Entity information:
NOTE 13. INCOME TAXES

GE and GE Capital file a consolidated U.S. federal income tax return. This enables GE and GE Capital to use tax deductions and credits of one member of the group to reduce the tax that otherwise would have been payable by another member of the group. The effective tax rate reflects the benefit of these tax reductions in the consolidated return. GE makes cash payments to GE Capital for tax reductions and GE Capital pays for tax increases at the time GE’s tax payments are due.

Our businesses are subject to regulation under a wide variety of U.S. federal, state and foreign tax laws, regulations and policies. Changes to these laws or regulations may affect our tax liability, return on investments and business operations.

U.S. TAX REFORM

On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (“U.S. tax reform”) that lowers the statutory tax rate on U.S. earnings, taxes historic foreign earnings at a reduced rate of tax, establishes a territorial tax system and enacts new taxes associated with global operations.
The impact of U.S. tax reform has been recorded on a provisional basis as the legislation provides for additional guidance to be issued by the U.S. Department of the Treasury on several provisions including the computation of the transition tax. Guidance during 2018 could impact the information required for and the calculation of the transition tax charge and could affect decisions that affect the tax on various U.S. and foreign items which would further impact the final amounts included in the transition charge and impact the revaluation of deferred taxes. In addition, analysis performed and conclusions reached as part of the tax return filing process and additional guidance on accounting for U.S. tax reform could affect the provisional amount.
Additionally, as part of tax reform, the U.S. has enacted a minimum tax on foreign earnings (“global intangible low-taxed income”). Because aspects of the new law and effect on our operations is uncertain and aspects of the accounting rules associated with this provision have not been resolved, we have not made a provisional accrual for the deferred tax aspects of this provision and consequently have not made an accounting policy election on the deferred tax treatment of this tax.
As a result of enactment of U.S. tax reform, we have recorded tax expense of $3,325 million in 2017 to reflect our provisional estimate of both the transition tax on historic foreign earnings ($1,155 million including $2,925 million at GE and $(1,770) million at GE Capital) and the revaluation of deferred taxes ($2,170 million including $793 million at GE and $1,377 million at GE Capital).
(BENEFIT) PROVISION FOR INCOME TAXES
 
 
 
 
(In millions)
2017

2016

2015

 
 
 
 
GE
 
 
 
Current tax expense (benefit)
$
2,810

$
(140
)
$
3,307

Deferred tax expense (benefit) from temporary differences
449

1,107

(1,800
)
 
3,259

967

1,506

GE Capital
 
 
 
Current tax expense (benefit)
(1,008
)
(1,138
)
2,796

Deferred tax expense (benefit) from temporary differences
(5,294
)
(293
)
2,183

 
(6,302
)
(1,431
)
4,979

Consolidated
 
 
 
Current tax expense (benefit)
1,802

(1,278
)
6,103

Deferred tax expense (benefit) from temporary differences
(4,845
)
814

383

Total
$
(3,043
)
$
(464
)
$
6,485


CONSOLIDATED EARNINGS (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
 
 
 
 
(In millions)
2017

2016

2015

 
 
 
 
U.S. earnings
$
(17,234
)
$
2,145

$
(309
)
Non-U.S. earnings
8,443

6,885

8,495

Total
$
(8,791
)
$
9,030

$
8,186


CONSOLIDATED (BENEFIT) PROVISION FOR INCOME TAXES
 
 
 
 
(In millions)
2017

2016

2015

 
 
 
 
U.S. Federal
 
 
 
Current
$
(823
)
$
(2,646
)
$
1,549

Deferred
(4,261
)
(754
)
492

Non - U.S.
 
 
 
Current
2,286

1,730

4,867

Deferred
(470
)
1,239

(121
)
Other
225

(33
)
(301
)
Total
$
(3,043
)
$
(464
)
$
6,485



RECONCILIATION OF U.S. FEDERAL STATUTORY INCOME TAX RATE TO ACTUAL INCOME TAX RATE
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated
 
GE
 
GE Capital
 
2017

2016

2015

 
2017

2016

2015

 
2017

2016

2015

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. federal statutory income tax rate
35.0
 %
35.0
 %
35.0
 %
 
35.0
 %
35.0
 %
35.0
 %
 
35.0
 %
35.0
%
35.0
 %
Increase (reduction) in rate resulting from
inclusion of after-tax earnings of GE Capital in
before-tax earnings of GE
—

—

—

 
(81.0
)
4.5

82.6

 
—

—

—

Tax on global activities including exports
41.2

(23.7
)
54.1

 
71.0

(20.8
)
(52.8
)
 
12.2

4.9

(224.5
)
U.S. business credits(a)
5.7

(4.5
)
(4.7
)
 
3.1

(0.9
)
(4.1
)
 
