NOTE 10. Income Taxes

Income Before Income Taxes


(Millions)	2018		2017		2016
United States	$	3,487	$	4,149	$	4,366
International		3,513		3,399		2,687
Total	$	7,000	$	7,548	$	7,053

Provision for Income Taxes


(Millions)	2018		2017		2016
Currently payable
Federal	$	698	$	1,022	$	1,192
State		109		59		75
International		763		722		733
Tax Cuts and Jobs Act (TCJA) non-current transition tax provision		176		623		—
Deferred
Federal		(38)		162		(3)
State		(17)		15		9
International		(54)		76		(11)
Total	$	1,637	$	2,679	$	1,995

Components of Deferred Tax Assets and Liabilities


(Millions)	2018		2017
Deferred tax assets:
Accruals not currently deductible
Employee benefit costs	$	187	$	178
Product and other claims		228		204
Miscellaneous accruals		113		98
Pension costs		643		760
Stock-based compensation		203		210
Net operating/capital loss/tax credit carryforwards		71		89
Foreign tax credits		—		32
Currency translation		—		59
Inventory		54		51
Other		24		—
Gross deferred tax assets		1,523		1,681
Valuation allowance		(67)		(81)
Total deferred tax assets	$	1,456	$	1,600

Deferred tax liabilities:
Product and other insurance receivables	$	(7)	$	(6)
Accelerated depreciation		(521)		(447)
Intangible amortization		(799)		(784)
Currency translation		(35)		—
Other		(8)		(87)
Total deferred tax liabilities	$	(1,370)	$	(1,324)

Net deferred tax assets	$	86	$	276

The net deferred tax assets are included as components of Other Assets and Other Liabilities within the Consolidated Balance Sheet. See Note 7 “Supplemental Balance Sheet Information” for further details.

As of December 31, 2018, the Company had tax effected operating losses, capital losses, and tax credit carryovers for federal (approximately $3 million), state (approximately $19 million), and international (approximately $50 million), with all amounts before limitation impacts and valuation allowances. The federal tax attribute carryovers will expire after 15 to 20 years, the state after 5 to 10 years, and the international after one to three years or have an indefinite carryover period. The tax attributes being carried over arise as certain jurisdictions may have tax losses or may have inabilities to utilize certain losses and foreign tax credits without the same type of taxable income. As of December 31, 2018, the Company has provided $67 million of valuation allowance against certain of these deferred tax assets based on management’s determination that it is more-likely-than-not that the tax benefits related to these assets will not be realized.

Reconciliation of Effective Income Tax Rate


	2018		2017		2016
Statutory U.S. tax rate	21.0	%	35.0	%	35.0	%
State income taxes - net of federal benefit	1.0		0.8		0.9
International income taxes - net	0.2		(6.3)		(2.7)
Global Intangible Low Taxed Income (GILTI)	1.1		—		—
Foreign Derived Intangible Income (FDII)	(1.3)		—		—
U.S. TCJA enactment - net impacts	2.5		10.1		—
U.S. research and development credit	(1.5)		(0.7)		(0.5)
Reserves for tax contingencies	1.2		2.2		0.2
Domestic Manufacturer’s deduction	—		(1.8)		(1.8)
Employee share-based payments	(1.4)		(3.2)		(2.8)
All other - net	0.6		(0.6)		—
Effective worldwide tax rate	23.4	%	35.5	%	28.3	%

The effective tax rate for 2018 was 23.4 percent, compared to 35.5 percent in 2017, a decrease of 12.1 percentage points, impacted by several factors. Primary factors that decreased the Company’s effective tax rate included favorable aspects of the Tax Cuts and Jobs Act (TCJA) including the decrease in the U.S. income tax rate and foreign-derived intangible income (FDII), reduced transitional impact of TCJA related to transition tax and remeasurement of deferred tax assets/liabilities (further discussed below), increased benefits from the R&D tax credit, and favorable adjustment to prior year uncertain tax provisions. These decreases were partially offset by the elimination of the domestic manufacturing deduction, the global intangible low-taxed income (GILTI) provision, and lower excess tax benefits related to employee share-based payments.

The effective tax rate for 2017 was 35.5 percent, compared to 28.3 percent in 2016, an increase of 7.2 percentage points, impacted by several factors. Primary factors that increased the Company’s effective tax rate included the impacts due to the TCJA being enacted in 2017 (see further information below) and remeasurements and establishment of 3M’s uncertain tax positions. The increase was partially offset by actions which related to international taxes that were impacted by increasing benefits from the Company’s supply chain centers of expertise, changes to the geographic mix of income before taxes and prior year cash optimization actions, higher year-on-year excess tax benefit for employee share-based payment, increased benefits from the R&D tax credit, a reduction of state taxes, and other items.

