Income Taxes

On December 22, 2017, the U.S. Government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Reform Act”). As a result of the Tax Reform Act, Altria recorded net tax benefits of approximately $3.4 billion in the fourth quarter of 2017 as discussed below. The main provisions of the Tax Reform Act that impact Altria include: (i) a reduction in the U.S. federal statutory corporate income tax rate from 35% to 21% effective January 1, 2018, and (ii) changes in the treatment of foreign-source income, commonly referred to as a modified territorial tax system.

The transition to a modified territorial tax system required Altria to record a deemed repatriation tax and an associated tax basis benefit in 2017. Substantially all of the deemed repatriation tax was related to Altria’s share of AB InBev’s accumulated earnings. Dividends received from AB InBev beginning in 2017, to the extent that such dividends represent previously taxed income attributable to the deemed repatriation tax, result in an associated tax basis expense, which reverses the tax basis benefit recorded in 2017. The Tax Reform Act also includes a provision to tax global intangible low-taxed income (“GILTI”) of foreign subsidiaries. Altria made an accounting policy election to treat taxes due under the GILTI provision as a current period expense.

Earnings before income taxes and provision (benefit) for income taxes consisted of the following for the years ended December 31, 2018, 2017 and 2016:



(in millions)	2018			2017			2016
Earnings (loss) before income taxes:
United States	$	9,441		$	9,809		$	21,867
Outside United States	(100		)	19			(15		)
Total	$	9,341		$	9,828		$	21,852
Provision (benefit) for income taxes:
Current:
Federal	$	1,911		$	2,346		$	4,093
State and local	519			366			390
Outside United States	1			15			6
	2,431			2,727			4,489
Deferred:
Federal	(18		)	(3,213		)	3,102
State and local	(42		)	86			20
Outside United States	3			1			(3		)
	(57		)	(3,126		)	3,119
Total provision (benefit) for income taxes	$	2,374		$	(399	)	$	7,608

Altria’s U.S. subsidiaries join in the filing of a U.S. federal consolidated income tax return. The U.S. federal income tax statute of limitations remains open for the year 2014 and forward, with years 2014 and 2015 currently under examination by the Internal Revenue Service (“IRS”) as part of an audit conducted in the ordinary course of business. With the exception of corresponding federal audit adjustments, state statutes of limitations generally remain open for the year 2014 and forward. Certain of Altria’s state tax returns are currently under examination by various states as part of routine audits conducted in the ordinary course of business.

A reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended December 31, 2018, 2017 and 2016 was as follows:



(in millions)	2018			2017			2016
Balance at beginning of year	$	66		$	169		$	158
Additions based on tax positions related to the current year	—			—			15
Additions for tax positions of prior years	22			129			29
Reductions for tax positions due to lapse of statutes of limitations	—			(4		)	(4		)
Reductions for tax positions of prior years	(1		)	(208		)	(28		)
Settlements	(2		)	(20		)	(1		)
Balance at end of year	$	85		$	66		$	169

Unrecognized tax benefits and Altria’s consolidated liability for tax contingencies at December 31, 2018 and 2017 were as follows:



(in millions)	2018			2017
Unrecognized tax benefits	$	85		$	66
Accrued interest and penalties	13			9
Tax credits and other indirect benefits	(1		)	(1		)
Liability for tax contingencies	$	97		$	74

The amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate at December 31, 2018 was $59 million, along with $26 million affecting deferred taxes. The amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate at December 31, 2017 was $43 million, along with $23 million affecting deferred taxes.

Altria recognizes accrued interest and penalties associated with uncertain tax positions as part of the tax provision.

For the years ended December 31, 2018, 2017 and 2016, Altria recognized in its consolidated statements of earnings $5 million, $(13) million and $9 million, respectively, of gross interest expense (income) associated with uncertain tax positions.

Altria is subject to income taxation in many jurisdictions. Unrecognized tax benefits reflect the difference between tax positions taken or expected to be taken on income tax returns and the amounts recognized in the financial statements. Resolution of the related tax positions with the relevant tax authorities may take many years to complete, and such timing is not entirely within the control of Altria. It is reasonably possible that within the next 12 months certain examinations will be resolved, which could result in a decrease in unrecognized tax benefits of approximately $45 million.

