INCOME TAXES
We recognize income tax-related penalties in the Provision for/(Benefit from) income taxes on our consolidated income statement. We recognize income tax-related interest income and interest expense in Non-Financial Services interest income and other income/(loss), net and Financial Services other income/(loss), net on our consolidated income statement.
Valuation of Deferred Tax Assets and Liabilities
Deferred tax assets and liabilities are recognized based on the future tax consequences attributable to temporary differences that exist between the financial statement carrying value of assets and liabilities and their respective tax bases, and operating loss and tax credit carryforwards on a taxing jurisdiction basis. We measure deferred tax assets and liabilities using enacted tax rates that will apply in the years in which we expect the temporary differences to be recovered or paid.
Our accounting for deferred tax consequences represents our best estimate of the likely future tax consequences of events that have been recognized on our financial statements or tax returns and their future probability. In assessing the need for a valuation allowance, we consider both positive and negative evidence related to the likelihood of realization of the deferred tax assets. If, based on the weight of available evidence, it is more likely than not that the deferred tax assets will not be realized, we record a valuation allowance.
NOTE 7. INCOME TAXES (Continued)
Components of Income Taxes
Components of income taxes excluding cumulative effects of changes in accounting principles, other comprehensive income, and equity in net results of affiliated companies accounted for after-tax, for the years ended December 31 were as follows:
|
| | | | | | | | | | | |
| 2015 | | 2016 | | 2017 |
Income before income taxes (in millions) | | | | | |
U.S. | $ | 5,374 |
| | $ | 5,266 |
| | $ | 4,850 |
|
Non-U.S. | 4,878 |
| | 1,530 |
| | 3,298 |
|
Total | $ | 10,252 |
| | $ | 6,796 |
| | $ | 8,148 |
|
Provision for/(Benefit from) income taxes (in millions) | |
| | |
| | |
|
Current | |
| | |
| | |
|
Federal | $ | 75 |
| | $ | (122 | ) | | $ | (125 | ) |
Non-U.S. | 572 |
| | 630 |
| | 868 |
|
State and local | 17 |
| | 12 |
| | 85 |
|
Total current | 664 |
| | 520 |
| | 828 |
|
Deferred | |
| | |
| | |
|
Federal | 1,494 |
| | 1,323 |
| | (1,096 | ) |
Non-U.S. | 472 |
| | 121 |
| | 593 |
|
State and local | 251 |
| | 225 |
| | 195 |
|
Total deferred | 2,217 |
| | 1,669 |
| | (308 | ) |
Total | $ | 2,881 |
| | $ | 2,189 |
| | $ | 520 |
|
Reconciliation of effective tax rate | |
| | |
| | |
|
U.S. statutory rate | 35.0 | % | | 35.0 | % | | 35.0 | % |
Non-U.S. tax rates under U.S. rates | (2.7 | ) | | (1.0 | ) | | (4.9 | ) |
State and local income taxes | 1.7 |
| | 2.3 |
| | 2.2 |
|
General business credits | (3.0 | ) | | (3.1 | ) | | (3.6 | ) |
Dispositions and restructurings | 0.4 |
| | 7.4 |
| | (11.7 | ) |
U.S. tax on non-U.S. earnings | (3.0 | ) | | (5.6 | ) | | (7.0 | ) |
Prior year settlements and claims | (0.4 | ) | | — |
| | (0.2 | ) |
Tax-exempt income | (2.0 | ) | | (0.9 | ) | | — |
|
Enacted change in tax laws | 0.1 |
| | (4.2 | ) | | (6.7 | ) |
Valuation allowances | 3.6 |
| | 2.7 |
| | 5.6 |
|
Other | (1.6 | ) | | (0.4 | ) | | (2.3 | ) |
Effective rate | 28.1 | % | | 32.2 | % | | 6.4 | % |
On December 22, 2017, the Tax Cuts and Jobs Act (H.R. 1) was signed into law. This act includes, among other items, a permanent reduction to the U.S. corporate income tax rate from 35% to 21% effective January 1, 2018, and requires immediate taxation of accumulated, unremitted non-U.S. earnings. As a result, at December 31, 2017, we recognized a tax benefit of $617 million from revaluing U.S. net deferred tax liabilities and tax expense of $219 million to record U.S. tax on unremitted non-U.S. earnings.
Our 2016 tax provision includes a $300 million benefit for the recognition of deferred taxes resulting from a 2016 change in U.S. tax law related to the taxation of foreign currency gains and losses for our non-U.S. branch operations.