The TCJA was enacted in December 2017. Among other things, the TCJA reduces the U.S. federal corporate tax rate from 35 percent to 21 percent beginning in 2018, requires companies to pay a one-time transition tax on previously unremitted earnings of non-U.S. subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings. The SEC staff issued Staff Accounting Bulletin (SAB) 118, which provided a measurement period of up to one year from the TCJA’s enactment date for companies to complete their accounting under ASC 740. In connection with the enactment of the TCJA, the Company recorded a net tax expense of $762 million in the fourth quarter of 2017 and additional net charges of $176 million as measurement period adjustments in 2018. As further discussed below, 3M completed its accounting for the income tax effects of enactment of the TCJA as follows:

Transition tax: 3M recorded a provisional income tax expense obligation of $745 million in the fourth quarter of 2017. During 2018, the Company recorded an additional obligation of $97 million related to the transition tax portion of the TCJA. The TCJA’s transition tax is payable over eight years beginning in 2018. As of December 31, 2018, 3M reflected $649 million in long-term income taxes payable associated with the transition tax.

Remeasurement of deferred tax assets/liabilities and other impacts: 3M remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21 percent under the TCJA. In the fourth quarter of 2017, 3M recorded a net income tax expense of $17 million related to remeasurement of deferred tax assets/liabilities and other impacts. During 2018, 3M recorded an additional net tax expense of $79 million as an associated measurement period adjustment.

3M has recorded current tax on GILTI relative to 2018 operations and will continue to account for GILTI as a period cost when incurred.

The IRS has completed its field examination of the Company’s U.S. federal income tax returns for the years 2005 to 2014, and 2016, but the years have not closed as the Company is in the process of resolving open issues. The Company remains under examination by the IRS for its U.S. federal income tax returns for the years 2015, 2017 and 2018. In addition to the U.S. federal examination, there is also audit activity in several U.S. state and foreign jurisdictions. As of December 31, 2018, no taxing authority proposed significant adjustments to the Company’s tax positions for which the Company is not adequately reserved.

It is reasonably possible that the amount of unrecognized tax benefits could significantly change within the next 12 months. The Company has ongoing federal, state and international income tax audits in various jurisdictions and evaluates uncertain tax positions that may be challenged by local tax authorities and not fully sustained. These uncertain tax positions are reviewed on an ongoing basis and adjusted in light of facts and circumstances including progression of tax audits, developments in case law and closing of statutes of limitation. At this time, the Company is not able to estimate the range by which these potential events could impact 3M’s unrecognized tax benefits in the next 12 months.

The Company recognizes the amount of tax benefit that has a greater than 50 percent likelihood of being ultimately realized upon settlement. A reconciliation of the beginning and ending amount of gross unrecognized tax benefits (UTB) is as follows:

Federal, State and Foreign Tax


(Millions)	2018		2017		2016
Gross UTB Balance at January 1	$	530	$	319	$	381

Additions based on tax positions related to the current year		129		119		67
Additions for tax positions of prior years		146		149		43
Reductions for tax positions of prior years		(123)		(38)		(66)
Settlements		(17)		(3)		(95)
Reductions due to lapse of applicable statute of limitations		(18)		(16)		(11)

Gross UTB Balance at December 31	$	647	$	530	$	319

Net UTB impacting the effective tax rate at December 31	$	655	$	526	$	333

The total amount of UTB, if recognized, would affect the effective tax rate by $655 million as of December 31, 2018, $526 million as of December 31, 2017, and $333 million as of December 31, 2016. The ending net UTB results from adjusting the gross balance for deferred items, interest and penalties, and deductible taxes. The net UTB is included as components of Other Assets, Accrued Income Taxes, and Other Liabilities within the Consolidated Balance Sheet.

The Company recognizes interest and penalties accrued related to unrecognized tax benefits in tax expense. The Company recognized in the consolidated statement of income on a gross basis approximately $12 million of expense, $20 million of expense, and $10 million of expense in 2018, 2017, and 2016, respectively. The amount of interest and penalties recognized may be an expense or benefit due to new or remeasured unrecognized tax benefit accruals. At December 31, 2018, and December 31, 2017, accrued interest and penalties in the consolidated balance sheet on a gross basis were $69 million and $68 million, respectively. Included in these interest and penalty amounts are interest and penalties related to tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility.

As a result of certain employment commitments and capital investments made by 3M, income from certain manufacturing activities in the following countries is subject to reduced tax rates or, in some cases, is exempt from tax for years through the following: Thailand (2018), China (2019), Korea (2019), Switzerland (2023), Singapore (2025), and Brazil (2028). The income tax benefits attributable to the tax status of these subsidiaries are estimated to be $227 million (38 cents per diluted share) in 2018, $228 million (37 cents per diluted share) in 2017, and $142 million (23 cents per diluted share) in 2016.

The Company has not provided deferred taxes on approximately $12 billion of undistributed earnings from non-U.S. subsidiaries as of December 31, 2018, which are indefinitely reinvested in operations. Because of the multiple avenues in which to repatriate the earnings to minimize tax cost, and because a large portion of these earnings are not liquid, it is not practical to determine the income tax liability that would be payable if such earnings were not reinvested indefinitely.