Entity information:
Income Taxes

The components of pretax income and provision for income taxes for the years ended December 31, 2017, 2016, and 2015, consisted of the following:
 
 
Year ended December 31,
(in millions)
 
2017
 
2016
 
2015
Components of pretax income (loss):
 
 
 
 
 
 
Domestic
 
$
484

 
$
492

 
$
(1,332
)
Foreign
 
451

 
249

 
165

 
 
$
935

 
$
741

 
$
(1,167
)
Provision for income taxes:
 
 
 
 
 
 
Federal
 
$
(795
)
 
$
20

 
$
7

State and local
 
(32
)
 
20

 
14

Foreign
 
98

 
41

 
80

Income tax (benefit) expense
 
$
(729
)
 
$
81

 
$
101

 
 
 
 
 
 
 
Effective income tax rate
 
(78
)%

11
%

(9
)%

 
The Company’s effective tax rates differ from statutory rates as follows:
 
 
Year ended December 31,
 
 
2017
 
2016
 
2015
Federal statutory rate
 
35
 %
 
35
 %
 
35
 %
State income taxes, net of federal income tax benefit
 
2

 
2

 
3

Nontaxable income from noncontrolling interests
 
(7
)
 
(11
)
 
6

Impact of foreign operations (a)
 
(1
)
 
13

 
(1
)
Valuation allowances
 
(147
)
 
(35
)
 
(54
)
Liability for unrecognized tax benefits
 
2

 
—

 
(2
)
Prior year adjustments (b)
 
(10
)
 
3

 
4

Enacted tax rate changes
 
27

 
(1
)
 
—

Other tax reform bill impact for foreign related items
 
17

 
—

 
—

Equity Compensation
 
—

 
5

 
—

Impact of divestiture
 
2

 
—

 
—

Other
 
2

 
—

 
—

Effective tax rate
 
(78
)%

11
 %

(9
)%
(a)
The impact of foreign operations includes the effects of earnings and profits adjustments, foreign losses, and differences between foreign tax expense and foreign taxes eligible for the U.S. foreign tax credit.
(b)
Includes prior year true ups for certain foreign and state net operating loss carryforwards as a result of tax rate and restructuring changes.

The Company’s income tax (benefits) provisions consisted of the following components:
 
 
Year ended December 31,
(in millions)
 
2017
 
2016
 
2015
Current:
 
 
 
 
 
 
Federal
 
$
8

 
$
22

 
$
5

State and local
 
23

 
24

 
23

Foreign
 
93

 
73

 
80

 
 
124


119


108

Deferred:
 
 
 
 
 
 
Federal
 
(803
)
 
(2
)
 
2

State and local
 
(55
)
 
(4
)
 
(9
)
Foreign
 
5

 
(32
)
 
—

 
 
(853
)

(38
)

(7
)
Income tax (benefit) expense
 
$
(729
)

$
81


$
101



Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the book and tax bases of the Company’s assets and liabilities. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. Deferred tax assets are included in "Other long-term assets" and deferred tax liabilities are included in "Deferred tax liabilities" on the Company’s consolidated balance sheets.


The following table outlines the principal components of deferred tax items:
 
 
As of December 31,
(in millions)
 
2017
 
2016
Deferred tax assets related to:
 
 
 
 
Reserves and other accrued expenses
 
$
66

 
$
—

Employee related liabilities
 
121

 
176

Deferred revenues
 
30

 
34

Net operating losses and tax credit carryforwards
 
2,281

 
3,122

U.S. foreign tax credits on undistributed earnings
 
39

 
252

Total deferred tax assets
 
2,537


3,584

Valuation allowance
 
(1,214
)
 
(2,396
)
Realizable deferred tax assets
 
1,323


1,188

Deferred tax liabilities related to:
 
 
 
 
Property, equipment, and intangibles
 
(772
)
 
(969
)
Reserves and other accrued expenses
 
—

 
(49
)
Pension obligations
 
(67
)
 