At December 31, 2017, $5.9 billion of non-U.S. earnings are considered indefinitely reinvested in operations outside the United States, for which deferred taxes have not been provided. Repatriation of these earnings in their entirety would result in incremental tax liability of about $100 million.
NOTE 7. INCOME TAXES (Continued)
Components of Deferred Tax Assets and Liabilities
The components of deferred tax assets and liabilities at December 31 were as follows (in millions):
|
| | | | | | | |
| 2016 | | 2017 |
Deferred tax assets | | | |
Employee benefit plans | $ | 6,870 |
| | $ | 5,293 |
|
Net operating loss carryforwards | 1,764 |
| | 2,235 |
|
Tax credit carryforwards | 5,860 |
| | 9,122 |
|
Research expenditures | 1,469 |
| | 577 |
|
Dealer and dealers’ customer allowances and claims | 2,500 |
| | 1,442 |
|
Other foreign deferred tax assets | 28 |
| | 430 |
|
All other | 2,289 |
| | 1,591 |
|
Total gross deferred tax assets | 20,780 |
| | 20,690 |
|
Less: valuation allowances | (909 | ) | | (1,492 | ) |
Total net deferred tax assets | 19,871 |
| | 19,198 |
|
Deferred tax liabilities | |
| | |
|
Leasing transactions | 4,523 |
| | 4,049 |
|
Deferred income | 807 |
| | 253 |
|
Depreciation and amortization (excluding leasing transactions) | 3,175 |
| | 2,646 |
|
Finance receivables | 593 |
| | 523 |
|
Other foreign deferred tax liabilities | 371 |
| | 842 |
|
All other | 1,388 |
| | 727 |
|
Total deferred tax liabilities | 10,857 |
| | 9,040 |
|
Net deferred tax assets/(liabilities) | $ | 9,014 |
| | $ | 10,158 |
|
At December 31, 2017, we have a valuation allowance of $1.5 billion primarily related to deferred tax assets in various non-U.S. operations.
Deferred tax assets for net operating losses and other temporary differences related to certain non-U.S. operations have not been recorded as a result of elections to tax these operations simultaneously in U.S. tax returns. Reversal of these elections would result in the recognition of $8.3 billion of deferred tax assets, subject to valuation allowance testing.
Operating loss carryforwards for tax purposes were $6.1 billion at December 31, 2017, resulting in a deferred tax asset of $2.2 billion. There is no expiration date for $4.5 billion of these losses. A substantial portion of the remaining losses will expire beyond 2021. Tax credits available to offset future tax liabilities are $9.1 billion. A substantial portion of these credits have a remaining carryforward period of five years or more. Tax benefits of operating loss and tax credit carryforwards are evaluated on an ongoing basis, including a review of historical and projected future operating results, the eligible carryforward period, and available tax planning strategies.
NOTE 7. INCOME TAXES (Continued)
Other
A reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended December 31 were as follows (in millions):
|
| | | | | | | |
| 2016 | | 2017 |
Beginning balance | $ | 1,601 |
| | $ | 1,586 |
|
Increase – tax positions in prior periods | 12 |
| | 716 |
|
Increase – tax positions in current period | 69 |
| | 44 |
|
Decrease – tax positions in prior periods | (67 | ) | | (22 | ) |
Settlements | (23 | ) | | (263 | ) |
Lapse of statute of limitations | (3 | ) | | (10 | ) |
Foreign currency translation adjustment | (3 | ) | | 12 |
|
Ending balance | $ | 1,586 |
| | $ | 2,063 |
|
The amount of unrecognized tax benefits that would affect the effective tax rate if recognized were $1.5 billion and $2 billion at December 31, 2016 and 2017, respectively.
Examinations by tax authorities have been completed through 2004 in Germany, 2008 in Canada, 2011 in the United States, and 2014 in China and the United Kingdom. Although examinations have been completed in these jurisdictions, limited transfer pricing disputes exist for years dating back to 2005.
Net interest income on income taxes was $3 million, $3 million, and $2 million for the years ended December 31, 2015, 2016, and 2017, respectively. These were reported in Non-Financial Services other income/(loss), net and Financial Services other income/(loss), net in our consolidated income statement. Net payables for tax related interest were $67 million and $70 million as of December 31, 2016 and 2017, respectively.
We paid income taxes of $585 million, $740 million, and $586 million in 2015, 2016, and 2017, respectively.