
Note 8.	Income Taxes

The components of income from continuing operations before provision for income taxes are as follows:



(In millions)	2018		2017		2016

U.S.	$	1,329	$	655	$	493
Non-U.S.	1,933		1,774		1,531

Income from Continuing Operations	$	3,262	$	2,429	$	2,024

The components of the provision for income taxes of continuing operations are as follows:



(In millions)	2018			2017			2016

Current Income Tax Provision
Federal	$	165		$	1,259		$	280
Non-U.S.	574			576			349
State	59			62			9

	798			1,897			638

Deferred Income Tax Provision (Benefit)
Federal	$	(258	)	$	(1,437	)	$	(510	)
Non-U.S.	(187		)	(271		)	(104		)
State	(29		)	12			(25		)

	(474		)	(1,696		)	(639		)

Provision for (benefit from) income taxes	$	324		$	201		$	(1	)

The provision for income taxes in the accompanying statement of income differs from the provision calculated by applying the statutory federal income tax rate to income from continuing operations before provision for income taxes due to the following:



(In millions)	2018			2017			2016

Statutory Federal Income Tax Rate	21		%	35		%	35		%

Provision for Income Taxes at Statutory Rate	$	685		$	850		$	708

Increases (Decreases) Resulting From:
Foreign rate differential	(375		)	(380		)	(322		)
Foreign exchange loss on inter-company debt refinancing	—			(237		)	—
Income tax credits	(349		)	(273		)	(318		)
Manufacturing deduction	—			(42		)	(38		)
Withholding taxes	31			55			—
Global intangible low-taxed income	167			—			—
Foreign-derived intangible income	(47		)	—			—
Singapore tax holiday	(28		)	(25		)	(23		)
Impact of change in tax laws and apportionment on deferred taxes	(12		)	(1,121		)	2
Transition tax and other initial impacts of U.S. tax reform	117			1,250			—
(Reversal of) provision for tax reserves, net	(49		)	99			12
Excess tax benefits from stock options and restricted stock units	(77		)	(65		)	—
Tax return reassessments and settlements	(26		)	8			(41		)
Valuation allowance	260			7			—
Other, net	27			75			19

Provision for (benefit from) income taxes	$	324		$	201		$	(1	)

The company has operations and a taxable presence in approximately 50 countries outside the U.S. The company's effective income tax rate differs from the U.S. federal statutory rate each year due to certain operations that are subject to tax incentives, state and local taxes, and foreign taxes that are different than the U.S. federal statutory rate.

U.S. Tax Reform Impacts

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 was enacted. The Tax Act includes significant changes to existing U.S. tax laws that affect the company, including a reduction of the U.S. corporate income tax rate from 35% to 21% beginning in 2018 and creation of a territorial tax system with a one-time transition tax on deemed repatriated earnings and profits of foreign subsidiaries (transition tax). As detailed below, the company recognized a net charge of $204 million for certain aspects of the Tax Act in its 2017 financial statements for which the accounting was provisional, but a reasonable estimate could be determined. During 2018, the company completed its accounting for the income tax effects of the Tax Act and recognized net adjustments (detailed below) to the provisional amounts, totaling a net charge of $68 million, as a component of income tax expense.

The transition tax is based on the company's total post-1986 earnings and profits, the tax on which was previously deferred from U.S. income taxes under U.S. law. The company recorded a provisional amount for the transition tax liability for each of the foreign subsidiaries, resulting in a total transition liability of $1.25 billion at December 31, 2017. After further analysis of new U.S. Treasury guidance, available tax accounting methods and elections, legislative updates, regulations, earnings and profits computations and foreign taxes, the company finalized the calculations of the transition tax liability during 2018. The increase in the liability for the transition tax in 2018 consisted of an incremental provision of $117 million offset in part by a $49 million reduction of related unrecognized tax benefits established in 2017.

In 2017, as a result of the Tax Act, the company remeasured certain deferred tax assets and liabilities based on the rates at which they were expected to reverse in the future (which was generally 21%), by recording a provisional tax benefit of $1.06 billion. During 2018, no material changes to this provisional amount were made.

