Willis Towers Watson Plc.

Income Taxes

Impact of U.S. Tax Reform

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (hereafter ‘U.S. Tax Reform’). U.S. Tax Reform makes broad and complex changes to the U.S. tax code, including, but not limited to: (1) requiring a one-time transition tax on certain unremitted earnings of foreign subsidiaries that may be payable over eight years; (2) bonus depreciation that will allow for a full expensing of qualified property; (3) reduction of the federal corporate tax rate from 35% to 21%; (4) a new provision designed to tax global intangible low-taxed income (‘GILTI’), which allows for the possibility of using foreign tax credits (‘FTCs’) and a deduction of up to 50% to offset the income tax liability (subject to some limitations); (5) a new limitation on deductible interest expense; (6) limitations on the deductibility of certain executive compensation; (7) limitations on the use of FTCs to reduce the U.S. income tax liability; (8) the creation of the base erosion anti-abuse tax (‘BEAT’), a new minimum tax; and (9) a general elimination of U.S. federal income taxes on dividends from foreign subsidiaries.

Also on December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (‘SAB 118’), which provides guidance on accounting for the tax effects of the U.S. Tax Reform. SAB 118 provides for a measurement period that should not extend beyond one year from the U.S. Tax Reform enactment date for companies to complete the accounting under ASC 740, Income Taxes (‘ASC 740’). In accordance with SAB 118, a company must reflect the income tax effects of those aspects of U.S. Tax Reform for which the accounting under ASC 740 is complete. Adjustments to incomplete and unknown amounts will be recorded and disclosed prospectively during the measurement period. To the extent that a company’s accounting for certain income tax effects of U.S. Tax Reform is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of U.S. Tax Reform.

At December 31, 2017, there are no material elements of U.S. Tax Reform for which the Company’s accounting is complete. While the Company's accounting for the following elements of U.S. Tax Reform is incomplete, the Company was able to make reasonable estimates of certain effects. Accordingly, the Company recorded provisional adjustments for the following significant items:

Reduction of the federal corporate tax rate – Beginning January 1, 2018, the Company’s U.S. income will be taxed at a 21% federal corporate tax rate. Under ASC 740, deferred tax assets and liabilities must be recalculated as of the enactment date using current tax laws and rates expected to be in effect when the deferred tax items reverse in future periods, which is 21%. Consequently, the Company has recorded a provisional decrease in its net deferred tax liabilities of $208 million, with a corresponding deferred income tax benefit of $208 million. While the Company is able to make a reasonable estimate of the impact of the reduction in the federal corporate tax rate, it may be affected by other analyses related to U.S. Tax Reform that could result in other adjustments to U.S. federal deferred tax balances, including analysis of tax amounts in other comprehensive income and any future guidance issued.

One-time transition tax – The one-time transition tax is based on the Company’s total post-1986 earnings and profits (‘E&P’) that it previously deferred from U.S. income taxes. The Company recorded a provisional amount for the one-time transition tax liability for its foreign subsidiaries owned by U.S. corporate shareholders, resulting in an increase in U.S. Federal income tax expense of $70 million and state income tax expense of $2 million. The Company has a significant number of foreign subsidiaries and therefore has not yet completed its calculation of the total post-1986 E&P as well as non-U.S. income taxes paid for these foreign subsidiaries. Further, the transition tax is based in part on the amount of those earnings held in cash and other specified assets, including trade receivables, based on estimates. The Company expects to revise its estimates of E&P, non-U.S. income taxes and cash balances throughout 2018 when actual results are available. In addition, guidance may be released which could also impact these estimates.

