Income Taxes

The components of income before income taxes are as follows:



		2017			2016			2015
United States		$	3,452		$	2,630		$	2,879
Foreign		6,150			5,923			4,563
		$	9,602		$	8,553		$	7,442

The provision for income taxes consisted of the following:
		2017			2016			2015
Current:	U.S. Federal	$	4,925		$	1,219		$	1,143
	Foreign	724			824			773
	State	136			77			65
		5,785			2,120			1,981
Deferred:	U.S. Federal	(1,159		)	109			(14		)
	Foreign	(9		)	(33		)	(32		)
	State	77			(22		)	6
		(1,091		)	54			(40		)
		$	4,694		$	2,174		$	1,941

A reconciliation of the U.S. Federal statutory tax rate to our annual tax rate is as follows:



	2017		2016		2015
U.S. Federal statutory tax rate	35.0	%	35.0	%	35.0	%
State income tax, net of U.S. Federal tax benefit	0.9		0.4		0.6
Lower taxes on foreign results	(9.4	)	(8.0	)	(10.5	)
Impact of Venezuela impairment charges	—		—		6.4
Provisional one-time mandatory transition tax - TCJ Act	41.4		—		—
Provisional remeasurement of deferred taxes - TCJ Act	(15.9	)	—		—
Tax settlements	—		—		(3.1	)
Other, net	(3.1	)	(2.0	)	(2.3	)
Annual tax rate	48.9	%	25.4	%	26.1	%

Tax Cuts and Jobs Act

During the fourth quarter of 2017, the TCJ Act was enacted in the United States. Among its many provisions, the TCJ Act imposed a mandatory one-time transition tax on undistributed international earnings and reduced the U.S. corporate income tax rate from 35% to 21%, effective January 1, 2018. As a result of the enactment of the TCJ Act, we recognized a provisional net tax expense of $2.5 billion in the fourth quarter of 2017. See further unaudited information in “Items Affecting Comparability” in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Included in the provisional net tax expense of $2.5 billion is a provisional mandatory one-time transition tax of approximately $4 billion on undistributed international earnings, included in other liabilities. This provisional mandatory one-time transition tax was partially offset by a provisional $1.5 billion benefit resulting from the required remeasurement of our deferred tax assets and liabilities to the new, lower U.S. corporate income tax rate, effective January 1, 2018. The effect of the remeasurement was recorded in the fourth quarter of 2017, consistent with the enactment date of the TCJ Act, and reflected in our provision for income taxes.

The TCJ Act also creates a new requirement that certain income earned by foreign subsidiaries, known as GILTI, must be included in the gross income of their U.S. shareholder. The FASB allows an accounting policy election of either recognizing deferred taxes for temporary differences expected to reverse as GILTI in future years or recognizing such taxes as a current-period expense when incurred. Due to the complexity of calculating GILTI under the new law, we have not determined which method we will apply. Therefore, we have not made any adjustments related to potential GILTI tax in our financial statements. We expect to elect an accounting policy in the first quarter of 2018.

The components of the provisional net tax expense recorded in 2017 are based on currently available information and additional information needs to be prepared, obtained and/or analyzed to determine the final amounts. The provisional tax expense for the mandatory repatriation of undistributed international earnings will require further analysis of certain foreign exchange gains or losses, substantiation of foreign tax credits, as well as estimated cash and cash equivalents as of November 30, 2018, the tax year-end of our foreign subsidiaries. The provisional tax benefit for the remeasurement of deferred taxes will require additional information necessary for the preparation of our U.S. federal tax return, and further analysis and interpretation of certain provisions of the TCJ Act impacting deferred taxes, for example 100% expensing of qualified assets as well as our accounting policy election for recognizing deferred taxes for GILTI, could impact our deferred tax balance as of December 30, 2017.

Tax effects for these items will be recorded in subsequent quarters, as discrete adjustments to our income tax provision, once complete. The SEC has issued guidance that allows for a measurement period of up to one year after the enactment date of the TCJ Act to finalize the recording of the related tax impacts. We currently anticipate finalizing and recording any resulting adjustments by the end of 2018.

The recorded impact of the TCJ Act is provisional and the final amount may differ, possibly materially, due to, among other things, changes in estimates, interpretations and assumptions we have made, changes in IRS interpretations, the issuance of new guidance, legislative actions, changes in accounting standards or related interpretations in response to the TCJ Act and future actions by states within the United States that have not currently adopted the TCJ Act.