The Tax Act included a provision for global intangible low-taxed income. The company has adopted a policy to account for this provision as a period cost.

Other Tax Impacts

In 2018, the provision for income taxes also included a $71 million charge to establish a valuation allowance against net operating losses that will not be utilized as a result of the planned sale of the Anatomical Pathology business (Note 2).

The foreign tax credits discussed below are the result of foreign earnings and profits remitted or deemed remitted to the U.S. during the reporting year and the U.S. treatment of taxes paid in the foreign jurisdictions in the years those profits were originally earned.

In 2017, the company continued to implement tax planning initiatives related to non U.S. subsidiaries. These non-U.S. subsidiaries incurred foreign tax obligations, and made cash and deemed distributions to the company’s U.S. operations which resulted in no net tax cost. As a result of these distributions, the company benefitted from U.S. foreign tax credits of $86 million, offset in part by additional U.S. income taxes of $53 million on the related foreign income (which reduced the benefit from the foreign rate differential in 2017). The company also implemented foreign tax credit planning in Sweden which resulted in $20 million of foreign tax credits, with no related incremental U.S. income tax expense. In 2017 the company refinanced certain long term inter-company debt which resulted in an income tax benefit of $237 million related to a foreign exchange loss recognized for income tax purposes.

In 2016, the company continued to implement tax planning initiatives related to non-U.S. subsidiaries. These non-U.S. subsidiaries incurred foreign tax obligations, and made cash and deemed distributions to the company’s U.S. operations which resulted in no net tax cost. As a result of these distributions, the company benefitted from U.S. foreign tax credits of $91 million, offset in part by additional U.S. income taxes of $37 million on the related foreign income (which reduced the benefit from the foreign rate differential in 2016). The company also implemented foreign tax credit planning in Sweden which resulted in $100 million of foreign tax credits, with no related incremental U.S. income tax expense.

The company generally receives a tax deduction upon the exercise of non-qualified stock options by employees, or the vesting of restricted stock units held by employees, for the difference between the exercise price and the market price of the underlying common stock on the date of exercise. The company uses the incremental tax benefit approach for utilization of tax attributes. Prior to 2017, the amount of the tax deduction in excess of compensation cost recognized was allocated to capital in excess of par value. Beginning in 2017, these excess tax benefits reduce the tax provision. In 2018 and 2017, the company's tax provision was reduced by $77 million and $65 million, respectively, of such benefits. In 2016, $53 million of such benefits were allocated to capital in excess of par value.

The company has significant activities in Singapore and has received considerable tax incentives. The local taxing authority granted the company pioneer company status which provides an incentive encouraging companies to undertake activities that have the effect of promoting economic or technological development in Singapore. This incentive equates to a tax exemption on earnings associated with most of the company’s manufacturing activities in Singapore and continues through December 31, 2026. In 2018, 2017 and 2016, the impact of this tax holiday decreased the annual effective tax rates by 0.9 percentage points, 1.0 percentage points and 1.1 percentage points, respectively, and increased diluted earnings per share by approximately $0.07, $0.06 and $0.06, respectively. In connection with the March 2017 extension of this agreement until 2026, the company recorded a benefit in the first quarter of 2017 of approximately $65 million ($0.16 per diluted share) for the effect on deferred tax balances of the extended tax holiday.

Net deferred tax asset (liability) in the accompanying balance sheet consists of the following:



(In millions)	2018			2017

Deferred Tax Asset (Liability)
Depreciation and amortization	$	(3,444	)	$	(3,957	)
Net operating loss and credit carryforwards	1,311			1,150
Reserves and accruals	148			139
Accrued compensation	250			265
Inventory basis difference	105			81
Other capitalized costs	103			61
Unrealized losses on hedging instruments	23			125
Other, net	143			126

Deferred tax assets (liabilities), net before valuation allowance	(1,361		)	(2,010		)
Less: Valuation allowance	471			256

Deferred tax assets (liabilities), net	$	(1,832	)	$	(2,266	)

The company estimates the degree to which tax assets and loss and credit carryforwards will result in a benefit based on expected profitability by tax jurisdiction and provides a valuation allowance for tax assets and loss and credit carryforwards that it believes will more likely than not expire unutilized. At December 31, 2018, all of the company’s valuation allowance relates to deferred tax assets, primarily net operating losses, for which any subsequently recognized tax benefits will reduce income tax expense.