Indefinite reinvestment assertion – Beginning in 2018, U.S. Tax Reform provides a 100% deduction for dividends received from 10-percent owned foreign corporations by U.S. corporate shareholders, subject to a one-year holding period. Although dividend income is now exempt from U.S. federal tax for U.S. corporate shareholders, companies must still account for the tax consequences of outside basis differences and other tax impacts of their investments in non-U.S. subsidiaries. As a result of U.S. Tax Reform we have analyzed our global working capital and cash requirements and the potential tax liabilities attributable to a repatriation and have determined that we may repatriate up to $219 million, the majority of which was previously deemed indefinitely reinvested. For those investments from which we were able to make a reasonable estimate of the tax effects of such repatriation, we have recorded a provisional estimate for foreign withholding and state income taxes of $1 million. In addition, we re-measured the existing deferred tax liability accrued on certain acquired Towers Watson subsidiaries and released the deferred tax liability relating to the outside basis difference. This resulted in an income tax benefit of $76 million as these foreign earnings were subject to the one-time transition tax which reduced the outside basis difference.

Bonus Depreciation – While the Company has not completed its determination of all capital expenditures that qualify for immediate expensing for the year ended December 31, 2017, the Company recorded a provisional tax deduction of $40 million based on its current intent to fully expense all qualifying expenditures. The Company will analyze the dates all capital expenditures were placed in service or acquired and consider any future guidance within the next twelve months to finalize the deduction. This resulted in an increase of approximately $14 million to the Company's U.S. federal current income taxes receivable and a corresponding increase in its net deferred tax liabilities of approximately $14 million.

Executive compensation – Starting with compensation paid in 2018, Section 162(m) will limit the Company from deducting compensation, including performance-based compensation, in excess of $1 million paid to anyone who, starting in 2018, serves as the Chief Executive Officer or Chief Financial Officer, or who is among the three most highly compensated executive officers. The only exception to this rule is for compensation that is paid pursuant to a binding contract in effect on November 2, 2017 that would have otherwise been deductible under the prior Section 162(m) rules. Accordingly, any compensation paid in the future pursuant to new compensation arrangements entered into after November 2, 2017, even if performance-based, will count towards the $1 million deduction limit if paid to a covered executive. The Company recorded a provisional income tax expense of $8 million relating to our compensation plans not qualifying for the binding contract exception. We are in the process of obtaining additional information needed to complete our analysis of the binding contract requirement on the various compensation plans to determine the full impact of the law change. In addition, guidance may be released which could also impact our estimates.

The Company's accounting for the following law changes of U.S. Tax Reform is incomplete, and it is not yet able to make reasonable estimates of the effects. Therefore, no provisional adjustment was recorded.

GILTI – U.S. Tax Reform creates a new requirement that certain income (i.e., GILTI) earned by controlled foreign corporations (‘CFCs’) must be included currently in the gross income of the CFCs’ U.S. shareholder. GILTI is the excess of the shareholder’s ‘net CFC tested income’ over the net deemed tangible income return, which is currently defined as the excess of (1) 10 percent of the aggregate of the U.S. shareholder’s pro rata share of the qualified business asset investment of each CFC with respect to which it is a U.S. shareholder over (2) the amount of certain interest expense taken into account in the determination of net CFC-tested income. Because of the complexity of the new GILTI tax rules, the Company is continuing to evaluate this provision of U.S. Tax Reform and the application of ASC 740. Under U.S. GAAP, the Company is allowed to make an accounting policy choice of either (1) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred (the ‘period cost method’) or (2) factoring such amounts into a company’s measurement of its deferred taxes (the ‘deferred method’). The Company’s selection of an accounting policy with respect to the new GILTI tax rules will depend, in part, on analyzing its global income of its CFCs to determine whether it expects to have future U.S. inclusions in taxable income related to GILTI and, if so, what the impact is expected to be. Because whether the Company expects to have future U.S. inclusions in taxable income related to GILTI depends on not only its current structure and estimated future results of global operations but also its intent and ability to modify its structure and/or its business, the Company is not yet able to reasonably estimate the effect of this provision of U.S. Tax Reform. Therefore, it has not made any adjustments related to potential GILTI tax in its consolidated financial statements and has not made a policy decision.

Valuation allowances – The Company must assess whether valuation allowances assessments are affected by various aspects of U.S. Tax Reform (e.g., limitation on net interest expense in excess of 30% of adjusted taxable income). As of December 31, 2017, no changes to valuation allowances have been recorded as a result of U.S. Tax Reform.

