Income Taxes

12 Months Ended

Dec. 31, 2017

Income before provision for income taxes, classified by source of income, was as follows:



In millions	2017		2016		2015
U.S.	$	2,242.0	$	2,059.4	$	2,597.8
Outside the U.S.	6,331.5		4,806.6		3,957.9
Income before provision for income taxes	$	8,573.5	$	6,866.0	$	6,555.7

Enacted on December 22, 2017, the Tax Act reduces the U.S. federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings. At December 31, 2017, the Company has not completed the accounting for the tax effects of enactment of the Tax Act. However, as described below, the Company has made a reasonable estimate of the effects on the existing deferred tax balances and the one-time transition tax. For these items, a net provisional tax cost of approximately $700 million is recognized and is included as a component of provision for income taxes from continuing operations.

Provisional amounts

Deferred tax assets and liabilities: The Company remeasured certain U.S. deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%. However, the Company is still analyzing certain aspects of the Tax Act and refining the calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. A provisional amount was recorded related to the remeasurement of the deferred tax balance, resulting in a provision for income taxes benefit of approximately $500 million.

Foreign tax effects: The one-time transition tax is based on the total post-1986 earnings and profits ("E&P") for which the Company had previously deferred from U.S. income taxes. A provisional amount was recorded for the one-time transition tax liability, resulting in a provision for income taxes cost of approximately $1.2 billion. The Company has not yet completed the calculation of the total post-1986 foreign E&P. Further, the transition tax is based in part on the amount of those earnings held in cash and other specified assets. This amount may change when the calculation of post-1986 foreign E&P and the amounts held in cash or other specified assets are finalized.

The provision for income taxes, classified by the timing and location of payment, was as follows:



In millions	2017			2016			2015
U.S. federal	$	2,030.8		$	1,046.6		$	1,072.3
U.S. state	169.8			121.3			139.5
Outside the U.S.	1,217.0			1,550.2			816.0
Current tax provision	3,417.6			2,718.1			2,027.8
U.S. federal	(120.1		)	(122.1		)	6.8
U.S. state	12.8			14.1			(3.9		)
Outside the U.S.	70.9			(430.6		)	(4.3		)
Deferred tax provision	(36.4		)	(538.6		)	(1.4		)
Provision for income taxes	$	3,381.2		$	2,179.5		$	2,026.4

Net deferred tax liabilities consisted of:



In millions	December 31, 2017				2016
Property and equipment		$	1,211.5		$	1,459.8
Unrealized foreign exchange gains		—			630.9
Intangible liabilities		296.2			445.2
Other		242.0			287.6
Total deferred tax liabilities		1,749.7			2,823.5
Property and equipment		(633.8		)	(650.2		)
Employee benefit plans		(253.1		)	(395.0		)
Intangible assets		(228.8		)	(170.7		)
Deferred foreign tax credits		(208.6		)	(316.8		)
Operating loss carryforwards		(71.1		)	(292.7		)
Other		(266.0		)	(338.6		)
Total deferred tax assets before valuation allowance		(1,661.4		)	(2,164.0		)
Valuation allowance		163.2			168.0
Net deferred tax liabilities		$	251.5		$	827.5
Balance sheet presentation:
Deferred income taxes		$	1,119.4		$	1,817.1
Other assets-miscellaneous		(867.9		)	(804.0		)
Liabilities of businesses held for sale		—			(185.6		)
Net deferred tax liabilities		$	251.5		$	827.5

At December 31, 2017, the Company had net operating loss carryforwards of $0.3 billion, of which $0.2 billion has an indefinite carryforward. The remainder will expire at various dates from 2018 to 2031.

The Company's effective income tax rate has been generally lower than the U.S. statutory tax rate primarily because non-U.S. income is generally subject to local statutory country tax rates that are below the 35% U.S. statutory tax rate and reflect the impact of global transfer pricing. Beginning in 2018, the Tax Act reduces the U.S. statutory tax rate to 21%.

