Note 24.
Income Taxes
Tax Legislation
The provision for taxes in 2017 reflected an increase in Income tax expense of $4.40 billion representing the estimated impact of Tax Legislation enacted on December 22, 2017. The $4.40 billion income tax expense includes the repatriation tax on undistributed earnings of foreign subsidiaries, the effects of the implementation of a territorial tax system and the remeasurement of U.S. deferred tax assets at lower enacted tax rates.
The repatriation tax is based on the greater of the firm’s post-1986 earnings and profits as of November 2, 2017 or December 31, 2017. Income taxes paid or payable to foreign jurisdictions partially reduce the repatriation tax as a foreign tax credit, based on a formula that includes future earnings of certain foreign subsidiaries. The calculation resulted in an estimated income tax expense of $3.32 billion.
U.S. deferred tax assets and liabilities were required to be remeasured as of December 22, 2017 to the new U.S. federal income tax rate of 21% and to any federal impact associated with state and local deferred income taxes, as well as due to the implementation of the territorial tax system. This remeasurement resulted in an estimated income tax expense of $1.08 billion.
While the components of the impact of Tax Legislation described above were calculated to account for all available information, these amounts are estimates. The firm anticipates modification to the estimate may occur as a result of (i) refinement of the firm’s calculations based on updated information, (ii) changes in the firm’s interpretations and assumptions, (iii) updates from issuance of future legislative guidance and (iv) actions the firm may take as a result of Tax Legislation.
Provision for Income Taxes
Income taxes are provided for using the asset and liability method under which deferred tax assets and liabilities are recognized for temporary differences between the financial reporting and tax bases of assets and liabilities. The firm reports interest expense related to income tax matters in provision for taxes and income tax penalties in other expenses.
The table below presents the components of the provision for taxes.
| Year Ended December | ||||||||||||
| $ in millions | 2017 | 2016 | 2015 | |||||||||
|
Current taxes |
||||||||||||
|
U.S. federal |
$ 320 | $1,032 | $1,116 | |||||||||
|
State and local |
64 | 139 | (12 | ) | ||||||||
|
Non-U.S. |
1,004 | 1,184 | 1,166 | |||||||||
|
Total current tax expense |
1,388 | 2,355 | 2,270 | |||||||||
|
Deferred taxes |
||||||||||||
|
U.S. federal |
5,083 | 399 | 397 | |||||||||
|
State and local |
157 | 51 | 62 | |||||||||
|
Non-U.S. |
218 | 101 | (34 | ) | ||||||||
|
Total deferred tax expense |
5,458 | 551 | 425 | |||||||||
|
Provision for taxes |
$6,846 | $2,906 | $2,695 | |||||||||
In the table above:
| • |
State and local current taxes includes the impact of settlements of state and local examinations. |
| • |
U.S. federal deferred tax expense includes the estimated impact of Tax Legislation. |
The table below presents a reconciliation of the U.S. federal statutory income tax rate to the firm’s effective income tax rate.
| Year Ended December | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
|
U.S. federal statutory income tax rate |
35.0% | 35.0% | 35.0% | |||||||||
|
State and local taxes, net of U.S. federal income tax effects |
1.5% | 0.9% | 0.3% | |||||||||
|
ASU No. 2016-09 tax benefits on settlement of employee share-based awards |
(6.4)% | – | – | |||||||||
|
Non-U.S. operations |
(6.3)% | (6.7)% | (12.1)% | |||||||||
|
Tax credits |
(2.1)% | (2.0)% | (1.7)% | |||||||||
|
Tax-exempt income, including dividends |
(0.2)% | (0.3)% | (0.7)% | |||||||||
|
Tax Legislation — repatriation tax |
29.8% | – | – | |||||||||
|
Tax Legislation — remeasurement of deferred tax assets |
9.7% | – | – | |||||||||
|
Non-deductible legal expenses |
0.5% | 1.0% | 10.2% | |||||||||
|
Other |
– | 0.3% | (0.3)% | |||||||||
|
Effective income tax rate |
61.5% | 28.2% | 30.7% | |||||||||
In the table above:
| • |
Non-U.S. operations includes the impact of permanently reinvested earnings and excludes the estimated impact of Tax Legislation. |
| • |
State and local taxes, net of U.S. federal income tax effects includes the impact of settlements of state and local examinations. |
| • |
Substantially all of the non-deductible legal expenses for 2015 relate to provisions for the settlement agreement with the RMBS Working Group. |
Deferred Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences between the financial reporting and tax bases of assets and liabilities. These temporary differences result in taxable or deductible amounts in future years and are measured using the tax rates and laws that will be in effect when such differences are expected to reverse. Valuation allowances are established to reduce deferred tax assets to the amount that more likely than not will be realized and primarily relate to the ability to utilize losses in various tax jurisdictions. Tax assets and liabilities are presented as a component of other assets and other liabilities and accrued expenses, respectively.
