6	)
Other	1.6		0.3		0.2
Effective tax rate	27.3	%	25.6	%	42.9	%

The Company’s consolidated effective tax rate was 27.3%, 25.6% and 42.9% in 2019, 2018 and 2017, respectively. The rates in 2019 and 2018 reflect ongoing impacts of the Tax Cuts and Jobs Act (TCJA) and certain tax planning benefits, largely offset by higher estimated tax costs from the TCJA quasi-territorial system, greater disallowance of certain expenses, a decrease in excess tax benefits related to share compensation primarily due to the 21% U.S. tax rate, lower Federal benefit for State tax deductions and State treatment of certain TCJA provisions. The 2019 rate includes certain tax costs of the JLT integration. The 2018 rate includes the effect of a charge related to the Company’s investment in Alexander Forbes as discussed in Note 10. The tax rate in 2017 reflects the fact that foreign operations were generally taxed at rates lower than the U.S. statutory tax rate prior to the TCJA, as well as including a provisional estimate of the impact of the enactment of the TCJA.

The TCJA provided for a transition to a quasi-territorial tax system for taxing foreign earnings via a transition tax on undistributed earnings of non-U.S. subsidiaries. The Company recorded a provisional transition tax charge of $240 million upon enactment of the TCJA in 2017. 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. These amounts were decreased by $5 million and finalized in 2018.

A valuation allowance was recorded to adjust deferred tax assets to the amount that the Company believes is more likely than not to be realized. Valuation allowances had net increases of $60 million and $36 million in 2019 and 2018, respectively. There was no change to income tax expense as a result of adjustments of the beginning of the year valuation allowances in 2019. Adjustments of the beginning of the year balances of valuation allowances increased income tax expense by $1 million during 2018. Approximately 69% of the Company’s net operating loss carryforwards expire from 2020 through 2040, and others are unlimited. The potential tax benefit from net operating loss carryforwards at the end of 2019 comprised federal, state and local, and non-U.S. tax benefits of $32 million, $34 million and $84 million, respectively, before reduction for valuation allowances.

Following is a reconciliation of the Company’s total gross unrecognized tax benefits for the years ended December 31, 2019, 2018 and 2017:



(In millions of dollars)	2019			2018			2017
Balance at January 1,	$	78		$	71		$	65
Additions, based on tax positions related to current year	8			6			1
Additions for tax positions of prior years	15			6			14
Reductions for tax positions of prior years	(1		)	—			(6		)
Settlements	(1		)	(2		)	—
Lapses in statutes of limitation	(13		)	(3		)	(3		)
Balance at December 31,	$	86		$	78		$	71

Of the total unrecognized tax benefits at December 31, 2019, 2018 and 2017, $75 million, $64 million and $56 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, 2019, 2018 and 2017, before any applicable federal benefit, was $31 million, $15 million and $12 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 be, in effect, a real-time audit. The IRS is currently examining the Company’s 2017 and 2018 tax returns and is performing a pre-filing review of 2019. In 2019, the Company settled its federal audit for the year 2016.

New York is a significant jurisdiction for the Company. During 2019, New York State initiated an audit for the 2015 tax year. 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 2010 through 2014.

The status of audits for significant jurisdictions outside the United States are summarized in the table below:



Tax Audit (Years)
Jurisdiction:	Initiated in 2019	Ongoing	Concluded
Canada	2018		2013-2016 during 2019
France	2017-2018		2011-2012 during 2018
Germany	2013-2016		2009-2012 during 2018
Italy	2016	2015
Singapore			2014-2016 during 2019
United Kingdom	2017	2016	2014-2015 during 2018

The Company has established liabilities for uncertain tax positions in relation to potential assessments in the jurisdictions in which it operates. 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.