INCOME TAXES
Domestic and foreign income before income taxes and discontinued operations are as follows (millions):
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| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Domestic | $ | 4,645 |
| | $ | 4,356 |
| | $ | 4,733 |
|
Foreign | 1,300 |
| | 839 |
| | 713 |
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Total | $ | 5,945 |
| | $ | 5,195 |
| | $ | 5,446 |
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Current and Deferred income taxes (tax benefits) provided on Income from continuing operations are as follows (millions):
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| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Federal: | | | | | |
Current | $ | 1,257 |
| | $ | 693 |
| | $ | 844 |
|
Deferred (a) | (1,040 | ) | | 216 |
| | 349 |
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Foreign: | | | | | |
Current (b) | 369 |
| | 342 |
| | 337 |
|
Deferred | 31 |
| | (2 | ) | | (29 | ) |
State and Local: | | | | | |
Current | 85 |
| | 10 |
| | 142 |
|
Deferred | (1 | ) | | 22 |
| | 8 |
|
Total (c) | $ | 701 |
| | $ | 1,281 |
| | $ | 1,651 |
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(a) | Includes a tax rate change benefit of $885 million in 2017 attributable to U.S. tax reform legislation enacted at the end of the year. |
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(b) | Includes foreign withholding taxes of $285 million in 2017, $264 million in 2016 and $236 million in 2015. |
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(c) | Excludes excess tax benefits from equity awards allocated directly to contributed capital of $88 million in 2016 and $151 million in 2015. |
The differences between income taxes expected at the U.S. federal statutory income tax rate of 35% and income taxes provided are as set forth below (millions):
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| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Taxes on income at U.S. federal statutory rate | $ | 2,081 |
| | $ | 1,818 |
| | $ | 1,906 |
|
State and local taxes, net of federal tax effects | 60 |
| | 56 |
| | 68 |
|
Domestic production activities deduction | (146 | ) | | (141 | ) | | (101 | ) |
Foreign rate differential | (204 | ) | | (176 | ) | | (129 | ) |
Impact of U.S. federal tax reform | (843 | ) | | — |
| | — |
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Excess tax benefits on share-based compensation | (149 | ) | | — |
| | — |
|
Change in tax method of accounting for film and TV cost amortization | — |
| | (224 | ) | | — |
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Other | (98 | ) | | (52 | ) | | (93 | ) |
Total | $ | 701 |
| | $ | 1,281 |
| | $ | 1,651 |
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Significant components of Time Warner’s net deferred tax liabilities are as follows (millions):
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| | | | | | | |
| December 31, |
| 2017 | | 2016 |
Deferred tax assets: | | | |
Tax attribute carryforwards (a) | $ | 292 |
| | $ | 435 |
|
Royalties, participations and residuals | 257 |
| | 344 |
|
Other | 1,343 |
| | 1,825 |
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Valuation allowances (a) | (287 | ) | | (463 | ) |
Total deferred tax assets | $ | 1,605 |
| | $ | 2,141 |
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Deferred tax liabilities: | | | |
Assets acquired in business combinations | $ | 1,688 |
| | $ | 2,752 |
|
Unbilled television receivables | 794 |
| | 1,086 |
|
Other | 596 |
| | 856 |
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Total deferred tax liabilities | 3,078 |
| | 4,694 |
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Net deferred tax liability | $ | 1,473 |
| | $ | 2,553 |
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(a) | The Company has recorded valuation allowances for certain tax attribute carryforwards and other deferred tax assets due to uncertainty that exists regarding future realizability. The tax attribute carryforwards consist of $18 million of tax credits, $2 million of capital losses and $272 million of net operating losses that expire in varying amounts from 2018 through 2037. If, in the future, the Company believes that it is more likely than not that these deferred tax benefits will be realized, the valuation allowances will be reversed and recognized in the Consolidated Statement of Operations. |
The Tax Cuts and Jobs Act (the “Tax Reform Act”) was enacted on December 22, 2017. The Tax Reform Act made significant changes to the Federal tax code, including a reduction in the Federal corporate statutory tax rate from 35% to 21%. The Tax Reform Act also made changes to the Federal taxation of foreign earnings and to the timing of recognition of certain revenue and expenses and the deductibility of certain business expenses.
The Company has not completed its accounting for the income tax effects of the Tax Reform Act. However, as described below, the Company is able to make a reasonable estimate of the impact of certain changes and has recognized a provisional tax benefit of $843 million in the Consolidated Statement of Operations for the year ended December 31, 2017. This benefit was derived primarily from a reduction of the value of the Company’s net deferred tax liabilities as a result of the decrease in the Federal tax rate. In addition, the provisional tax benefit includes an estimate of the effects of a one-time transition tax on most of the Company’s post-1986 unremitted foreign earnings, partially offset by the reversal of existing deferred tax liabilities related to such earnings that were not previously deferred from U.S. income taxes. Provisional estimates were also made with regard to the Company’s deductions under the Tax Reform Act’s new expensing provisions, the Company’s deferred tax assets related to executive compensation deductions and foreign tax credits, and foreign withholding taxes and state and local income taxes related to foreign earnings subject to the one-time transition tax. During 2018, the Company plans to complete its analysis and recognize any adjustments to the provisional tax benefit. Accordingly, the ultimate impact of the Tax Reform Act may differ from the provisional amount recognized due to, among other things, changes in estimates resulting from the receipt or calculation of final data, changes in interpretations of the Tax Reform Act, and additional regulatory guidance that may be issued. The accounting for the impact of the Tax Reform Act is expected to be completed during the quarter ended September 30, 2018 when the Company’s 2017 U.S. Federal corporate income tax return is expected to be filed.