The effective income tax rate on pre-tax earnings differed from the U.S. federal statutory rate for the following reasons for the years ended December 31, 2018, 2017 and 2016:



	2018		2017		2016
U.S. federal statutory rate	21.0	%	35.0	%	35.0	%
Increase (decrease) resulting from:
State and local income taxes, net of federal tax benefit	4.0		3.5		1.2
Re-measurement of net deferred tax liabilities	—		(31.2	)	—
Tax basis in foreign investments	1.5		(7.8	)	—
Deemed repatriation tax	0.1		4.2		—
Uncertain tax positions	0.1		(0.9	)	—
Investment in AB InBev/SABMiller	(1.1	)	(5.9	)	(0.6	)
Domestic manufacturing deduction	—		(1.8	)	(0.8	)
Other	(0.2	)	0.8		—
Effective tax rate	25.4	%	(4.1	)%	34.8	%

The tax provision in 2018 included tax expense of $188 million related to the Tax Reform Act as follows: (i) tax expense of $140 million resulting from a partial reversal of the tax basis benefit associated with the deemed repatriation tax recorded in 2017; (ii) tax expense of $34 million for a valuation allowance on foreign tax credit carryforwards that are not realizable as a result of updates to the provisional estimates recorded in 2017 and (iii) tax expense of $14 million for an adjustment to the provisional estimates for the repatriation tax recorded in 2017.

Substantially all of the 2018 amounts related to the tax basis adjustment, valuation allowance on foreign tax credits and repatriation tax relate to Altria’s share of AB InBev’s accumulated earnings and associated taxes. The adjustments recorded in 2018 to the provisional estimates recorded in 2017 were based on (i) additional guidance related to, or interpretation of, the Tax Reform Act and associated tax laws and (ii) additional information received from AB InBev, including information regarding AB InBev’s accumulated earnings and associated taxes for the 2016 and 2017 tax years. The accounting for the repatriation tax is complete; therefore, no further adjustments to the provisional estimates are required.

The tax benefit in 2017 included net tax benefits of $3,367 million related to the Tax Reform Act recorded in the fourth quarter of 2017 as follows: (i) a tax benefit of $3,017 million to re-measure Altria and its consolidated subsidiaries’ net deferred tax liabilities based on the new U.S. federal statutory rate and (ii) a net tax benefit of $763 million for a tax basis adjustment associated with the deemed repatriation tax, partially offset by tax expense of $413 million for the deemed repatriation tax.

The 2017 amounts related to the tax basis adjustment and the deemed repatriation tax were based on provisional estimates as of January 18, 2018, substantially all of which are related to Altria’s share of AB InBev’s accumulated earnings and associated taxes.

The tax benefit in 2017 also included tax benefits of $232 million for the release of a valuation allowance in the third quarter of 2017 related to deferred income tax assets for foreign tax credit carryforwards, which is included in investment in AB InBev/SABMiller in the table above; and tax benefits of $152 million related primarily to the effective settlement in the second quarter of 2017 of the IRS audit of Altria and its consolidated subsidiaries’ 2010-2013 tax years, partially offset by tax expense of $114 million in the third quarter of 2017 for tax reserves related to the calculation of certain foreign tax credits.

The tax provision in 2016 included increased tax benefits associated with the cumulative SABMiller and AB InBev dividends and tax expense of $4.9 billion (approximately 35%) for the gain on the AB InBev Transaction.

The tax effects of temporary differences that gave rise to deferred income tax assets and liabilities consisted of the following at December 31, 2018 and 2017:



(in millions)	2018			2017
Deferred income tax assets:
Accrued postretirement and postemployment benefits	$	500		$	539
Settlement charges	864			614
Accrued pension costs	155			136
Net operating losses and tax credit carryforwards	57			18
Total deferred income tax assets	1,576			1,307
Deferred income tax liabilities:
Property, plant and equipment	(251		)	(261		)
Intangible assets	(2,689		)	(2,674		)
Investment in AB InBev	(3,038		)	(2,859		)
Finance assets, net	(313		)	(404		)
Other	(115		)	(121		)
Total deferred income tax liabilities	(6,406		)	(6,319		)
Valuation allowances	(71		)	—
Net deferred income tax liabilities	$	(4,901	)	$	(5,012	)

At December 31, 2018, Altria had estimated gross state tax net operating losses of $658 million that, if unused, will expire in 2019 through 2038. The 2018 valuation allowance is primarily related to foreign tax credit and state net operating loss carryforwards that more-likely-than-not will not be realized.

On October 1, 2018, Altria adopted ASU 2018-02 and elected to reclassify the stranded income tax effects of the Tax Reform Act on items within accumulated other comprehensive losses to earnings reinvested in the business. The adjustment relates to the change in the U.S. federal statutory corporate income tax rate. This election resulted in an increase to both accumulated other comprehensive losses and earnings reinvested in the business of $408 million on October 1, 2018.