The statutory U.S. federal income tax rate reconciles to the effective income tax rates as follows:



	2017		2016		2015
Statutory U.S. federal income tax rate	35.0	%	35.0	%	35.0	%
State income taxes, net of related federal income tax benefit	1.2		1.5		1.6
Foreign income taxed at different rates	(4.6	)	(6.5	)	(4.9	)
Transition tax	13.7		—		—
US net deferred tax liability remeasurement	(6.0	)	—		—
Cash repatriation	0.3		—		(2.3	)
Other, net	(0.2	)	1.7		1.5
Effective income tax rates	39.4	%	31.7	%	30.9	%

As of December 31, 2017 and 2016, the Company’s gross unrecognized tax benefits totaled $1.2 billion and $924.1 million, respectively. After considering the deferred tax accounting impact, it is expected that about $700 million of the total as of December 31, 2017 would favorably affect the effective tax rate if resolved in the Company’s favor.

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



In millions	2017			2016
Balance at January 1	$	924.1		$	781.2
Decreases for positions taken in prior years	(13.7		)	(37.1		)
Increases for positions taken in prior years	143.9			150.1
Increases for positions related to the current year	140.2			116.6
Settlements with taxing authorities	(6.5		)	(17.7		)
Lapsing of statutes of limitations	(7.6		)	(69.0		)
Balance at December 31⁽¹⁾	$	1,180.4		$	924.1


(1)	Of this amount, $1,132.3 million and $890.0 million are included in Other long-term liabilities for 2017 and 2016, respectively, and $30.8 million and $9.0 million are included in Current liabilities - income taxes for 2017 and 2016, respectively, on the consolidated balance sheet. The remainder is included in Deferred income taxes on the consolidated balance sheet.

In 2015, the Internal Revenue Service (“IRS”) issued a Revenue Agent Report (“RAR”) that included certain disagreed transfer pricing adjustments related to the Company’s U.S. Federal income tax returns for 2009 and 2010. Also in 2015, the Company filed a protest with the IRS Appeals Office related to these disagreed transfer pricing matters. During 2017 the Company received a response to its protest, and, as of December 31, 2017, is awaiting scheduling of an opening conference with IRS Appeals. In 2017, the IRS completed its examination of the Company’s U.S. Federal income tax returns for 2011 and 2012. Although at December 31, 2017 the IRS had not yet issued its RAR for these years, when issued it is expected to result in the same disagreed transfer pricing matters as the 2009 and 2010 RAR. Consequently, it is expected that the transfer pricing matters for 2011 and 2012 will be addressed along with the 2009 and 2010 matters as part of the 2009-2010 appeal. The Company is also under audit in multiple foreign tax jurisdictions for matters primarily related to transfer pricing, and the Company is under audit in multiple state tax jurisdictions. It is reasonably possible that the total amount of unrecognized tax benefits could decrease up to $710 million within the next 12 months, of which up to $20 million could favorably affect the effective tax rate. This would be due to the possible settlement of the 2009-2012 IRS transfer pricing matters, completion of the aforementioned foreign and state tax audits and the expiration of the statute of limitations in multiple tax jurisdictions.

In addition, it is reasonably possible that, as a result of audit progression in both the U.S. and foreign tax audits within the next 12 months, there may be new information that causes the Company to reassess the total amount of unrecognized tax benefits recorded. While the Company cannot estimate the impact that new information may have on our unrecognized tax benefit balance, it believes that the liabilities recorded are appropriate and adequate as determined under ASC 740.

The Company operates within multiple tax jurisdictions and is subject to audit in these jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations for years before 2009.

The Company had $155.3 million and $117.0 million accrued for interest and penalties at December 31, 2017 and 2016, respectively. The Company recognized interest and penalties related to tax matters of $34.9 million in 2017, $41.7 million in 2016, and $21.1 million in 2015, which are included in the provision for income taxes.

As a result of the Tax Act, the Company has re-evaluated its assertion related to the indefinite reinvestment of unremitted foreign earnings and recorded a provisional deferred tax liability for temporary differences related to investments in certain foreign

subsidiaries and corporate joint ventures. Although the Company has accrued certain amounts, the Company is still evaluating how the Tax Act will affect the Company’s accounting position related to the indefinite reinvestment of unremitted foreign earnings. During the measurement period, the Company may reflect adjustments to this provisional amount upon obtaining, preparing, and analyzing the necessary information to complete the accounting under ASC 740.