Provision for income taxes

An analysis of income/(loss) before income taxes by taxing jurisdiction is shown below:



	Years ended December 31,
	2017			2016			2015
Ireland	$	(23	)	$	(27	)	$	(61	)
U.S.	(198		)	(311		)	(67		)
U.K.	31			123			65
Other jurisdictions	679			555			403
Total	$	489		$	340		$	340

The components of the income tax provision for/(benefit from) income from operations include:



	Years ended December 31,
	2017			2016			2015
Current tax expense/(benefit):
U.S. federal taxes	$	65		$	35		$	14
U.S. state and local taxes	7			14			1
U.K. corporation tax	14			28			—
Other jurisdictions	99			71			51
Total current tax expense	185			148			66
Deferred tax expense/(benefit):
U.S. federal taxes	(268		)	(214		)	(113		)
U.S. state and local taxes	6			(5		)	(3		)
U.K. corporation tax	(9		)	10			14
Other jurisdictions	(14		)	(35		)	3
Total deferred tax benefit	(285		)	(244		)	(99		)
Total benefit from income taxes	$	(100	)	$	(96	)	$	(33	)

The U.S. federal current tax expense includes the impact of a one-time transition tax expense of $70 million related to U.S. Tax Reform which the Company intends to elect to pay over an eight year period without interest. The Company currently estimates that $6 million of this transition tax liability will be paid within the next twelve months.

Effective tax rate reconciliation

The reported income tax provision for /(benefit from) operations differs from the amounts that would have resulted had the reported income before income taxes been taxed at the U.S. federal statutory rate. The principal reasons for the differences between the amounts provided and those that would have resulted from the application of the U.S. federal statutory tax rate are as follows:



	Years ended December 31,
	2017			2016			2015
INCOME FROM OPERATIONS BEFORE INCOME TAXES AND INTEREST IN EARNINGS OF ASSOCIATES	$	489		$	340		$	340
U.S. federal statutory income tax rate	35		%	35		%	35		%
Income tax expense at U.S. federal tax rate	171			119			119
Adjustments to derive effective tax rate:
Non-deductible expenses and dividends	68			15			32
Non-deductible acquisition costs	11			1			9
Disposal of non-deductible goodwill	11			2			3
Gain on re-measurement of equity interests	—			—			(20		)
Impact of change in rate on deferred tax balances	—			(15		)	(5		)
Effect of foreign exchange and other differences	3			6			(1		)
Non-deductible Venezuelan foreign exchange loss	2			4			11
Changes in valuation allowances	13			(74		)	(104		)
Net tax effect of intra-group items	(97		)	(98		)	(30		)
Tax differentials of non-U.S. jurisdictions	(69		)	(80		)	(42		)
Tax differentials of U.S. state taxes and local taxes	(6		)	14			(2		)
Impact of U.S. Tax Reform	(204		)	—			—
Other items, net	(3		)	10			(3		)
Benefit from income taxes	$	(100	)	$	(96	)	$	(33	)

In connection with our initial analysis of U.S. Tax Reform, the Company has recorded a provisional net tax benefit of $204 million in 2017, which consists of a net benefit of $208 million due to the reduction of the federal corporate tax rate and re-measurement of our net U.S. deferred tax liabilities primarily related to acquisition-based intangibles and a $76 million benefit relating to the release of a deferred tax liability we had previously recorded on the accumulated earnings of certain Towers Watson subsidiaries. These net benefit items are offset by provisional expenses of $8 million recognized as a write-off of a deferred tax asset the Company had previously recorded on executive compensation as well as the U.S. federal and state income tax expense of $72 million associated with the one-time transition tax on foreign earnings of our subsidiaries.

Willis Towers Watson plc is a non-trading holding company tax resident in Ireland where it is taxed at the statutory rate of 25%. The provision for income tax on operations has been reconciled above to the U.S. federal statutory tax rate of 35% due to significant operations in the U.S.

Deferred income taxes

Deferred income tax assets and liabilities reflect the effect of temporary differences between the assets and liabilities recognized for financial reporting purposes and the amounts recognized for income tax purposes. We recognize deferred tax assets if it is more likely than not that a benefit will be realized.