(4
)
Investment in affiliates and other
 
(209
)
 
(217
)
Tax on foreign undistributed earnings
 
(12
)
 
(252
)
Foreign exchange gain
 
(35
)
 
(91
)
Total deferred tax liabilities
 
(1,095
)

(1,582
)
Net deferred tax asset (liabilities)
 
$
228


$
(394
)

The Company’s deferred tax assets and liabilities included in the consolidated balance sheets were as follows:
 
 
As of December 31,
(in millions)
 
2017
 
2016
Deferred tax assets
 
$
305

 
$
15

Deferred tax liabilities
 
(77
)
 
(409
)
Net deferred tax asset (liabilities)
 
$
228


$
(394
)

 
As of December 31, 2017 and 2016, the Company had recorded valuation allowances of $1.2 billion and $2.4 billion, respectively, against its net deferred tax assets. The decrease to the valuation allowance of $(1.2) billion in 2017 was primarily due to utilization of federal and state net operating losses and the release of the US federal and certain state valuation allowances due to improved performance.

The following table presents the amounts of federal, state, and foreign net operating loss carryforwards, general business credit, and minimum tax credit carryforwards:
 
 
As of December 31,
(in millions)
 
2017
Federal net operating loss carryforwards (a)
 
$
4,567

State net operating loss carryforwards (b)
 
6,069

Foreign net operating loss carryforwards (c)
 
3,403

General business credit carryforwards (d)
 
12

Minimum tax credit carryforwards (e)
 
30

(a)
Will expire if not utilized, for the years 2018, 2019, 2020 of $0.1 million, $0.8 million, $0.1 million, respectively, and the remaining through 2037.
(b)
Will expire if not utilized, for the years 2018, 2019, 2020 of $90 million, $245 million, $192 million, respectively, and the remaining through 2037.
(c)
Foreign net operating loss carryforwards of $74 million, if not utilized, will expire in years 2017 through 2035. The remaining foreign net operating loss carryforwards of $3.3 billion have an indefinite life.
(d)
If not utilized, these carryforwards will expire in years 2027 through 2037.
(e)
These carryforwards are refundable credits and will be utilized from 2018 through 2021.

The Company intends to indefinitely invest its net equity in its foreign operations, with the exception of any undistributed foreign earnings in those jurisdictions with positive earnings. Under the U.S. tax reform law changes enacted during 2017, all existing positive earnings were deemed to be distributed, and future foreign earnings will not be taxed in the U.S. Accordingly, as of December 31, 2017, no provision had been made for U.S. federal and state income taxes on the cumulative amount of temporary differences related to investments in foreign subsidiaries. However, these earnings are subject to local country withholding tax upon distribution. Upon sale or liquidation of these investments, the Company would potentially be subject to U.S., state, and foreign income taxes and withholding taxes payable to the various foreign countries.  The amount of unrecognized deferred tax liability related to investments in foreign subsidiaries is approximately $165 million as of December 31, 2017.

On December 22, 2017, the Tax Cuts and Jobs Act (tax reform bill) was signed into law in the U.S. The provisions of the tax reform bill with the most significant implications to the Company were the reduction of the federal tax rate from 35% to 21%, the creation of a 100% participation exemption for foreign dividends, the enactment of a one-time transition tax on existing foreign earnings, limitations on the deductibility of interest expense, and the establishment of global intangible low-taxed income (GILTI) rules. The first three provisions impacted the year-ended December 31, 2017. At December 31, 2017, the Company has not completed its accounting for the tax effects of enactment of the Act; however, in certain cases, the Company has made a reasonable estimate of the effects on its existing deferred tax balances, valuation allowance assessment for certain tax assets and the one-time transition tax. The Company recognized a provisional net tax expense of $353 million related to the tax reform bill, which is included as a component of income tax expense from continuing operations.

