Taxation

Under Swiss law, a resident company is subject to income tax at the federal, cantonal, and communal levels that is levied on net worldwide income. Income attributable to permanent establishments or real estate located abroad is excluded from the Swiss tax base. Chubb Limited is a holding company and, therefore, is exempt from cantonal and communal income tax. As a result, Chubb Limited is subject to Swiss income tax only at the federal level. Furthermore, participation relief (i.e., tax relief) is granted to Chubb Limited at the federal level for qualifying dividend income and capital gains related to the sale of qualifying participations (i.e., subsidiaries). It is expected that the participation relief will result in a full exemption of participation income from federal income tax. Chubb Limited is subject to an annual cantonal and communal capital tax on the taxable equity of Chubb Limited in Switzerland.

Chubb has two Swiss operating subsidiaries, an insurance company, Chubb Insurance (Switzerland) Limited and a reinsurance company, Chubb Reinsurance (Switzerland) Limited. Both are subject to federal, cantonal, and communal income tax and to annual cantonal and communal capital tax.

Under current Bermuda law, Chubb Limited and its Bermuda subsidiaries are not required to pay any taxes on income or capital gains. If a Bermuda law were enacted that would impose taxes on income or capital gains, Chubb Limited and the Bermuda subsidiaries have received an undertaking from the Minister of Finance in Bermuda that would exempt such companies from Bermudian taxation until March 2035.

Income from Chubb's operations at Lloyd's is subject to United Kingdom (U.K.) corporation taxes. Lloyd's is required to pay U.S. income tax on U.S. connected income (U.S. income) written by Lloyd's syndicates. Lloyd's has a closing agreement with the Internal Revenue Service (IRS) whereby the amount of tax due on this business is calculated by Lloyd's and remitted directly to the IRS. These amounts are then charged to the accounts of the Names/Corporate Members in proportion to their participation in the relevant syndicates. Chubb's Corporate Members are subject to this arrangement but, as U.K. domiciled companies, will receive U.K. corporation tax credits for any U.S. income tax incurred up to the value of the equivalent U.K. corporation income tax charge on the U.S. income.

Chubb Group Holdings and its respective subsidiaries are subject to income taxes imposed by U.S. authorities and file a consolidated U.S. tax return. As part of the Chubb Corp acquisition, immediately following the merger, legacy Chubb Corp merged with and into Chubb INA Holdings Inc., and therefore, joined the Chubb Group Holdings consolidated return. Starting in tax year 2014, Combined Insurance and its life subsidiary joined the Chubb Group Holdings consolidated return. For tax years prior to 2014, Combined Insurance and its life subsidiary filed a separate consolidated U.S. tax return. Should Chubb Group Holdings pay a dividend to Chubb Limited, withholding taxes would apply. Currently, however, no withholding taxes are accrued with respect to such un-remitted earnings as management has no intention of remitting these earnings. Similarly, no taxes have been provided on the un-remitted earnings of certain foreign subsidiaries (Hong Kong and Korea) as management has no intention of remitting these earnings. The cumulative amount that would be subject to withholding tax, if distributed, as well as the determination of the associated tax liability are not practicable to compute; however, such amount would be material to Chubb. Certain international operations of Chubb are also subject to income taxes imposed by the jurisdictions in which they operate.

Chubb's domestic operations are in Switzerland, the jurisdiction where we are legally organized, incorporated, and registered.

The following table presents pre-tax income and the related provision for income taxes:



	Year Ended December 31
(in millions of U.S. dollars)	2016			2015		2014
Pre-tax income:
Switzerland	$	766		$	469	$	404
Outside Switzerland	4,184			2,827		3,083
Total pre-tax income	$	4,950		$	3,296	$	3,487
Provision for income taxes:
Current tax expense:
Switzerland	$	97		$	38	$	31
Outside Switzerland	727			266		450
Total current tax expense	824			304		481
Deferred tax expense:
Switzerland	(27		)	4		9
Outside Switzerland	18			154		144
Total deferred tax expense	(9		)	158		153
Provision for income taxes	$	815		$	462	$	634

The most significant jurisdictions contributing to the overall taxation of Chubb are calculated using the following rates: Switzerland 7.83 percent, Bermuda 0.0 percent, U.S. 35.0 percent, and U.K. 20.0 percent. The following table presents a reconciliation of the difference between the provision for income taxes and the expected tax provision at the Swiss statutory income tax rate:



