Entity information:
Income Taxes

U.S. and foreign income before taxes are set forth below:

 
 
2017
 
2016
 
2015
U.S.
 
$
662

 
$
366

 
$
480

Foreign
 
1,612

 
979

 
773

 
 
$
2,274

 
$
1,345

 
$
1,253



The details of our income tax provision (benefit) are set forth below:

 
 
 
 
2017
 
2016
 
2015
Current:
 
Federal
 
$
(2
)
 
$
126

 
$
267

 
 
Foreign
 
290

 
160

 
133

 
 
State
 
12

 
13

 
28

 
 
 
 
$
300

 
$
299

 
428

 
 
 
 
 
 
 
 
 
Deferred:
 
Federal
 
$
603

 
$
19

 
(116
)
 
 
Foreign
 
19

 
3

 
15

 
 
State
 
12

 
6

 
—

 
 
 
 
$
634

 
$
28

 
$
(101
)
 
 
 
 
$
934


$
327


$
327



The reconciliation of income taxes calculated at the U.S. federal statutory rate to our effective tax rate is set forth below:

 
 
2017
 
2016
 
2015
U.S. federal statutory rate
 
$
797

 
35.0
 %
 
$
473

 
35.0
 %
 
$
438

 
35.0
 %
State income tax, net of federal tax benefit
 
11

 
0.5

 
15

 
1.1

 
12

 
0.9

Statutory rate differential attributable to foreign operations
 
(212
)
 
(9.3
)
 
(143
)
 
(10.5
)
 
(175
)
 
(13.7
)
Adjustments to reserves and prior years
 
12

 
0.5

 
(11
)
 
(0.8
)
 
13

 
1.0

Share-based payments
 
(117
)
 
(5.1
)
 
—

 
—

 
—

 
—

Change in valuation allowances
 
34

 
1.5

 
(3
)
 
(0.2
)
 
41

 
3.0

Other, net
 
(25
)
 
(1.1
)
 
(4
)
 
(0.3
)
 
(2
)
 
(0.1
)
Tax Act Enactment
 
434

 
19.1

 
—

 
—

 
—

 
—

Effective income tax rate
 
$
934

 
41.1
 %
 
$
327

 
24.3
 %
 
$
327

 
26.1
 %


Statutory rate differential attributable to foreign operations.  This item includes local taxes, withholding taxes, and shareholder-level taxes, net of foreign tax credits.  The favorable impact is primarily attributable to a majority of our income being earned outside of the U.S. where tax rates are generally lower than the U.S. rate.

In 2015, this benefit was positively impacted by the repatriation of current year foreign earnings as we recognized excess foreign tax credits, resulting from the related effective foreign tax rate being higher than the U.S. federal statutory rate.

Adjustments to reserves and prior years.  This item includes: (1) changes in tax reserves, including interest thereon, established for potential exposure we may incur if a taxing authority takes a position on a matter contrary to our position; and (2) the effects of reconciling income tax amounts recorded in our Consolidated Statements of Income to amounts reflected on our tax returns, including any adjustments to the Consolidated Balance Sheets. The impact of certain effects or changes may offset items reflected in the 'Statutory rate differential attributable to foreign operations' line.

In 2016, this item was favorably impacted by the resolution of uncertain tax positions in the U.S.

Share-based payments. 2017 includes a $117 million tax benefit related to the excess tax benefits from share-based payments. These excess benefits were largely associated with deferred compensation payouts to recently retired employees. See Note 2 for discussion related to the adoption of a new accounting standard for share based payments in 2017.

Change in valuation allowances.  This item relates to changes for deferred tax assets generated or utilized during the current year and changes in our judgment regarding the likelihood of using deferred tax assets that existed at the beginning of the year.  The impact of certain changes may offset items reflected in the 'Statutory rate differential attributable to foreign operations' line.

In 2017, $34 million of net tax expense was driven by valuation allowances recorded against deferred tax assets generated in the current year. This amount excludes a valuation allowance of $189 million related to the Tax Act.

