AFLAC INC

INCOME TAXES

The components of income tax expense (benefit) applicable to pretax earnings for the years ended December 31 were as follows:



(In millions)	Foreign				U.S.				Total
2017:
Current		$	722			$	(91	)		$	631
Deferred		(24		)		(1,193		)		(1,217		)
Total income tax expense		$	698			$	(1,284	)		$	(586	)
2016:
Current		$	650			$	234			$	884
Deferred		136				388				524
Total income tax expense		$	786			$	622			$	1,408
2015:
Current		$	1,063			$	225			$	1,288
Deferred		42				(1		)		41
Total income tax expense		$	1,105			$	224			$	1,329

The Japan income tax rate for the fiscal year 2015 was 30.8%. The rate was reduced to 28.8% for the fiscal year 2016 and 28.2% for the fiscal year 2017.

For the United States, the Tax Cuts and Jobs Act (Tax Act) was signed into law on December 22, 2017. Effective January 1, 2018, the Tax Act imposes a broad number of changes in tax law, including the permanent reduction of the U.S. federal statutory corporate income tax rate from 35% to 21%.

At December 22, 2017, prior to accounting for the effects of the Tax Act, the Company calculated a reasonable estimate of its deferred tax assets (DTA) to equal $6.2 billion and deferred tax liabilities (DTL) to equal $12.7 billion, resulting in a net deferred tax liability of $6.5 billion. Based on the value of its deferred assets and liabilities as of the December 22, 2017, enactment date, the Company has evaluated the effects of the Tax Act and has concluded that the reduction in the U.S. federal statutory corporate income tax rate from 35% to 21% will necessitate revaluation of its deferred tax assets and liabilities.

The Company expects to complete its accounting for the effects of the Tax Act over the measurement period of up to one year from the enactment date, as permitted by SEC Staff Accounting Bulletin No. 118 (SAB 118). As of the enactment date, the Company has determined a reasonable estimate of income tax effects of the Tax Act. The Company’s current estimated provisional amounts for its deferred taxes, including related valuation allowance, result in a reduction of its DTA by approximately $1.0 billion and its DTL by $2.9 billion, for a net DTL reduction of approximately $1.9 billion. The Company believes that these amounts represent reasonable estimates in accordance with SAB 118. The provisions of ASC 740-10, Income Taxes, require that the effects of changes in tax law on deferred taxes be recognized as a component of the income tax provision in the period the tax rate change was enacted. Therefore, the $1.9 billion provisional amount of net DTL reduction has been recorded in the fourth quarter of 2017 as a reduction in the “Income tax expense, Deferred” line item of the Company’s consolidated statement of earnings.

The following includes an overview of the existing current and deferred balances for which calculation of income tax effects of the Tax Act has not been completed:

Japan deferred tax balances: The Tax Act reduces the tax rate to 21%, effective January 1, 2018. Prior to the reduction in rate, the Japan deferred tax balances were completely offset by an anticipatory foreign tax credit. As a result of the rate reduction, the Japan deferred tax balance will no longer be offset by an anticipatory foreign tax credit as all of the foreign tax credits will be used to offset the U.S. deferred tax balance of the Aflac Japan branch.

The Company has not yet completed its analysis of the components of the Japan tax computation, including a complete validation of the Aflac Japan tax basis. Additional time is needed to collect, analyze, and validate the detailed data underlying the deferred tax amounts in the Aflac Japan branch. The Company has currently recorded a provisional amount of $4.5 billion of net DTL related to this item.

Valuation allowances: The Company must assess whether its valuation allowance analyses are impacted by various aspects of the Tax Act with a primary focus on any unused anticipatory foreign tax credits. As the Company has recorded provisional amounts related to the Japan deferred tax balances, any corresponding determination of the need for or change in a valuation allowance is also provisional. The Company has recorded a provisional valuation allowance of $.7 billion against its anticipatory foreign tax credit asset.

The impact of the Tax Act may differ, possibly materially, from the recorded provisional amounts.

As noted above, the provisions of ASC 740-10, Income Taxes, require that the effects of changes in tax law on deferred taxes be recognized as a component of the income tax provision in the period the tax rate change was enacted, even if the deferred taxes are related to items recorded in accumulated other comprehensive income (AOCI). This results in the misalignment between deferred taxes (reflected, net of allowance, at the newly enacted income tax rates) and the corresponding effects of the deferred amounts in AOCI, which are not subject to revaluation as of the enactment date. Therefore, the deferred tax amounts recorded through AOCI and existing at the enactment date of the Tax Act continue to be reflected at the tax rates effective immediately prior to the enactment date, and the amounts recorded in the period between the enactment date and the end of 2017 are reflected at the new rates pursuant to the Tax Act.