3.2

15.7

9.2

Tax Cuts and Jobs Act enactment
(37.8
)
—

—

 
(127.2
)
—

—

 
3.1

—

—

All other – net(b)
(9.5
)
(11.9
)
(5.2
)
 
(12.4
)
(7.9
)
(14.4
)
 
(3.6
)
14.7

(1.5
)
 
(0.4
)
(40.1
)
44.2

 
(146.5
)
(25.1
)
11.3

 
14.9

35.3

(216.8
)
Actual income tax rate
34.6
 %
(5.1
)%
79.2
 %
 
(111.5
)%
9.9
 %
46.3
 %
 
49.9
 %
70.3
%
(181.8
)%
(a)
U.S. general business credits, primarily the credit for energy produced from renewable sources and the credit for research performed in the U.S.
(b)
Includes, for each period, the expense or (benefit) for “Other” taxes reported above in the consolidated (benefit) provision for income taxes, net of 35.0% federal effect.

Included in 2017 "All other-net" in the "Reconciliation of U.S. federal statutory income tax rate to the actual income tax rate" above is (14.7)%, (27.6)% and (3.8)% in consolidated, GE and GE Capital, respectively, related to losses on planned dispositions and asset impairments. Also included in 2017 is 7.3% and 22.0% in consolidated and GE, respectively, related to the disposition of the Water business. Included is (7.7)% and (7.1)% in consolidated and GE, respectively, related to deductible stock losses in 2016 and (4.2)% and (10.6)% in consolidated and GE, respectively, related to deductible stock losses in 2015.

As a result of the GE Capital Exit Plan, GE Capital recognized a tax expense of $6,327 million in continuing operations during 2015. This primarily consisted of $3,548 million of tax expense related to the repatriation of excess foreign cash and the write-off of deferred tax assets of $2,779 million that will no longer be supported under this plan. The write-off of deferred tax assets largely related to our Treasury operations in Ireland where it was no longer apparent that the tax benefits would be realized upon implementation of the GE Capital Exit Plan. These charges, which increased the 2015 Consolidated effective tax rate by 77.3 percentage points, are reported in the lines “Tax on global activities including exports”, and “All other-net” in the "Reconciliation of U.S. federal statutory income tax rate to actual income tax rate.”

UNRECOGNIZED TAX POSITIONS

Annually, we file over 5,000 income tax returns in over 290 global taxing jurisdictions. We are under examination or engaged in tax litigation in many of these jurisdictions. The Internal Revenue Service (IRS) is currently auditing our consolidated U.S. income tax returns for 2012-2013 and has begun the audit for 2014-2015. In addition, certain other U.S. tax deficiency issues and refund claims for previous years are still unresolved. It is reasonably possible that a portion of the unresolved items could be resolved during the next 12 months, which could result in a decrease in our balance of “unrecognized tax benefits” – that is, the aggregate tax effect of differences between tax return positions and the benefits recognized in our financial statements. The IRS had disallowed the tax loss on our 2003 disposition of ERC Life Reinsurance Corporation. We contested the disallowance of this loss. In August 2016, the government approved a final settlement of the case and the balance of unrecognized tax benefits and associated interest was adjusted to reflect the agreed settlement. During 2015, the IRS completed the audit of our consolidated U.S. income tax returns for 2010-2011, except for certain issues that were completed in 2016. We believe that there are no other jurisdictions in which the outcome of unresolved issues or claims is likely to be material to our results of operations, financial position or cash flows. We further believe that we have made adequate provision for all income tax uncertainties. Resolution of audit matters, including the IRS audit of our consolidated U.S. income tax returns for 2010-2011 and the resolution of the ERC Life Reinsurance Corporation case, reduced our 2016 consolidated income tax rate by 5.3 percentage points. Resolution of audit matters, including the IRS audit of our consolidated U.S. income tax returns for 2010-2011, reduced our 2015 consolidated income tax rate by 4.4 percentage points.

The balance of unrecognized tax benefits, the amount of related interest and penalties we have provided and what we believe to be the range of reasonably possible changes in the next 12 months were:
UNRECOGNIZED TAX BENEFITS
 
 
 
December 31 (In millions)
2017

2016

 
 
 
Unrecognized tax benefits
$
5,449

$
4,692

Portion that, if recognized, would reduce tax expense and effective tax rate(a)
3,626

2,886

Accrued interest on unrecognized tax benefits
810

615

Accrued penalties on unrecognized tax benefits
158

118

Reasonably possible reduction to the balance of unrecognized tax benefits
in succeeding 12 months
0-1,100

0-600

Portion that, if recognized, would reduce tax expense and effective tax rate(a)
0-900

0-500

(a)
Some portion of such reduction may be reported as discontinued operations.
UNRECOGNIZED TAX BENEFITS RECONCILIATION
 
 
 
(In millions)
2017

2016

 
 
 
Balance at January 1
$
4,692

$
6,778

Additions for tax positions of the current year
260

248

Additions for tax positions of prior years(a)
791

521

Reductions for tax positions of prior years
(113
)
(2,016
)
Settlements with tax authorities
(57
)
(823
)
Expiration of the statute of limitations
(124
)
(16
)
Balance at December 31
$
5,449

$
4,692

(a)
For 2017, the amount shown as “additions for tax positions of prior years” included $326 million related to uncertain tax liabilities acquired in the Baker Hughes transaction.