The Company remeasured certain deferred tax assets and liabilities based on the federal rate at which they are expected to reverse in the future, which is generally 21%. The Company also remeasured the state rate at which certain deferred tax assets and liabilities are expected to reverse in the future. Because the Company’s deferred tax assets exceed its deferred tax liabilities in the U.S., the reduction of the tax rate from 35% to 21% provided by the tax reform bill resulted in a negative impact to the tax rate of $194 million. The Company is still analyzing certain aspects of the Act and refining its calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts.

The one-time transition tax coupled with the 100% participation exemption had an immaterial impact on the tax rate. Because the Company has historically repatriated its foreign earnings, the Company’s cumulative foreign deficits exceed its cumulative foreign profits, causing the one-time taxable inclusion under the transition tax rules to be zero. As a result of the future participation exemption, the Company determined that it will not have enough future foreign sourced income to utilize any foreign tax credit carryforwards, and has therefore determined that it will amend its 2010-2016 tax returns to elect to claim foreign tax deductions, rather than foreign tax credits. The deferred tax impact of changing the election from a credit to a deduction was $159 million. This change was assumed when determining the appropriate valuation allowance on the Company’s foreign tax credit carryforwards in prior years, and as a result, the decision to amend the returns had an immaterial net tax rate impact. The Company is still evaluating the overall impact of the one-time transition tax on the outside basis differences and cumulative temporary differences inherent in these subsidiaries as of December 31, 2017.

The tax reform bill subjects a U.S. shareholder to current tax on GILTI earned by certain foreign subsidiaries. The FASB Staff Q&A, Topic 740 No. 5, Accounting for Global Intangible Low-Taxed Income, states that an entity can make an accounting policy election to either recognize deferred taxes for temporary differences expected to reverse as GILTI in future years or provide for the tax expense related to GILTI in the year the tax is incurred. The Company has elected to recognize the tax on GILTI as a period expense in the period the tax is incurred.

A reconciliation of the unrecognized tax benefits was as follows:
(in millions)
 
Unrecognized Tax Benefits
Balance as of January 1, 2015
 
$
236

Increases for tax positions of prior years
 
25

Decreases for tax positions of prior years
 
(4
)
Increases for tax positions related to the current period
 
1

Decreases for cash settlements with taxing authorities
 
(3
)
Decreases due to the lapse of the applicable statute of limitations
 
(6
)
Balance as of December 31, 2015
 
249

Increases for tax positions of prior years
 
2

Decreases for tax positions of prior years
 
(1
)
Increases for tax positions related to the current period
 
—

Decreases for cash settlements with taxing authorities
 
(1
)
Decreases due to the lapse of the applicable statute of limitations
 
(9
)
Balance as of December 31, 2016
 
240

Increases for tax positions of prior years
 
14

Decreases for tax positions of prior years
 
(10
)
Decreases for tax positions related to the current period
 
(3
)
Decreases for cash settlements with taxing authorities
 
(1
)
Decreases due to the lapse of the applicable statute of limitations
 
(7
)
Decreases due to change in tax rates
 
(13
)
Balance as of December 31, 2017
 
$
220


 
Most of the unrecognized tax benefits are included in “Other long-term liabilities” on the consolidated balance sheets, net of the federal benefit on state income taxes (approximately $12 million as of December 31, 2017). However, those unrecognized tax benefits that affect the federal consolidated tax years ending December 31, 2008 through December 31, 2017 are included in “Deferred tax liabilities” on the consolidated balance sheets, as these items reduce the Company’s net operating loss and credit carryforwards from those periods. The unrecognized tax benefits as of December 31, 2017, 2016, and 2015 included approximately $130 million, $133 million, and $136 million, respectively, of tax positions that, if recognized, would affect the effective tax rate.