Deferred income tax assets and liabilities included in the consolidated balance sheets at December 31, 2017 and 2016 are comprised of the following:



	December 31,
	2017			2016
Deferred tax assets:
Accrued expenses not currently deductible	$	131		$	286
Net operating losses	145			116
Capital loss carryforwards	28			28
Accrued retirement benefits	339			467
Deferred compensation	69			83
Stock options	24			36
Financial derivative transactions	18			12
Gross deferred tax assets	754			1,028
Less: valuation allowance	(162		)	(134		)
Net deferred tax assets	$	592		$	894
Deferred tax liabilities:
Cost of intangible assets, net of related amortization	$	929		$	1,431
Cost of tangible assets, net of related depreciation	56			73
Prepaid retirement benefits	114			85
Accrued revenue not currently taxable	62			119
Deferred tax liabilities	$	1,161		$	1,708
Net deferred tax liabilities	$	569		$	814

During December 2017, the Company re-measured its U.S. deferred tax assets and liabilities as a result of U.S. Tax Reform to the newly enacted federal tax rate, which is 21%. The net deferred income tax assets are included in other non-current assets and the net deferred tax liabilities are included in deferred tax liabilities in our consolidated balance sheets.



	December 31,
	2017		2016
Balance sheet classifications:
Other non-current assets	$	46	$	50
Deferred tax liabilities	615		864
Net deferred tax liability	$	569	$	814

At December 31, 2017, we had U.S. federal and non-U.S. net operating loss carryforwards amounting to $289 million of which $237 million can be indefinitely carried forward under local statutes. The remaining $52 million of net operating loss carryforwards will expire, if unused, in varying amounts from 2018 through 2037. In addition, we had U.S. state net operating loss carryforwards of $1.5 billion, which will expire in varying amounts from 2018 to 2037.

Management believes, based on the evaluation of positive and negative evidence, including the future reversal of existing taxable temporary differences, it is more likely than not that the Company will realize the benefits of net deferred tax assets of $592 million, net of the valuation allowance. During 2017 the Company increased its valuation allowance by $28 million primarily due to state net operating losses as it is more likely than not that such losses will not be realized in the foreseeable future. During 2016 the Company released a U.S. valuation allowance of $69 million relating to accrued interest not deductible as a result of deferred tax liabilities recorded for the Merger. The future reversal of the deferred tax liabilities serve as a source of income to recognize the deferred tax asset for accrued interest not deductible. During 2015 the Company released a U.S. valuation allowance of $91 million due to an increase in actual and forecast U.S. earnings.

At December 31, 2017 and 2016, the Company had valuation allowances of $162 million and $134 million, respectively, to reduce its deferred tax assets to estimated realizable value. The valuation allowance at December 31, 2017 relates to deferred tax assets for U.K. capital loss carryforwards of $28 million, which have an unlimited carryforward period but can only be utilized against capital gains and U.S. and non-U.S. net operating losses of $80 million and $34 million, respectively. The valuation allowance at December 31, 2016 relates to deferred tax assets for U.K. capital loss carryforwards of $28 million, which have an unlimited carryforward period and U.S. and non-U.S. net operating losses of $78 million and $28 million, respectively.

An analysis of our valuation allowance is shown below.



	Years ended December 31,
	2017			2016			2015
Balance at beginning of year	$	134		$	187		$	280
Additions charged against/(credited to) to costs and expenses	35			—			—
Additions charged against/(credited to) to other accounts	—			21			2
Deductions	(7		)	(74		)	(95		)
Balance at end of year	$	162		$	134		$	187

In 2017, the amount charged to tax expense in the table above differs from the 2017 rate reconciliation of $13 million because a portion of the valuation allowance increase is related to the U.S. federal corporate tax rate reduction impact on the U.S. state valuation allowance and is included in the impact of U.S. Tax Reform. The amount charged to tax expense in the table above for 2016 differs from the effect of $74 million disclosed in the 2016 rate reconciliation primarily because the movement in this table includes the effects of acquisition accounting, which does not impact tax expense.

