Income Taxes
ALIC and its subsidiaries (the “Allstate Life Group”) join with the Corporation (the “Allstate Group”) in the filing of a consolidated federal income tax return and are party to a federal income tax allocation agreement (the “Allstate Tax Sharing Agreement”). Under the Allstate Tax Sharing Agreement, the Allstate Life Group pays to or receives from the Corporation the amount, if any, by which the Allstate Group’s federal income tax liability is affected by virtue of inclusion of the Allstate Life Group in the consolidated federal income tax return. Effectively, this results in the Allstate Life Group’s annual income tax provision being computed, with adjustments, as if the Allstate Life Group filed a separate return.
The Internal Revenue Service (“IRS”) is currently examining the Allstate Group’s 2013 and 2014 federal income tax returns and the exam is expected to be complete in the first quarter of 2018. The IRS has also begun their examination of the Allstate Group’s 2015 and 2016 federal income tax returns. The Allstate Group’s tax years prior to 2013 have been examined by the IRS and the statute of limitations has expired on those years. Any adjustments that may result from IRS examinations of the Allstate Group’s tax returns are not expected to have a material effect on the results of operations, cash flows or financial position of the Company.
The Company had $2 million liability for unrecognized tax benefits as of December 31, 2017, $1 million as of both December 31, 2016 and 2015, and zero liability as of December 31, 2014. The change in the liability for unrecognized tax benefits in 2017 and 2015 related to the increase for tax positions taken in a prior year. The Company believes it is reasonably possible that the liability balance will not significantly increase within the next twelve months.
The Company recognizes interest accrued related to unrecognized tax benefits in income tax expense. The Company did not record interest income or expense relating to unrecognized tax benefits in income tax expense in 2017, 2016 or 2015. As of December 31, 2017 and 2016, there was no interest accrued with respect to unrecognized tax benefits. No amounts have been accrued for penalties.
Tax Reform
On December 22, 2017, Public Law 115-97, known as the Tax Cuts and Jobs Act of 2017 (“Tax Legislation”) became effective. The Tax Legislation impacts the Company generally in four areas:
1.Amends the U.S. Internal Revenue Code of 1986, as amended, which among other items, permanently reduces the corporate income tax rate from a maximum of 35% to 21% beginning January 1, 2018.
2.Changes international taxation to a modified territorial tax system whereby profits from non-U.S. subsidiaries will generally be taxed only in their local jurisdictions.
3.Contains several other provisions, such as limitations of deductibility of executive compensation, meals and entertainment and lobbying expenses and changes to the dividends received deduction.
4.Affects the timing of certain tax deductions for reserves and deferred acquisition costs, but does not impact the Company’s overall income tax expense.
Deferred income taxes result from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements that will result in taxable or deductible amounts in future years. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in years in which those temporary differences are expected to be recovered or settled. Deferred tax assets and liabilities are adjusted through income tax expense as changes in tax laws or rates are enacted.
The Company revalued its deferred tax assets and liabilities at the new corporate income tax rate. The transition to the modified territorial system for international taxation required the Company to recognize a liability in 2017 based on non-U.S. income from international subsidiaries that had not been repatriated to their U.S. parent company (the “Transition Tax”). The Company recorded a net tax benefit of $514 million, recognized as a reduction to income tax expense in the Company’s Consolidated Statements of Operations for the year ended December 31, 2017. The net benefit was primarily due to re-measurement of the Company’s deferred tax assets and liabilities, partially offset by the impact of the transition tax on deemed repatriation of deferred non-U.S. income. The Company’s effective income tax rate benefit for 2017 was 38.7% and included this one-time benefit of 71.8%.
The impact of the Tax Legislation may differ from the Company’s preliminary estimates due to, among other things, changes in interpretations and assumptions the Company has made, guidance that may be issued and actions the Company may take as a result of the Tax Legislation. The transition tax calculation is based on estimated amounts. Any potential adjustments made could be material in relation to the preliminary estimates recorded.
The components of the deferred income tax assets and liabilities as of December 31 are as follows:
|
| | | | | | | |
($ in millions) | 2017 | | 2016 |
Deferred assets | | | |
Deferred reinsurance gain | $ | 8 |
| | $ | 16 |
|
Other assets | 2 |
| | 4 |
|
Total deferred assets (1) | 10 |
| | 20 |
|
Deferred liabilities | |
| | |
|
Life and annuity reserves | (269 | ) | | (362 | ) |
Unrealized net capital gains | (223 | ) | | (369 | ) |
DAC | (221 | ) | | (370 | ) |
Difference in tax bases of investments | (79 | ) | | (35 | ) |
Other liabilities | (54 | ) | | (75 | ) |
Total deferred liabilities | (846 | ) | | (1,211 | ) |
Net deferred liability (1) | $ | (836 | ) | | $ | (1,191 | ) |
| |
(1) | Changes in deferred tax assets and liabilities primarily relate to the Tax Legislation. |
Although realization is not assured, management believes it is more likely than not that the deferred tax assets will be realized based on the Company’s assessment that the deductions ultimately recognized for tax purposes will be fully utilized.
The components of income tax (benefit) expense for the years ended December 31 are as follows:
|
| | | | | | | | | | | |
($ in millions) | 2017 | | 2016 | | 2015 |
Current | $ | 104 |
| | $ | 24 |
| | $ | 251 |
|
Deferred | (382 | ) | | 120 |
| | 50 |
|
Total income tax (benefit) expense | $ | (278 | ) | | $ | 144 |
| | $ | 301 |
|
The Company received refunds of $1 million and $22 million in 2017 and 2016, respectively, and paid income taxes of $221 million in 2015. The Company had current income tax payable of $56 million and current tax receivable $16 million as of December 31, 2017 and 2016, respectively.
A reconciliation of the statutory federal income tax rate to the effective income tax rate on income from operations for the years ended December 31 is as follows:
|
| | | | | | | | |
| 2017 | | 2016 | | 2015 |
Statutory federal income tax rate - expense | 35.0 | % | | 35.0 | % | | 35.0 | % |
Tax Legislation benefit | (71.8 | ) | | — |
| | — |
|
Tax credits | (1.7 | ) | | (3.3 | ) | | (1.7 | ) |
Dividends received deduction | (0.6 | ) | | (1.3 | ) | | (0.6 | ) |
Adjustments to prior year tax liabilities | (0.3 | ) | | — |
| | (0.3 | ) |
State income taxes | 0.6 |
| | 0.3 |
| | 0.4 |
|
Non-deductible expenses | 0.1 |
| | 0.2 |
| | 0.2 |
|
Change in accounting for investments in qualified affordable housing projects | — |
| | — |
| | 2.0 |
|
Other | — |
| | 0.1 |
| | (0.1 | ) |
Effective income tax rate (benefit) expense | (38.7 | )% | | 31.0 | % | | 34.9 | % |