For further unaudited information and discussion of the potential impact of the TCJ Act, refer to “Item 1A. Risk Factors,” “Our Business Risks,” “Our Liquidity and Capital Resources” and “Our Critical Accounting Policies” in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Deferred tax liabilities and assets are comprised of the following:

Deferred Tax Liabilities



	2017			2016
Debt guarantee of wholly-owned subsidiary	$	578		$	839
Property, plant and equipment	1,397			1,967
Intangible assets other than nondeductible goodwill	3,169			4,124
Other	50			245
Gross deferred tax liabilities	5,194			7,175
Deferred tax assets
Net carryforwards	1,400			1,255
Share-based compensation	107			219
Retiree medical benefits	198			316
Other employee-related benefits	338			614
Pension benefits	22			419
Deductible state tax and interest benefits	157			189
Other	893			839
Gross deferred tax assets	3,115			3,851
Valuation allowances	(1,163		)	(1,110		)
Deferred tax assets, net	1,952			2,741
Net deferred tax liabilities	$	3,242		$	4,434

A summary of our valuation allowance activity is as follows:



	2017		2016			2015
Balance, beginning of year	$	1,110	$	1,136		$	1,230
Provision/(benefit)	33		13			(26		)
Other additions/(deductions)	20		(39		)	(68		)
Balance, end of year	$	1,163	$	1,110		$	1,136

For additional unaudited information on our income tax policies, including our reserves for income taxes, see “Our Critical Accounting Policies” in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Reserves

A number of years may elapse before a particular matter, for which we have established a reserve, is audited and finally resolved. The number of years with open tax audits varies depending on the tax jurisdiction. Our major taxing jurisdictions and the related open tax audits are as follows:



Jurisdiction	Years Open to Audit	Years Currently Under Audit
United States	2012-2016	2012-2013
Mexico	2014-2016	2014
United Kingdom	2014-2016	None
Canada (Domestic)	2013-2016	2013-2014
Canada (International)	2010-2016	2010-2014
Russia	2012-2016	2012-2016

While it is often difficult to predict the final outcome or the timing of resolution of any particular tax matter, we believe that our reserves reflect the probable outcome of known tax contingencies. We adjust these reserves, as well as the related interest, in light of changing facts and circumstances. Settlement of any particular issue would usually require the use of cash. Favorable resolution would be recognized as a reduction to our annual tax rate in the year of resolution. For further unaudited information on the impact of the resolution of open tax issues, see “Other Consolidated Results” in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

In 2015, we reached an agreement with the IRS resolving substantially all open matters related to the audits of taxable years 2010 and 2011. The agreement resulted in a 2015 non-cash tax benefit totaling $230 million.

As of December 30, 2017, the total gross amount of reserves for income taxes, reported in other liabilities, was $2.2 billion. We accrue interest related to reserves for income taxes in our provision for income taxes and any associated penalties are recorded in selling, general and administrative expenses. The gross amount of interest accrued, reported in other liabilities, was $283 million as of December 30, 2017, of which $89 million of expense was recognized in 2017. The gross amount of interest accrued, reported in other liabilities, was $193 million as of December 31, 2016, of which $61 million of expense was recognized in 2016.

A reconciliation of unrecognized tax benefits, is as follows:



	2017			2016
Balance, beginning of year	$	1,885		$	1,547
Additions for tax positions related to the current year	309			349
Additions for tax positions from prior years	86			139
Reductions for tax positions from prior years	(51		)	(70		)
Settlement payments	(4		)	(26		)
Statutes of limitations expiration	(33		)	(27		)
Translation and other	20			(27		)
Balance, end of year	$	2,212		$	1,885

Carryforwards and Allowances

Operating loss carryforwards totaling $12.6 billion at year-end 2017 are being carried forward in a number of foreign and state jurisdictions where we are permitted to use tax operating losses from prior periods to reduce future taxable income. These operating losses will expire as follows: $0.2 billion in 2018, $11.1 billion between 2019 and 2037 and $1.3 billion may be carried forward indefinitely. We establish valuation allowances for our deferred tax assets if, based on the available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

Undistributed International Earnings

As of December 30, 2017, we had approximately $42.5 billion of undistributed international earnings. We intend to repatriate approximately $20 billion of our foreign earnings back to the United States and have recognized all tax expense on these earnings in the fourth quarter of 2017. We intend to continue to reinvest the remaining $22.5 billion of earnings outside the United States for the foreseeable future and while U.S. federal tax expense has been recognized as a result of the TCJ Act, no deferred tax liabilities with respect to items such as certain foreign exchange gains or losses, foreign withholding taxes or state taxes have been recognized. It is not practicable for us to determine the amount of unrecognized tax expense on these reinvested international earnings.