	Year Ended December 31
(in millions of U.S. dollars)	2016			2015			2014
Expected tax provision at Swiss statutory tax rate	$	388		$	258		$	273
Permanent differences:
Taxes on earnings subject to rate other than Swiss statutory rate	582			193			224
Change to deferred taxes related to unrealized foreign exchange losses⁽¹⁾	—			—			139
Tax-exempt interest and dividends received deduction, net of proration	(200		)	(32		)	(33		)
Net withholding taxes	20			35			33
Change in valuation allowance⁽¹⁾	(1		)	2			(20		)
Other	26			6			18
Total provision for income taxes	$	815		$	462		$	634

⁽¹⁾2014 includes a charge to deferred taxes related to non-recognition of foreign tax credits related to unrealized foreign exchange losses.

The following table presents the components of the net deferred tax assets (liabilities):



	December 31			December 31
(in millions of U.S. dollars)	2016			2015 ⁽¹⁾
Deferred tax assets:
Loss reserve discount	$	1,269		$	663
Unearned premiums reserve	498			190
Foreign tax credits	2,115			969
Provision for uncollectible balances	72			65
Loss carry-forwards	92			72
Debt related amounts	219			3
Compensation related amounts	449			189
Cumulative translation adjustments	59			17
Other, net	69			80
Total deferred tax assets	4,842			2,248
Deferred tax liabilities:
Deferred policy acquisition costs	842			412
Other intangible assets, including VOBA	2,352			384
Un-remitted foreign earnings	2,001			827
Investments	406			6
Unrealized appreciation on investments	60			195
Depreciation	91			68
Total deferred tax liabilities	5,752			1,892
Valuation allowance	78			38
Net deferred tax assets (liabilities)	$	(988	)	$	318

⁽¹⁾Certain amounts within the components of deferred taxes at December 31, 2015 have been reclassified to conform to the new presentation at December 31, 2016.

In connection with the Chubb Corp acquisition, we established deferred tax liabilities, principally related to purchased intangibles. These liabilities resulted in a net deferred tax liability position for us at December 31, 2016 as noted in the table above.

The valuation allowance of $78 million at December 31, 2016, and $38 million at December 31, 2015, reflects management's assessment, based on available information, that it is more likely than not that a portion of the deferred tax assets will not be realized due to the inability of certain foreign subsidiaries to generate sufficient taxable income. Adjustments to the valuation allowance are made when there is a change in management's assessment of the amount of deferred tax assets that are realizable.

At December 31, 2016, Chubb has net operating loss carry-forwards of $356 million which, if unused, will expire starting in the year 2018, and a foreign tax credit carry-forward in the amount of $114 million which, if unused, will expire in the years 2019 through 2026.

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



	December 31			December 31
(in millions of U.S. dollars)	2016			2015
Balance, beginning of year	$	16		$	23
Additions based on tax positions related to the current year	3			1
Additions based on tax positions related to prior years ⁽¹⁾	2			—
Reductions for tax positions of prior years	(4		)	(7		)
Reductions for the lapse of the applicable statutes of limitations	—			(1		)
Balance, end of year	$	17		$	16

⁽¹⁾Assumed in connection with the Chubb Corp acquisition.

At December 31, 2016 and 2015, the total amount of unrecognized tax benefits that would affect the effective tax rate, if recognized, were $17 million and $16 million, respectively.

Chubb recognizes accruals for interest and penalties, if any, related to unrecognized tax benefits in income tax expense in the Consolidated statements of operations. For the years ended December 31, 2016, 2015, and 2014, tax-related interest expense (income) and penalties reported in the Consolidated statements of operations were $1 million, $1 million, and $(1) million, respectively. At both December 31, 2016 and 2015, liabilities for tax-related interest and penalties in our Consolidated balance sheets were $4 million.

In September 2016, the IRS completed its examination of one of our subsidiary’s federal tax returns for the 2010-2012 tax years. No material adjustments resulted from this examination. It is reasonably possible that over the next twelve months, the amount of unrecognized tax benefits may change resulting from the re-evaluation of unrecognized tax benefits arising from examinations of taxing authorities and the closing of tax statutes of limitations. With few exceptions, Chubb is no longer subject to state and local or non-U.S. income tax examinations for years before 2009.