NOTE K. TAXES

 

 

The income from continuing operations provision for income taxes by geographic operations is as follows:

 

 

The components of the income from continuing operations provision for income taxes/(benefits) by taxing jurisdiction are as follows:

 

 

If the company’s provision for income taxes had been prepared using the separate tax return method without modification for the benefits-for-loss approach, there would be no material difference in the total taxes included in net income reported in each of the years above. For additional information, refer to note A, “Significant Accounting Policies,” to the Consolidated Financial Statements.

 

For the year ended December 31, 2017, the U.S. operations generated a taxable loss as a result of the effect of temporary differences between asset and liability amounts that are recognized for financial reporting purposes and the amounts that are recognized for income tax purposes. As the company’s U.S. federal and certain state operations are included in various IBM consolidated tax returns, under the tax sharing agreement, the benefits-for-loss approach has been applied and the losses were recorded as a current tax receivable due from IBM to be settled during the first quarter of 2018.

 

A reconciliation of the statutory U.S. federal tax rate to the company’s effective tax rate from continuing operations is as follows:

 

 

Percentages rounded for disclosure purposes.

 

The component reflected within the tax rate reconciliation table above labeled “Foreign tax differential” includes the effects of foreign subsidiaries’ earnings taxed at rates other than the U.S. statutory rate.

 

On December 22, 2017, the Tax Cuts and Jobs Act was enacted. U.S. tax reform introduced many changes, including lowering the U.S. corporate income tax rate to 21 percent, allowing for full expensing for investments in certain property placed in service after September 27, 2017 and before January 1, 2023, changes in incentives, provisions to prevent U.S. base erosion and significant changes in the taxation of international income, including provisions which allow for the repatriation of foreign earnings without U.S. tax. The enactment of U.S. tax reform resulted in a provisional one-time net benefit of $162 million to tax expense in the fourth-quarter and year ended December 31, 2017. This benefit was the result of the re-measurement of deferred tax balances to the new U.S. federal tax rate, as well as the U.S. transition tax and any foreign tax costs on undistributed foreign earnings.

 

The net benefit related to U.S. tax reform is based on the company’s estimates as of December 31, 2017. All components of the provisional net benefit of $162 million are based on the company’s estimates as of December 31, 2017. Specifically, the transition tax, any foreign tax costs as well as the re-measurement of deferred tax balances are provisional and have been calculated based on existing tax law and the best information available as of the date of estimate. The final impact of U.S. tax reform may differ, possibly materially, due to factors such as changes in interpretations and assumptions that the company has made in its assessment, conclusion of the effects of the “Global Intangible Low-Taxed Income” provisions, further refinement of the company’s calculations, additional guidance that may be issued by the U.S. government, among other items. As these various factors are finalized, any change will be recorded as an adjustment to the provision for, or benefit from, income taxes in the period the amounts are determined, not to exceed 12 months from the date of U.S. tax reform enactment.

 

The 2017 continuing operations effective tax rate decreased 30.2 points from 2016 driven primarily by the tax benefit related to the impact from the enactment of U.S. tax reform described above (21 points) and a benefit due to the geographic mix of pre-tax earnings in 2017 (9 points).

 

The 2016 continuing operations effective tax rate decreased 8.9 points from 2015 largely due to the establishment of certain foreign valuation allowances in 2015.

 

The effect of tax law changes on deferred tax assets and liabilities was a benefit of $171 million, driven by the U.S. tax reform and was included in the net benefit.

 

The significant components of deferred tax assets and liabilities recorded in other assets and tax liabilities, respectively, in the Consolidated Statement of Financial Position are as follows:

 

Deferred Tax Assets

 

 

Deferred Tax Liabilities

 

 

The loss carryforwards as of December 31, 2017 and 2016 were $82 million and $76 million (tax effected), respectively, with substantially all of these carryforwards available for at least two and up to five years.

 

The valuation allowances as of December 31, 2017, 2016 and 2015 were $96 million, $89 million and $81 million, respectively. The amounts principally apply to loss carryforwards, credits and timing differences. In the opinion of management, it is more likely than not that these assets will not be realized. However, to the extent that tax benefits related to these carryforwards are realized in the future, the reduction in the valuation allowance will reduce income tax expense.

 

The company is subject to taxation in the U.S. and various state and foreign jurisdictions. With respect to the company’s U.S. federal and certain state and foreign operations that are included in applicable IBM consolidated tax returns, pursuant to the Tax Sharing Agreement, any subsequent changes to the company’s income tax liability as a result of valuation allowances and tax examinations are the responsibility of IBM. Therefore, any recognition and subsequent changes in assessment about the sustainability of related tax positions, including interest and penalties, are the responsibility of IBM. As such, there have been no uncertain tax liabilities recorded in the Consolidated Financial Statements for entities that file as part of IBM’s consolidated tax filings as the company bears no risk associated with any subsequent change in the sustainability of uncertain tax positions.

 

For the company’s separate income tax return filings, the company is generally no longer subject to tax examinations for years prior to 2013. At December 31, 2017, current year unrecognized tax benefits recorded in the Consolidated Financial Statements related to certain foreign separate income tax return filers were $1 million. There were no uncertain tax positions recorded in the Consolidated Financial Statements related to separate income tax return filers for the years ended December 31, 2016 and 2015.

 

Interest and penalties related to income tax liabilities are included in income tax expense. During the year ended December 31, 2017, the company recognized $5 million in interest expense relating to certain foreign separate income tax return filers. For the years ended December 31, 2016 and 2015, interest accrued relating to income taxes was immaterial.

 

Included in consolidated retained earnings at December 31, 2017 are undistributed after-tax earnings from non-US subsidiaries, as well as a provisional amount of U.S. income taxes and foreign distribution taxes associated with the repatriation of these earnings.