In 2016, $3 million of net tax benefit was driven by $14 million in net tax expense for valuation allowances recorded against deferred tax assets generated in the current year and $17 million in net tax benefit for valuation allowances resulting from a change in judgment regarding the future use of certain deferred tax assets that existed at the beginning of the year.

In 2015, $41 million of net tax expense was driven by $17 million for valuation allowances recorded against deferred tax assets generated in the current year and $24 million in net tax expense resulting from a change in judgment regarding the future use of certain deferred tax assets that existed at the beginning of the year.

Other.  This item primarily includes the impact of permanent differences related to current year earnings as well as U.S. tax credits and deductions.

In 2017, this item was primarily driven by the favorable impact of certain international refranchising gains.

Tax Act Enactment. On December 22, 2017, the U.S. government enacted comprehensive Federal tax legislation commonly referred to as the Tax Cuts and Jobs Act of 2017 (the "Tax Act"). The Tax Act significantly modifies the U.S. corporate income tax system by, among other things, reducing the federal income tax rate from 35% to 21%, limiting certain deductions, including limiting the deductibility of interest expense to 30% of U.S. Earnings Before Interest, Taxes, Depreciation and Amortization, imposing a mandatory one-time deemed repatriation tax on accumulated foreign earnings and creating a territorial tax system that changes the manner in which future foreign earnings are subject to U.S. tax. On December 22, 2017, the SEC staff issued Staff Accounting Bulletin 118 that allows us to record provisional amounts related to the impacts of the Tax Act during a measurement period not to extend beyond one year of the enactment date. We currently are analyzing the Tax Act and have made reasonable estimates of the effects on our Consolidated Financial Statements and tax disclosures, including the amount of the deemed repatriation tax and changes to our existing deferred tax balances.

The deemed repatriation tax is based on our accumulated foreign earnings and profits that we previously deferred from U.S. income taxes. We recorded an estimated amount for our repatriation tax liability of $170 million as of December 31, 2017. In addition, we remeasured certain net deferred tax assets and liabilities based on the tax rates at which they are expected to reverse in the future. The estimated amount recorded related to the remeasurement of these balances was a net expense of $75 million. Lastly, we recorded a valuation allowance of $189 million on our remaining foreign tax credit carryforwards which are unlikely to be realized under the U.S. territorial tax system. The estimated total impact upon enactment of the Tax Act is $434 million.

We consider the key estimates on the deemed repatriation tax, net deferred tax remeasurement and the impact on our foreign tax credit carryforwards to be incomplete due to our continuing analysis of final year-end data and tax positions. Our analysis could affect the measurement of these balances and give rise to new deferred and other tax assets and liabilities. Since the Tax Act was passed late in the fourth quarter of 2017, and further guidance and accounting interpretation is expected over the next 12 months, our review is still pending. We expect to complete our analysis of the amounts recorded upon enactment of the Tax Act within the measurement period of one year.

The details of 2017 and 2016 deferred tax assets (liabilities) are set forth below:
 
 
2017
 
2016
Operating losses
 
$
216

 
$
172

Capital losses
 
4

 
184

Tax credit carryforwards
 
311

 
284

Employee benefits
 
94

 
185

Share-based compensation
 
58

 
100

Self-insured casualty claims
 
7

 
32

Lease-related liabilities
 
51

 
65

Various liabilities
 
51

 
56

Property, plant and equipment
 
24

 
37

Deferred income and other
 
31

 
32

Gross deferred tax assets
 
847

 
1,147

Deferred tax asset valuation allowances
 
(421
)
 
(195
)
Net deferred tax assets
 
$
426

 
$
952

Intangible assets, including goodwill
 
$
(69
)
 
$
(107
)
Property, plant and equipment
 
(18
)
 
(46
)
Deemed repatriation tax
 
(170
)
 
—

Other
 
(36
)
 
(34
)
Gross deferred tax liabilities
 
$
(293
)
 
$
(187
)
Net deferred tax assets (liabilities)
 
$
133


$
765


Reported in Consolidated Balance Sheets as:
 
 
 
 
Deferred income taxes
 
$
139


$
772

Other liabilities and deferred credits
 
(6
)
 
(7
)
 