The Company recognizes deferred tax balances related to the undistributed earnings of subsidiaries when the Company expects that it will recover those undistributed earnings in a taxable manner, such as through receipt of dividends or sale of the investments. In 2016 we began accruing deferred taxes on the cumulative earnings of certain acquired Towers Watson subsidiaries. The historical cumulative earnings of our other subsidiaries have been reinvested indefinitely.

As a result of U.S. Tax Reform, we have analyzed our global working capital and cash requirements and the potential tax liabilities attributable to a repatriation and have determined that we may repatriate up to $219 million, the majority of which was previously deemed indefinitely reinvested. For those investments from which we were able to make a reasonable estimate of the tax effects of such repatriation, we have recorded a provisional estimate for foreign withholding taxes and state income taxes of $1 million. In addition, we re-measured the existing deferred tax liability accrued on certain acquired Towers Watson subsidiaries and released the deferred tax liability relating to the outside basis difference. This resulted in an income tax benefit of $76 million as these foreign earnings were subject to the one-time transition tax which reduced the outside basis difference.

The cumulative earnings related to amounts reinvested indefinitely as of December 31, 2017 were approximately $6.8 billion. If future events, including material changes in estimates of cash, working capital, long-term investment requirements or additional guidance relating to U.S. Tax Reform necessitate that these earnings be distributed, an additional provision for income and foreign withholding taxes, net of credits, may be necessary.

Uncertain tax positions

At December 31, 2017, the amount of unrecognized tax benefits associated with uncertain tax positions, determined in accordance with ASC 740-10, excluding interest and penalties, was $59 million. A reconciliation of the beginning and ending balances of the liability for unrecognized tax benefits is as follows:



	2017			2016			2015
Balance at beginning of year	$	56		$	22		$	19
Increases related to acquisitions	—			33			8
Increases related to tax positions in prior years	2			1			1
Decreases related to tax positions in prior years	(5		)	(9		)	(6		)
Decreases related to settlements	—			(1		)	—
Decreases related to lapse in statute of limitations	(2		)	(1		)	—
Increases related to current year tax positions	9			11			2
Cumulative translation adjustment and other adjustments	(1		)	—			(2		)
Balance at end of year	$	59		$	56		$	22

The liability for unrecognized tax benefits for the years ended December 31, 2017, 2016 and 2015 can be reduced by $3 million, $4 million and nil, respectively, of offsetting deferred tax benefits associated with timing differences, foreign tax credits and the federal tax benefit of state income taxes. If these offsetting deferred tax benefits were recognized, there would have been a favorable impact on our effective tax rate. There are no material balances that would result in adjustments to other tax accounts.

Interest and penalties related to unrecognized tax benefits are included as a component of income tax expense. At December 31, 2017, we had cumulative accrued interest of $5 million. At December 31, 2016, the cumulative accrued interest was $4 million. Penalties accrued in 2017 were $2 million and immaterial in 2016.

Tax expense for the years ended December 31, 2017 and 2016 included immaterial interest benefits.

The Company believes that the outcomes which are reasonably possible within the next 12 months may result in a reduction in the liability for unrecognized tax benefits in the range of $4 million to $6 million, excluding interest and penalties.

The Company and its subsidiaries file income tax returns in various tax jurisdictions in which it operates.

Willis North America Inc. is not currently under examination by the U.S. Internal Revenue Service (‘IRS’). We have ongoing state income tax examinations in certain states for tax years ranging from fiscal year ended June 30, 2012 through calendar year ended December 31, 2015. The statute of limitations in certain states extends back to the fiscal year ended June 30, 2012 as a result of changes to taxable income resulting from prior year federal tax examinations.

All U.K. tax returns have been filed timely and are in the normal process of being reviewed by HM Revenue & Customs. The Company is not currently subject to any material examinations in other jurisdictions. A summary of the tax years that remain open to tax examination in our major tax jurisdictions are as follows:



	Open Tax Years (fiscal year ending in)
U.S. — federal	2014 and forward
U.S. — various states	2012 and forward
U.K.	2010 and forward
Ireland	2013 and forward
France	2010 and forward
Germany	2002 and forward
Canada - federal	2010 and forward