We classify interest on tax deficiencies as interest expense; we classify income tax penalties as provision for income taxes. For the years ended December 31, 2017, 2016 and 2015, $143 million, $(105) million and $48 million of interest expense (income), respectively, and $7 million, $(4) million and $(4) million of tax expense (income) related to penalties, respectively, were recognized in the Statement of Earnings (Loss).

DEFERRED INCOME TAXES

Deferred income tax balances reflect the effects of temporary differences between the carrying amounts of assets and liabilities and their tax bases, as well as from net operating loss and tax credit carryforwards, and are stated at enacted tax rates (including the U.S. tax rate of 21% beginning in 2018 as a result of U.S. tax reform) expected to be in effect when taxes are paid or recovered. Deferred income tax assets represent amounts available to reduce income taxes payable on taxable income in future years. We evaluate the recoverability of these future tax deductions and credits by assessing the adequacy of future expected taxable income from all sources, including reversal of taxable temporary differences, forecasted operating earnings and available tax planning strategies. To the extent we consider it more likely than not that a deferred tax asset will not be recovered, a valuation allowance is established.
Deferred taxes, as needed, are provided for earnings of non-U.S. affiliates and associated companies when we plan to remit those earnings. We have not provided U.S. deferred taxes on cumulative earnings of non-U.S. affiliates and associated companies that have been reinvested indefinitely. Most of our earnings have been reinvested in active non-U.S. business operations and as of December 31, 2017, we have not decided to repatriate these earnings to the U.S. As a result of U.S. tax reform, substantially all of our prior unrepatriated tax earnings were subject to U.S. tax and accordingly we expect to have the ability to repatriate those earnings without additional U.S. federal tax cost and any foreign withholding taxes on a repatriation to the U.S. would potentially be partially offset by a U.S. foreign tax credit. We will update our analysis of investment of foreign earnings in 2018 as we consider the impact of U.S. tax reform.

Aggregated deferred income tax amounts are summarized below.
December 31 (In millions)
2017

2016

 
 
 
Assets
 
 
GE
$
15,586

$
21,106

GE Capital
6,176

5,093

 
21,762

26,199

Liabilities
 
 
GE
(10,382
)
(14,440
)
GE Capital
(5,177
)
(9,926
)
Eliminations
4

—

 
(15,555
)
(24,366
)
Net deferred income tax asset (liability)
$
6,207

$
1,833

COMPONENTS OF THE NET DEFERRED INCOME TAX ASSET (LIABILITY)
 
 
 
December 31 (In millions)
2017

2016

 
 
 
GE
 
 
Principal pension plans
$
3,911

$
8,963

Other non-current compensation and benefits
2,780

4,230

Provision for expenses
2,499

2,633

Retiree insurance plans
1,152

2,000

Non-U.S. loss carryforwards(a)
2,078

1,444

U.S. credit carryforwards(b)
1,932

67

Contract assets
(5,051
)
(6,677
)
Intangible assets
(2,033
)
(2,962
)
Depreciation
(1,022
)
(1,755
)
Other – net
(1,042
)
(1,277
)
 
5,204

6,666

GE Capital
 
 
Operating leases
(2,689
)
(3,582
)
Financing leases
(877
)
(1,632
)
Energy investments
(754
)
(1,410
)
Intangible assets
(25
)
(125
)
U.S. credit carryforwards(b)
1,632

1,092

Insurance company loss reserves
1,373

(819
)
Non-U.S. loss carryforwards(a)
1,271

1,323

Other – net
1,068

320

 
999

(4,833
)
Eliminations
4

—

Net deferred income tax asset (liability)
$
6,207

$
1,833

(a)
Net of valuation allowances of $4,251 million and $2,450 million for GE and $448 million and $391 million for GE Capital, for 2017 and 2016, respectively. Of the net deferred tax asset as of December 31, 2017 of $3,349 million, $11 million relates to net operating loss carryforwards that expire in various years ending from December 31, 2018 through December 31, 2020; $342 million relates to net operating losses that expire in various years ending from December 31, 2021 through December 31, 2037 and $2,996 million relates to net operating loss carryforwards that may be carried forward indefinitely.
(b)
Of the net deferred tax asset as of December 31, 2017 of $3,564 million for U.S. credit carryforwards, $1,194 million expires in the year ending December 31, 2027, $67 million expires in the years ending December 31, 2030 through 2032 and $2,303 million expires in various years ending from December 31, 2033 through December 31, 2037.