Entity information:
Income Taxes

On December 22, 2017, the "Tax Cuts and Jobs Act" (the “Act”) was enacted in the United States. The provisions of the Act significantly revise the U.S. corporate income tax rules. At December 31, 2017, the Company has not completed the accounting for the tax effects of enactment of the Act; however, the Company made a reasonable estimate of the effects on the existing deferred tax balances and one-time transition tax. The Company is still analyzing certain aspects of the Act and refining its calculations, which could potentially affect the measurement of the amounts recorded at December 31, 2017.

In the fourth quarter of 2017, the Company recorded a one-time additional income tax expense of $658 million related to the enactment of the Act. The more significant tax law changes resulting from the Act and related impacts to the Company are as follows:

•
A one-time repatriation tax on the deemed repatriation of post-1986 undistributed earnings of foreign subsidiaries. As a result of this one-time deemed repatriation, the Company recorded a one-time additional income tax expense of $676 million during the fourth quarter of 2017. A portion of the resulting income taxes payable can be paid in installments over eight years and, as such, $614 million was recorded as noncurrent income taxes payable in the statement of financial position. Additionally, as a result of the one-time repatriation provisions of the Act, the Company expects to repatriate approximately $2 billion of foreign held cash and equivalents and recorded additional foreign withholding taxes of $53 million in the fourth quarter of 2017.

•
A reduction in the U.S. corporate federal tax rate from a maximum of 35% to a flat rate of 21% beginning in 2018. Although the lower tax rate takes effect in 2018, deferred tax assets and liabilities should be measured using the enacted tax rate expected to apply in the years in which they are expected to be settled. The Company recorded a one-time net income tax benefit of $82 million as a result of the revaluation of the Company’s deferred tax assets and liabilities to reflect the impact of lower future U.S. corporate tax rates.

•
Deductibility of certain executive compensation. The Company recorded a one-time write-off of deferred tax assets of $11 million related to the non-deductibility of certain performance-based compensation.

•
Taxation of certain global intangible low-taxed income entities ("GILTI") beginning in 2018. This provision does not impact the Company in 2017, but will impact the Company in subsequent years and is expected to partially offset the benefit of the lower U.S. corporate tax rate discussed above.

The provisional amounts recorded for the year ended December 31, 2017 reflect the Company’s best estimate based on information currently available and are subject to future changes due to subsequent clarification of the tax law and refinement of estimated amounts.

Provision for income taxes— The components of the provision for income taxes were as follows:

In millions
 
2017
 
2016
 
2015
U.S. federal income taxes:
 
 
 
 
 
 
Current
 
$
1,117

 
$
756

 
$
503

Deferred
 
(10
)
 
(224
)
 
8

Total U.S. federal income taxes
 
1,107

 
532

 
511

Foreign income taxes:
 
 
 
 
 
 
Current
 
296

 
290

 
310

Deferred
 
102

 
(5
)
 
(11
)
Benefit of net operating loss carryforwards
 
—

 
—

 
(48
)
Total foreign income taxes
 
398

 
285

 
251

State income taxes:
 
 
 
 
 
 
Current
 
106

 
90

 
66

Deferred
 
(28
)
 
(34
)
 
(8
)
Total state income taxes
 
78

 
56

 
58

Total provision for income taxes
 
$
1,583

 
$
873

 
$
820



Income before taxes for domestic and foreign operations was as follows:

In millions
 
2017
 
2016
 
2015
Domestic
 
$
1,806

 
$
1,653

 
$
1,660

Foreign
 
1,464

 
1,255

 
1,059

Total income before taxes
 
$
3,270

 
$
2,908

 
$
2,719


The reconciliation between the U.S. federal statutory tax rate and the effective tax rate was as follows:

 
 
2017
 
2016
 
2015
U.S. federal statutory tax rate
 
35.0
 %
 
35.0
 %
 
35.0
 %
Tax effect of U.S. federal tax law change
 
20.1

 
—

 
—

State income taxes, net of U.S. federal tax benefit
 
1.2

 
1.3

 
1.4

Differences between U.S. federal statutory and foreign tax rates
 
(3.5
)
 
(3.6
)
 
(3.1
)
Nontaxable foreign interest income
 
(1.7
)
 
(2.1
)
 
(3.3
)
Tax effect of foreign dividends
 
0.9

 
1.5

 
2.8

Tax relief for U.S. manufacturers
 
(1.4
)
 
(1.4
)
 
(1.6
)
Excess tax benefits from stock-based compensation
 
(1.5
)
 
—

 
—

Other, net
 
(0.7
)
 
(0.7
)
 
(1.1
)
Effective tax rate
 
48.4
 %
 
30.0
 %
 
30.1
 %


Prior to the Act, deferred U.S. federal and state income taxes and foreign withholding taxes had not been provided on substantially all undistributed earnings of international subsidiaries as these earnings were considered permanently invested. As part of the one-time deemed repatriation provisions of the Act, the Company provided for U.S. tax on substantially all undistributed earnings of its foreign subsidiaries as of December 31, 2017. Upon repatriation of these earnings to the U.S., the Company may be subject to foreign withholding taxes. As of December 31, 2017, the Company had provided for $75 million of foreign withholding taxes related to the expected repatriation of approximately $2 billion of foreign held cash and equivalents, which includes the $53 million recorded in the fourth quarter of 2017, as discussed above.

