CENTENE CORP

Income Taxes

The consolidated income tax expense consists of the following for the years ended December 31 ($ in millions):



	2017			2016		2015
Current provision
Federal	$	421		$	485	$	332
State and local	14			22		26
Total current provision	435			507		358
Deferred provision	(109		)	92		(19		)
Total income tax expense	$	326		$	599	$	339

The reconciliation of the tax provision at the U.S. federal statutory rate to income tax expense for the years ended December 31 is as follows ($ in millions):



	2017			2016			2015
Earnings from continuing operations, before income tax expense	$	1,134		$	1,157		$	697
(Earnings) loss attributable to flow through noncontrolling interest	15			(8		)	1
Earnings from continuing operations, less noncontrolling interest, before income tax expense	1,149			1,149			698

Tax provision at the U.S. federal statutory rate	402			402			244
State income taxes, net of federal income tax benefit	11			10			15
Nondeductible compensation	58			23			2
ACA Health Insurer Fee	—			162			75
Income Tax Reform	(125		)	—			—
Other, net	(20		)	2			3
Income tax expense	$	326		$	599		$	339

The tax effects of temporary differences which give rise to deferred tax assets and liabilities are presented below for the years ended December 31 ($ in millions):



	2017			2016
Deferred tax assets:
Medical claims liability	$	46		$	66
Nondeductible liabilities	41			39
Net operating loss and tax credit carryforwards	94			101
Compensation accruals	129			156
Premium and trade receivables	45			79
Other	11			14
Deferred tax assets	366			455
Valuation allowance	(81		)	(86		)
Net deferred tax assets	$	285		$	369

Deferred tax liabilities:
Intangible assets	$	342		$	577
Prepaid assets	23			17
Fixed assets	84			65
Investments in joint ventures	20			11
Deferred revenue	26			—
Other	17			2
Deferred tax liabilities	512			672
Net deferred tax assets (liabilities)	$	(227	)	$	(303	)

Valuation allowances are provided when it is considered more likely than not that deferred tax assets will not be realized. The valuation allowances primarily relate to future tax benefits on certain federal, state and foreign net operating loss and tax credit carryforwards. The $5 million decrease in valuation allowance primarily relates to the effect of the tax rate change due to The Tax Cuts and Jobs Act (Income Tax Reform), which was passed in December 2017, offset partially by an increase due to losses from entities that file nonconsolidated federal tax returns.

Federal net operating loss carryforwards of $44 million expire beginning in 2020 through 2037; state net operating loss and tax credit carryforwards of $42 million expire beginning in 2018 through 2037. Substantially all of the non-U.S. tax loss carryforwards have indefinite carryforward periods.

The Company maintains a reserve for uncertain tax positions that may be challenged by a tax authority. A rollforward of the beginning and ending amount of uncertain tax positions, exclusive of related interest and penalties, is as follows:



	Year Ended December 31,
	2017			2016
Gross unrecognized tax benefits, beginning of period	$	102		$	5
Gross increases:
Current year tax positions	43			6
Prior year tax positions	113			93
Gross decreases:
Prior year tax positions	—			(1		)
Statute of limitation lapses	(1		)	(1		)
Gross unrecognized tax benefits, end of period	$	257		$	102

Uncertain tax positions increased $143 million to reflect the impact of a multi-year reserve for deductions related to domestic production activities. As of December 31, 2017, $225 million of unrecognized tax benefits would impact the Company's effective tax rate in future periods, if recognized. The Company believes it is reasonably possible that its liability for unrecognized tax benefits will decrease in the next twelve months by $8 million as a result of the expiration of statutes of limitations in certain jurisdictions.

The table above excludes interest, net of related tax benefits, which is treated as income tax expense (benefit) under the Company's accounting policy. For the year ended December 31, 2017, the Company recognized net interest expense and penalties related to uncertain positions of $4 million. The Company had $9 million and $5 million of accrued interest and penalties for uncertain tax positions as of December 31, 2017 and 2016, respectively.

The Company files tax returns for federal as well as numerous state tax jurisdictions. As of December 31, 2017, Health Net is under federal examination for tax years 2011 through its final return in 2016. Additionally, Centene's tax returns for years 2014 through 2016 are subject to federal examination.

Income Tax Reform

Income Tax Reform was enacted on December 22, 2017. Income Tax Reform reduces the U.S. federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax-deferred, and creates new taxes on foreign sourced earnings. As of December 31, 2017, the Company has not completed its accounting for the tax effects of enactment of Income Tax Reform; however, as described below, the Company has made a reasonable estimate of the effects on its existing deferred tax balances and the one-time transition tax. As a result of the enactment, the Company recognized a provisional tax benefit of $125 million, which is included as a component of income tax expense from continuing operations.

The Company remeasured deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is now 21% for federal tax purposes. However, the Company is still analyzing certain aspects of Income Tax Reform and refining its calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. The provisional tax benefit recorded related to the remeasurement of the Company's net deferred tax liability balance was $126 million.

The one-time transition tax is based on the Company's total post-1986 earnings and profits (E&P) for which the Company had previously deferred from U.S. income taxes. The Company recorded a provisional amount for the one-time transition tax liability for its foreign subsidiaries, resulting in an increase in income tax expense of $1 million.