Income tax expense in the accompanying statements of earnings varies from the amount computed by applying the expected U.S. tax rate of 35% to pretax earnings. The principal reasons for the differences and the related tax effects for the years ended December 31 were as follows:



(In millions)	2017				2016				2015
Income taxes based on U.S. statutory rates		$	1,406			$	1,424			$	1,352
Write-down of U.S. deferred tax liabilities for tax reform change		(1,933		)		0				0
Utilization of foreign tax credit		(27		)		(30		)		(27		)
Nondeductible expenses		10				8				3
Other, net		(42		)		6				1
Income tax expense		$	(586	)		$	1,408			$	1,329

Total income tax expense for the years ended December 31 was allocated as follows:



(In millions)	2017				2016				2015
Statements of earnings		$	(586	)		$	1,408			$	1,329
Other comprehensive income (loss):
Unrealized foreign currency translation gains (losses) during period		52				70				16
Unrealized gains (losses) on investment securities:
Unrealized holding gains (losses) on investment securities during period		575				962				(931		)
Reclassification adjustment for realized (gains) losses on investment securities included in net earnings		1				18				21
Unrealized gains (losses) on derivatives during period		0				1				0
Pension liability adjustment during period		3				(16		)		(7		)
Total income tax expense (benefit) related to items of other comprehensive income (loss)		631				1,035				(901		)
Additional paid-in capital (exercise of stock options)		0				(10		)		4
Total income taxes		$	45			$	2,433			$	432

The income tax effects of the temporary differences that gave rise to deferred income tax assets and liabilities as of December 31 were as follows:



(In millions)	2017				2016
Deferred income tax liabilities:
Deferred policy acquisition costs		$	3,285			$	4,065
Unrealized gains and other basis differences on investment securities		2,882				3,056
Premiums receivable		104				130
Policy benefit reserves		3,557				3,303
Total deferred income tax liabilities		9,828				10,554
Deferred income tax assets:
Unfunded retirement benefits		8				13
Other accrued expenses		141				39
Policy and contract claims		870				792
Foreign currency loss on Japan branch		67				185
Deferred compensation		155				243
Capital loss carryforwards		0				3
Depreciation		114				88
Anticipatory foreign tax credit		4,504				4,028
Other		57				107
Total deferred income tax assets before valuation allowance		5,916				5,498
Valuation allowance		(657		)		0
Total deferred income tax assets after valuation allowance		5,259				5,498
Net deferred income tax liability		4,569				5,056
Current income tax liability		176				331
Total income tax liability		$	4,745			$	5,387

The application of U.S. GAAP requires the Company to evaluate the recoverability of deferred tax assets and establish a valuation allowance if necessary to reduce the deferred tax asset to an amount that is more likely than not expected to be realized. As noted above, the Company has determined a $.7 billion valuation allowance against its anticipatory foreign tax credit is necessary. The anticipatory foreign tax credit represents the foreign tax credit the Company will generate from the reversal of Japan deferred tax liabilities in the future. Based upon a review of the Company's anticipated future taxable income, and including all other available evidence, both positive and negative, the Company's management has concluded that, notwithstanding the anticipatory foreign tax credit, it is more likely than not that all other deferred tax assets will be realized.

Under U.S. income tax rules, only 35% of non-life operating losses can be offset against life insurance taxable income each year. For current U.S. income tax purposes, there were no unused operating loss carryforwards available to offset against future taxable income. The Company has no capital loss carryforwards available to offset capital gains.

The Company files federal income tax returns in the United States and Japan as well as state or prefecture income tax returns in various jurisdictions in the two countries. The Company is currently under audit by the State of Illinois for tax years 2006-2012. There are currently no other open Federal, State, or local U.S. income tax audits. U.S. federal income tax returns for years before 2014 are no longer subject to examination. Japan corporate income tax returns for years before 2016 are no longer subject to examination. Management believes it has established adequate tax liabilities and final resolution of all open audits is not expected to have a material impact on the Company's consolidated financial statements.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows for the years ended December 31:



(In millions)	2017			2016
Balance, beginning of year	$	294		$	264
Additions for tax positions of prior years	0			33
Reductions for tax positions of prior years	(280		)	(3		)
Balance, end of year	$	14		$	294

Included in the balance of the liability for unrecognized tax benefits at December 31, 2017, are $13 million of tax positions for which the ultimate deductibility is highly certain, but for which there is uncertainty about the timing of such deductibility, compared with $293 million at December 31, 2016. Because of the impact of deferred tax accounting, other than interest and penalties, the disallowance of the shorter deductibility period would not affect the annual effective tax rate, but would accelerate the payment of cash to the taxing authority to an earlier period. The Company has accrued approximately $1 million as of December 31, 2017, for permanent uncertainties, which if reversed would not have a material effect on the annual effective rate.

The Company recognizes accrued interest and penalties related to unrecognized tax benefits in income tax expense. The Company recognized approximately $1 million in interest and penalties in 2017, compared with $13 million in 2016 and $11 million in 2015. The Company has accrued approximately $2 million for the payment of interest and penalties as of December 31, 2017, compared with $26 million a year ago.

As of December 31, 2017, there were no material uncertain tax positions for which the total amounts of unrecognized tax benefits will significantly increase or decrease within the next 12 months.