The Company considers post-1986 unremitted foreign earnings subjected to the one-time transition tax not to be indefinitely reinvested as such earnings can be repatriated without any significant incremental tax costs. U.S. income and foreign withholding taxes have not been recorded on temporary differences related to investments in certain foreign subsidiaries as such differences are considered indefinitely reinvested. Determination of the amount of unrecognized deferred tax liability with respect to such investments is not practicable.
On February 9, 2018, the Federal Bipartisan Budget Act of 2018 was enacted. The Act included a retroactive extension for the 2017 tax year of a previously expired tax provision that allows for the immediate expensing of certain film production costs. The Company anticipates that this provision of the Act will result in a tax benefit to continuing operations of approximately $125 million for the three months ending March 31, 2018.
For accounting purposes, the Company records share-based compensation expense and a related deferred tax asset for the future tax deductions it may receive. For income tax purposes, the Company receives a tax deduction equal to the stock price on the date that an RSU (or PSU) vests or the excess of the stock price over the exercise price of an option upon exercise. The deferred tax asset consists of amounts relating to individual unvested and/or unexercised share-based compensation awards; accordingly, deferred tax assets related to certain equity awards may currently be in excess of the tax benefit ultimately received. The applicable accounting rules require that the deferred tax asset related to a share-based compensation award be reduced only at the time the award vests (in the case of an RSU or PSU), is exercised (in the case of a stock option) or otherwise expires or is canceled. On January 1, 2017, the Company adopted, on a prospective basis, new accounting guidance that changes the reporting for certain aspects of share-based payments. One aspect of the guidance requires that the income tax effects of share-based payments be recognized in the Income tax provision in the Consolidated Statement of Operations when the awards vest or are settled. Under the previous guidance, excess tax benefits and deficiencies were generally recognized in Additional paid-in capital in the Consolidated Balance Sheet.
Accounting for Uncertainty in Income Taxes
The Company recognizes income tax benefits for tax positions determined more likely than not to be sustained upon examination, based on the technical merits of the positions.
Changes in the Company’s uncertain income tax positions, excluding the related accrual for interest and penalties, from January 1 through December 31 are set forth below (millions):
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| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Beginning balance | $ | 1,325 |
| | $ | 1,330 |
| | $ | 1,327 |
|
Additions for prior year tax positions | 96 |
| | 154 |
| | 61 |
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Additions for current year tax positions | 66 |
| | 81 |
| | 62 |
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Reductions for prior year tax positions | (110 | ) | | (203 | ) | | (75 | ) |
Settlements | (5 | ) | | (29 | ) | | (40 | ) |
Lapses in statute of limitations | (12 | ) | | (8 | ) | | (5 | ) |
Ending balance | $ | 1,360 |
| | $ | 1,325 |
| | $ | 1,330 |
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Should the Company’s position with respect to these uncertain tax positions be upheld, the significant majority of the effect would be recorded in the Consolidated Statement of Operations as part of the Income tax provision.
During the year ended December 31, 2017, the Company recorded an increase to interest reserves in the Consolidated Statement of Operations of approximately $53 million and made interest payments of approximately $2 million in connection with settlements reached during 2017. During the year ended December 31, 2016, the Company recorded an increase to interest reserves in the Consolidated Statement of Operations of approximately $58 million and made interest payments of approximately $17 million in connection with settlements reached during 2016. The amount accrued for interest and penalties as of December 31, 2017 and 2016 was $474 million and $423 million, respectively. The Company’s policy is to recognize interest and penalties accrued on uncertain tax positions as part of income tax expense.
In the Company’s judgment, uncertainties related to certain tax matters are reasonably possible of being resolved during the next twelve months. The effect of the resolutions of these matters, a portion of which could vary based on the final terms and timing of actual settlements with taxing authorities, is estimated to be a reduction of recorded unrecognized tax benefits ranging from $0 to $260 million, the majority of which would lower the Company’s effective tax rate. The Company does not otherwise currently anticipate that its reserves related to uncertain income tax positions as of December 31, 2017 will significantly increase or decrease during the twelve-month period ended December 31, 2018; however, various events could cause the Company’s current expectations to change in the future.
During the year ended December 31, 2014, the Company recognized a tax benefit of $687 million primarily related to the reversal of certain tax reserves, including related interest accruals, in connection with a Federal tax settlement on the examination of the Company’s 2005–2007 tax returns. Certain matters involving the Company’s capital loss carryforward and research and development tax credits were not resolved as part of the settlement and, accordingly, the Company is pursuing resolution of such matters through the Internal Revenue Service’s (“IRS”) administrative appeals process. A final settlement of these matters is expected from the IRS appeals office in 2018.
The Company and its subsidiaries file income tax returns in the U.S. and various state and local and foreign jurisdictions. The IRS is currently conducting an examination of the Company’s U.S. income tax returns for the 2008 through 2014 period.
As of December 31, 2017, the tax years that remain subject to examination by significant jurisdiction are as follows:
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U.S. federal | 2005 through 2017 |
California | 2013 through 2017 |
New York State | 2012 through 2017 |
New York City | 2012 through 2017 |