Deferred tax assets and liabilities— The components of deferred income tax assets and liabilities at December 31, 2017 and 2016 were as follows:

 
 
2017
 
2016
In millions
 
Asset
 
Liability
 
Asset
 
Liability 
Goodwill and intangible assets
 
$
195

 
$
(506
)
 
$
240

 
$
(716
)
Inventory reserves, capitalized tax cost and LIFO inventory
 
31

 
(3
)
 
40

 
(5
)
Investments
 
15

 
(180
)
 
23

 
(206
)
Plant and equipment
 
18

 
(64
)
 
23

 
(79
)
Accrued expenses and reserves
 
45

 
—

 
76

 
—

Employee benefit accruals
 
177

 
—

 
306

 
—

Foreign tax credit carryforwards
 
13

 
—

 
6

 
—

Net operating loss carryforwards
 
507

 
—

 
610

 
—

Capital loss carryforwards
 
98

 
—

 
42

 
—

Allowances for uncollectible accounts
 
9

 
—

 
13

 
—

Pension liabilities
 
—

 
(25
)
 
25

 
—

Deferred intercompany deductions
 
405

 
—

 
430

 
—

Unrealized loss (gain) on foreign debt instruments
 
—

 
(19
)
 
—

 
(140
)
Other
 
99

 
(15
)
 
97

 
(16
)
Gross deferred income tax assets (liabilities)
 
1,612

 
(812
)
 
1,931

 
(1,162
)
Valuation allowances
 
(459
)
 
—

 
(454
)
 
—

Total deferred income tax assets (liabilities)
 
$
1,153

 
$
(812
)
 
$
1,477

 
$
(1,162
)


The valuation allowances recorded at December 31, 2017 and 2016 related primarily to certain net operating loss carryforwards, capital loss carryforwards and foreign tax credit carryforwards. As of December 31, 2017, the Company has utilized all realizable foreign tax credit carryforwards.

At December 31, 2017, the Company had net operating loss carryforwards available to offset future taxable income in the U.S. and certain foreign jurisdictions, which expire as follows:

 
Gross Carryforwards Related
In millions
 to Net Operating Losses
2018
$
15

2019
17

2020
86

2021
79

2022
24

2023
19

2024
17

2025-2037
17

Do not expire
1,685

Total gross carryforwards related to net operating losses
$
1,959



Unrecognized tax benefits— The changes in the amount of unrecognized tax benefits for the years ended 2017, 2016 and 2015 were as follows:

In millions
 
2017
 
2016
 
2015
Beginning balance
 
$
210

 
$
259

 
$
218

Additions based on tax positions related to the current year
 
42

 
19

 
39

Additions for tax positions of prior years
 
100

 
126

 
54

Reductions for tax positions of prior years
 
(24
)
 
(97
)
 
(41
)
Settlements
 
(53
)
 
(96
)
 
(6
)
Foreign currency translation
 
10

 
(1
)
 
(5
)
Ending balance
 
$
285

 
$
210

 
$
259



Included in the balance at December 31, 2017 were approximately $254 million of unrecognized tax benefits that, if recognized, would impact the Company’s effective tax rate.

Settlements during 2017 primarily related to the Company effectively settling with the German Fiscal Authority on issues identified during its 2009-2011 audit, which primarily related to intercompany transactions. During the fourth quarter of 2016, the Company effectively settled with the Internal Revenue Service on issues identified during its 2012-2013 audit, which primarily related to deferred gain recognition and foreign tax credits. Based on this agreement, the Company decreased its unrecognized tax benefits by approximately $96 million.

The Company and its subsidiaries file tax returns in the U.S. and various state, local and foreign jurisdictions. These tax returns are routinely audited by the tax authorities in these jurisdictions including the Internal Revenue Service, Her Majesty's Revenue and Customs, German Fiscal Authority, French Fiscal Authority, and Australian Tax Office, and a number of these audits are currently ongoing, which may increase the amount of the unrecognized tax benefits in future periods. Due to the ongoing audits, the Company believes it is reasonably possible that within the next twelve months the amount of the Company's unrecognized tax benefits may be decreased by approximately $31 million related predominantly to various intercompany transactions. The Company has recorded its best estimate of the potential exposure for these issues. The following table summarizes the open tax years for the Company’s major jurisdictions:

Jurisdiction
 
Open Tax Years
United States – Federal
 
2014-2017
United Kingdom
 
2016-2017
Germany
 
2012-2017
France
 
2014-2017
Australia
 
2013-2017


The Company recognizes interest and penalties related to income tax matters in income tax expense. The accrual for interest and penalties as of December 31, 2017 and 2016 was $25 million and $28 million, respectively.

On February 18, 2014, the Company received a Notice of Deficiency ("NOD") from the IRS asserting that a non-taxable return of capital received from a subsidiary was a taxable dividend distribution. The NOD assesses additional taxes of $70 million for the 2006 tax year, plus interest and penalties. In May 2014, the Company petitioned the United States Tax Court to challenge the NOD. The Company's petition was subsequently denied and the case proceeded to court with the trial taking place in the third quarter of 2016. Final decision by the tax court is expected in 2018. Although the court's final decision cannot be predicted with certainty, the Company believes its position continues to be supportable. Accordingly, no reserve has been recorded related to this matter.