 
$
133


$
765



As of December 31, 2017, we had approximately $3.2 billion of unremitted foreign earnings. We have historically reinvested all the unremitted earnings of our foreign subsidiaries and affiliates, and therefore have not recognized any U.S. deferred tax liability on these earnings. However, upon the enactment of the Tax Act, the unremitted earnings of our foreign subsidiaries and affiliates are subject to U.S. tax due to the mandatory deemed repatriation tax on accumulated foreign earnings provision. As a result, we recognized a one-time income tax expense of $170 million. Our intent is to indefinitely reinvest our unremitted earnings outside the U.S. and our current plans do not demonstrate a need to repatriate these amounts to fund our U.S. operations. Thus, for our investments in foreign subsidiaries where the carrying values for financial reporting exceed the tax basis, we have not provided taxes, other than U.S. federal taxes, for the portion of the excess that we believe is permanently invested, as we have the ability and intent to indefinitely postpone these basis differences from reversing with a tax consequence. However, if these funds were repatriated, we would be required to accrue and pay applicable income taxes (if any) and withholding taxes payable to various countries. A determination of the deferred tax liability on this amount is not practicable.

At December 31, 2017, the Company has foreign operating and capital loss carryforwards of $0.5 billion and U.S. state operating loss and tax credit carryforwards of $1.1 billion and U.S. federal tax credit carryforwards of $0.3 billion.  A valuation allowance of $434 million has been recorded against the carryforwards that are not likely to be realized. These losses are being carried forward in jurisdictions where we are permitted to use tax losses from prior periods to reduce future taxable income and will expire as follows:

 
 
Year of Expiration
 
 
 
 
2018
 
2019-2022
 
2023-2036
 
Indefinitely
 
Total
Foreign
 
$
9

 
$
46

 
$
85

 
$
376

 
$
516

U.S. state
 
—

 
61

 
1,012

 
—

 
1,073

U.S. federal
 
—

 
67

 
238

 
—

 
305

 
 
$
9

 
$
174

 
$
1,335

 
$
376

 
$
1,894



We recognize the benefit of positions taken or expected to be taken in tax returns in the Consolidated Financial Statements when it is more likely than not that the position would be sustained upon examination by tax authorities.  A recognized tax position is measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon settlement.

The Company had $100 million and $91 million of unrecognized tax benefits at December 31, 2017 and December 31, 2016, respectively, $10 million and $87 million of which are temporary in nature and if recognized, would not impact the effective income tax rate.  A reconciliation of the beginning and ending amount of unrecognized tax benefits follows:
 
 
2017
 
2016
Beginning of Year
 
$
91

 
$
98

     Additions on tax positions - current year
 
3

 
—

     Additions for tax positions - prior years
 
8

 
1

     Reductions for tax positions - prior years
 
—

 
(5
)
     Reductions for settlements
 
(1
)
 
(1
)
     Reductions due to statute expiration
 
(1
)
 
(2
)
     Foreign currency translation adjustment
 
—

 
—

End of Year
 
$
100

 
$
91



The Company believes its unrecognized tax benefits will not materially increase or decrease in the next 12 months.

The Company’s income tax returns are subject to examination in the U.S. federal jurisdiction and numerous U.S. state and foreign jurisdictions.

The Company has settled audits with the IRS through fiscal year 2010. Our operations in certain foreign jurisdictions remain subject to examination for tax years as far back as 2006, some of which years are currently under audit by local tax authorities.

The accrued interest and penalties related to income taxes at December 31, 2017 and December 31, 2016 are set forth below:
 
 
2017
 
2016
Accrued interest and penalties
 
$
14

 
$
9



During 2017, 2016 and 2015, a net expense of $5 million, a net benefit of $4 million and a net expense of $5 million, respectively, for interest and penalties was recognized in our Consolidated Statements of Income as components of its Income tax provision.

In October 2016, the Company completed the separation of its China business into an independent publicly-traded company. The transaction has been treated as qualifying as a tax-free reorganization for U.S. income tax purposes. In addition, the Company considered the China indirect income tax on indirect transfers of assets by nonresident enterprises and concluded that it does not apply to the separation transaction.