The Company recognizes interest and penalties related to unrecognized tax benefits in “Income tax (benefit) expense” in the consolidated statements of operations. Cumulative accrued interest and penalties (net of related tax benefits) are not included in the ending balances of unrecognized tax benefits. Cumulative accrued interest and penalties are included in “Other long-term liabilities” on the consolidated balance sheets while the related tax benefits are included in “Deferred tax liabilities” on the consolidated balance sheets. The following table presents the approximate amounts associated with accrued interest expense and the cumulative accrued interest and penalties:
 
 
Year ended December 31,
 (in millions)
 
2017
 
2016
 
2015
Current year accrued interest expense (net of related tax benefits)
 
$
6

 
$
5

 
$
7

Cumulative accrued interest and penalties (net of related tax benefits)
 
60

 
48

 
45



As of December 31, 2017, the Company anticipates it is reasonably possible that its liability for unrecognized tax benefits may decrease by approximately $134 million within the next 12 months as a result of the possible closure of federal tax audits, potential settlements with certain states and foreign countries, and the lapse of the statute of limitations in various state and foreign jurisdictions.

The Company or one or more of its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. As of December 31, 2017, the Company was no longer subject to income tax examination by the U.S. federal jurisdiction for years before 2005. State and local examinations are substantially complete through 2006. Foreign jurisdictions generally remain subject to examination by their respective authorities from 2007 forward, none of which are considered major jurisdictions.

In September 2017, the Internal Revenue Service issued a directive pertaining to the research and development (R&D) tax credit. The Company incurred approximately $150 million of R&D expenses during 2017.

Under the Tax Allocation Agreement executed at the time of the spin-off of The Western Union Company (Western Union) on September 29, 2006, Western Union is responsible for and must indemnify the Company against all taxes, interest, and penalties that relate to Western Union for periods prior to the spin-off date. If Western Union were to agree to or be finally determined to owe any amounts for such periods but were to default in its indemnification obligation under the Tax Allocation Agreement, the Company, as parent of the tax filing group during such periods, generally would be required to pay the amounts to the relevant tax authority, resulting in a potentially material adverse effect on the Company’s financial position and results of operations. As of December 31, 2017, the Company had approximately $129 million of income taxes payable, including approximately $4 million of uncertain income tax liabilities, recorded related to Western Union for periods prior to the spin-off date. The Company has recorded a corresponding account receivable of equal amount from Western Union, which is included as a long-term account receivable in “Other long-term assets” on the Company’s consolidated balance sheets, reflecting the indemnification obligation. The uncertain income tax liabilities and corresponding receivable are based on information provided by Western Union regarding its tax contingency reserves for periods prior to the spin-off date. There is no assurance that a Western Union-related issue raised by the IRS or other tax authority will be finally resolved at a cost not in excess of the amount reserved and reflected in the Company’s uncertain income tax liabilities and corresponding receivable from Western Union. The Western Union contingent liability is in addition to the Company’s liability for unrecognized tax benefits discussed above.

The IRS completed its examination of the U.S. federal consolidated income tax returns of the Company for 2005 through 2007 and issued a 30-Day letter in October 2012. The 30-Day letter claims that the Company and its subsidiaries, which included Western Union during some of the years at issue, owe additional taxes with respect to a variety of adjustments. The Company and Western Union agree with several of the adjustments in the 30-Day letter, such adjustments representing tax due of approximately $40 million. This undisputed tax and associated interest due (pretax) of approximately $26 million through December 31, 2017, were fully reserved. The undisputed tax for which Western Union would be required to indemnify the Company is greater than the total tax due, such that settlement of the undisputed tax would result in a net refund to the Company. As to the adjustments that are disputed, such issues represent total taxes allegedly due of approximately $59 million, of which $40 million relates to the Company and $19 million relates to Western Union. The Company estimates that total interest due (pretax) on the disputed amounts is approximately $29 million through December 31, 2017, of which $17 million relates to the Company and $11 million relates to Western Union. As to the disputed issues, the Company and Western Union are contesting the asserted deficiencies with the Appeals Office of the IRS.  In December, 2017, the Company was notified by the Appeals Office that the case had been forwarded to the Joint Committee on Taxation for review. The Company believes that it has adequately reserved for the disputed issues in its liability for unrecognized tax benefits described above and that final resolution of those issues will not have a material adverse effect on its financial position or results of operations.