The changes in the valuation allowance are as follows:



	Year Ended December 31,
(In millions)	2018			2017		2016

Beginning Balance	$	256		$	113	$	109
Additions charged to income tax provision	223			28		—
Additions due to acquisitions	17			108		25
Deductions	(15		)	—		—
Currency translation and other	(10		)	7		(21		)

Ending Balance	$	471		$	256	$	113

At December 31, 2018, the company had federal, state and non-U.S. net operating loss carryforwards of $412 million, $1.69 billion and $4.41 billion, respectively. Use of the carryforwards is limited based on the future income of certain subsidiaries. The federal and state net operating loss carryforwards expire in the years 2019 through 2038. Of the non-U.S. net operating loss carryforwards, $2.15 billion expire in the years 2019 through 2038, and the remainder do not expire.

The company operates in various jurisdictions around the world. A provision has not been made for certain U.S. state income taxes or additional non-U.S. taxes on $14.4 billion of undistributed earnings of international subsidiaries that could be subject to taxation if remitted to the U.S. because such amounts are intended to be reinvested outside the United States indefinitely. It is not practicable to estimate the unrecognized tax liability due to i) the extent of uncertainty as to which remittance structure would be used (among several possibilities) should a decision be made to repatriate; and ii) the implications of indirect taxes, including withholding taxes that could potentially be required depending on the repatriation structure. The company’s intent is to only make distributions from non-U.S. subsidiaries in the future when they can be made at no net tax costs.

Unrecognized Tax Benefits

As of December 31, 2018, the company had $1.44 billion of unrecognized tax benefits which, if recognized, would reduce the effective tax rate.

A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows:



(In millions)	2018			2017			2016

Balance at beginning of year	$	1,409		$	802		$	350
Additions due to acquisitions	—			31			54
Reductions due to acquisitions	(5		)	—			—
Additions for tax positions of current year	48			565			342
Additions for tax positions of prior years	82			51			94
Closure of tax years	(5		)	—			(28		)
Settlements	(87		)	(40		)	(10		)

Balance at end of year	$	1,442		$	1,409		$	802

During 2018, the company's unrecognized tax benefits increased $85 million as a result of uncertain tax positions relating to foreign tax positions and $45 million relating to U.S. federal and state tax positions. All of the total $1.44 billion liability is classified as a long-term liability. The company does not expect its unrecognized tax benefits to change significantly over the next twelve months.

During 2017, the company’s unrecognized tax benefits provisionally increased $511 million as a result of uncertain tax positions relating to the scope of the Tax Act’s one-time transition tax, $54 million relating to foreign tax positions, $43 million as a result of a foreign exchange loss recognized on the refinancing of certain long term inter-company debt and $31 million due to an acquisition.

During 2016, the company’s unrecognized tax benefits increased $342 million due to the uncertainty around the deductibility of a foreign exchange loss on intercompany investments, $54 million due to acquisitions, $43 million due to tax planning related to prior years that resulted in amended tax filings, $35 million relating to foreign tax positions and $14 million due to the utilization of deferred tax assets. In 2016, the company also settled the Life Technologies tax audit for the 2012 to 2014 tax years which reduced the reserve on unrecognized tax benefits by $10 million.

The company classified interest and penalties related to unrecognized tax benefits as income tax expense. The total amount of interest and penalties related to uncertain tax positions and recognized in the balance sheet as of December 31, 2018 and 2017 was $59 million and $31 million, respectively.

The company conducts business globally and, as a result, Thermo Fisher or one or more of its subsidiaries files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business, the company is subject to examination by taxing authorities throughout the world, including such major jurisdictions as Australia, Canada, China, Denmark, Finland, France, Germany, Japan, Singapore, Sweden, the United Kingdom and the United States. 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 2011.