Income before income taxes is comprised of the following:
|
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
Domestic | $ | 2,988 |
| | $ | 2,622 |
| | $ | 2,574 |
|
Foreign | 1,051 |
| | 997 |
| | 1,030 |
|
Total | $ | 4,039 |
| | $ | 3,619 |
| | $ | 3,604 |
|
The provisions for income taxes for 2017, 2016, and 2015 are as follows:
|
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
Federal: | | | | | |
Current | $ | 802 |
| | $ | 468 |
| | $ | 766 |
|
Deferred | 7 |
| | 233 |
| | (12 | ) |
Total federal | 809 |
| | 701 |
| | 754 |
|
State: | | | | | |
Current | 161 |
| | 108 |
| | 131 |
|
Deferred | 8 |
| | 21 |
| | 1 |
|
Total state | 169 |
| | 129 |
| | 132 |
|
Foreign: | | | | | |
Current | 389 |
| | 398 |
| | 399 |
|
Deferred | (42 | ) | | 15 |
| | (90 | ) |
Total foreign | 347 |
| | 413 |
| | 309 |
|
Total provision for income taxes | $ | 1,325 |
| | $ | 1,243 |
| | $ | 1,195 |
|
Tax benefits associated with the release of employee RSUs were allocated to equity attributable to Costco in the amount of $37, $74, and $86, in 2017, 2016, and 2015, respectively.
The reconciliation between the statutory tax rate and the effective rate for 2017, 2016, and 2015 is as follows:
|
| | | | | | | | | | | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
Federal taxes at statutory rate | $ | 1,414 |
| | 35.0 | % | | $ | 1,267 |
| | 35.0 | % | | $ | 1,262 |
| | 35.0 | % |
State taxes, net | 116 |
| | 2.9 |
| | 91 |
| | 2.5 |
| | 85 |
| | 2.3 |
|
Foreign taxes, net | (64 | ) | | (1.6 | ) | | (21 | ) | | (0.6 | ) | | (125 | ) | | (3.5 | ) |
Employee stock ownership plan (ESOP) | (104 | ) | | (2.6 | ) | | (17 | ) | | (0.5 | ) | | (66 | ) | | (1.8 | ) |
Other | (37 | ) | | (0.9 | ) | | (77 | ) | | (2.1 | ) | | 39 |
| | 1.2 |
|
Total | $ | 1,325 |
| | 32.8 | % | | $ | 1,243 |
| | 34.3 | % | | $ | 1,195 |
| | 33.2 | % |
The Company’s provision for income taxes in 2017 and 2015 was favorably impacted by net tax benefits of $104 and $68, respectfully, primarily due to tax benefits recorded in connection with the May 2017 and February 2015 special cash dividends paid by the Company to employees through the Company's 401(k) Retirement Plan of $82 and $57, respectively. Dividends on these shares are deductible for U.S. income tax purposes.
The components of the deferred tax assets (liabilities) are as follows:
|
| | | | | | | |
| 2017 | | 2016 |
Equity compensation | $ | 109 |
| | $ | 99 |
|
Deferred income/membership fees | 167 |
| | 177 |
|
Accrued liabilities and reserves | 647 |
| | 601 |
|
Other(1) | 18 |
| | 63 |
|
Property and equipment | (747 | ) | | (779 | ) |
Merchandise inventories | (252 | ) | | (256 | ) |
Net deferred tax (liabilities)/assets | $ | (58 | ) | | $ | (95 | ) |
| |
(1) | Includes foreign tax credits of $36 and $78 for 2017 and 2016, respectively, which will expire beginning in 2025. |
The deferred tax accounts at the end of 2017 and 2016 include non-current deferred income tax assets of $254 and $202, respectively, included in other assets; and non-current deferred income tax liabilities of $312 and $297, respectively, included in other liabilities.
During 2015, the Company repatriated a portion of the earnings in the Canadian operations that, in 2014, the Company determined were no longer considered indefinitely reinvested. In the fourth quarter of 2015, the Company changed its position regarding an additional portion of the undistributed earnings of the Canadian operations, which are no longer considered indefinitely reinvested. These earnings were distributed in 2016. Current exchange rates compared to historical rates when these earnings were generated resulted in an immaterial U.S. benefit, which was recorded at the end of 2015. During 2017, the Company changed its position regarding an additional portion of the undistributed earnings of its Canadian operations as they could be repatriated without adverse tax consequences. Accordingly, that portion is no longer considered to be indefinitely reinvested. Subsequent to the end of the fiscal year, the Company repatriated a portion of undistributed earnings in its Canadian operations without adverse tax consequences.
The Company has not provided for U.S. deferred taxes on cumulative undistributed earnings of $3,176 and $3,280 at the end of 2017 and 2016, respectively, of certain non-U.S. consolidated subsidiaries because the earnings have not been repatriated, or subsidiaries have invested or will invest the undistributed earnings indefinitely, or the earnings, if repatriated would not result in an adverse tax consequence. Because of the availability of U.S. foreign tax credits and complexity of the computation, it is not practicable to determine at this time the U.S. federal income tax liability that would be associated with such earnings if such earnings were not deemed to be indefinitely reinvested. Deferred taxes are recorded for earnings of foreign operations when it is determined that such earnings are no longer indefinitely reinvested.
The Company believes that its U.S. current and projected asset position is sufficient to meet its U.S. liquidity requirements and has no current plans to repatriate for use in the U.S. the cash and cash equivalents and short-term investments held by these non-U.S. subsidiaries whose earnings are considered indefinitely reinvested.
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits for 2017 and 2016 is as follows:
|
| | | | | | | |
| 2017 | | 2016 |
Gross unrecognized tax benefit at beginning of year | $ | 52 |
| | $ | 158 |
|
Gross increases—current year tax positions | 3 |
| | 2 |
|
Gross increases—tax positions in prior years | 17 |
| | 1 |
|
Gross decreases—tax positions in prior years | 0 |
| | (47 | ) |
Settlements | (11 | ) | | (25 | ) |
Lapse of statute of limitations | (9 | ) | | (37 | ) |
Gross unrecognized tax benefit at end of year | $ | 52 |
| | $ | 52 |
|
The gross unrecognized tax benefit includes tax positions for which the ultimate deductibility is highly certain but there is uncertainty about the timing of such deductibility. At the end of 2017 and 2016, these amounts were immaterial. Because of the impact of deferred tax accounting, other than interest and penalties, the disallowance of these tax positions would not affect the annual effective tax rate but would accelerate the payment of cash to the taxing authority. The total amount of such unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate in future periods is $29 and $46 at the end of 2017 and 2016, respectively.
Accrued interest and penalties related to income tax matters are classified as a component of income tax expense. Interest and penalties recognized by the Company were not material in 2017 or 2016. Accrued interest and penalties were not material at the end of 2017 or 2016.
The Company is currently under audit by several taxing jurisdictions in the United States and in several foreign countries. Some audits may conclude in the next 12 months and the unrecognized tax benefits recorded in relation to the audits may differ from actual settlement amounts. It is not practical to estimate the effect, if any, of any amount of such change during the next 12 months to previously recorded uncertain tax positions in connection with the audits. The Company does not anticipate that there will be a material increase or decrease in the total amount of unrecognized tax benefits in the next 12 months.
The Company files income tax returns in the United States, various state and local jurisdictions, in Canada and in several other foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state or local examination for years before fiscal 2014. The Company is currently subject to examination in Canada for fiscal years 2013 to present and in California for fiscal years 2007 to present. No other examinations are believed to be material.