The table below presents the significant components of deferred tax assets and liabilities, excluding the impact of netting within tax jurisdictions.
| As of December | ||||||||
| $ in millions | 2017 | 2016 | ||||||
|
Deferred tax assets |
||||||||
|
Compensation and benefits |
$1,233 | $2,461 | ||||||
|
ASC 740 asset related to unrecognized tax benefits |
75 | 231 | ||||||
|
Non-U.S. operations |
– | 967 | ||||||
|
Net operating losses |
428 | 427 | ||||||
|
Occupancy-related |
67 | 100 | ||||||
|
Other comprehensive income-related |
408 | 757 | ||||||
|
Tax credits carryforward |
1,006 | – | ||||||
|
Other, net |
113 | 394 | ||||||
|
Subtotal |
3,330 | 5,337 | ||||||
|
Valuation allowance |
(156 | ) | (115 | ) | ||||
|
Total deferred tax assets |
$3,174 | $5,222 | ||||||
|
Deferred tax liabilities |
||||||||
|
Depreciation and amortization |
$ 826 | $1,200 | ||||||
|
Tax Legislation — repatriation tax |
3,114 | – | ||||||
|
Non-U.S. operations |
180 | – | ||||||
|
Unrealized gains |
742 | 342 | ||||||
|
Total deferred tax liabilities |
$4,862 | $1,542 | ||||||
The firm has recorded deferred tax assets of $428 million and $427 million as of December 2017 and December 2016, respectively, in connection with U.S. federal, state and local and foreign net operating loss carryforwards. The firm also recorded a valuation allowance of $128 million and $67 million as of December 2017 and December 2016, respectively, related to these net operating loss carryforwards.
As of December 2017, the U.S. federal, state and local, and foreign net operating loss carryforwards were $268 million, $1.33 billion and $1.23 billion, respectively. If not utilized, the U.S. federal, state and local, and foreign net operating loss carryforwards will begin to expire in 2018. If these carryforwards expire, they will not have a material impact on the firm’s results of operations. As of December 2017, the foreign tax credit carryforwards were $446 million, the general business credit carryforwards were $533 million and the state and local tax credit carryforwards were $27 million. If not utilized, the foreign tax credit carryforward will begin to expire in 2027, the general business credit carryforward will begin to expire in 2037, and the state and local tax credit carryforward will begin to expire in 2020.
The firm had no capital loss carryforwards and no related net deferred income tax assets as of December 2017 and December 2016.
The valuation allowance increased by $41 million during 2017 and increased by $42 million during 2016. The increases in 2017 and 2016 were primarily due to an increase in deferred tax assets from which the firm does not expect to realize any benefit.
The firm permanently reinvested eligible earnings of certain foreign subsidiaries. As of December 2017, substantially all U.S. taxes were accrued on these subsidiaries’ earnings and profits as a result of Tax Legislation repatriation tax. As of December 2016, the firm did not accrue any U.S. income taxes that would arise if such earnings were repatriated, resulting in an unrecognized net deferred tax liability of $6.18 billion, attributable to reinvested earnings of $31.24 billion.
Unrecognized Tax Benefits
The firm recognizes tax positions in the consolidated financial statements only when it is more likely than not that the position will be sustained on examination by the relevant taxing authority based on the technical merits of the position. A position that meets this standard is measured at the largest amount of benefit that will more likely than not be realized on settlement. A liability is established for differences between positions taken in a tax return and amounts recognized in the consolidated financial statements.
The accrued liability for interest expense related to income tax matters and income tax penalties was $81 million and $141 million as of December 2017 and December 2016, respectively. The firm recognized interest expense and income tax penalties of $63 million, $27 million and $17 million for 2017, 2016 and 2015, respectively. It is reasonably possible that unrecognized tax benefits could change significantly during the twelve months subsequent to December 2017 due to potential audit settlements. However, at this time it is not possible to estimate any potential change.
The table below presents the changes in the liability for unrecognized tax benefits. This liability is included in other liabilities and accrued expenses. See Note 17 for further information.
| Year Ended or as of December | ||||||||||||
| $ in millions | 2017 | 2016 | 2015 | |||||||||
|
Beginning balance |
$ 852 | $ 825 | $ 871 | |||||||||
|
Increases based on tax positions related to the current year |
94 | 113 | 65 | |||||||||
|
Increases based on tax positions related to prior years |
101 | 188 | 158 | |||||||||
|
Decreases based on tax positions related to prior years |
(128 | ) | (88 | ) | (205 | ) | ||||||
|
Decreases related to settlements |
(255 | ) | (186 | ) | (87 | ) | ||||||
|
Exchange rate fluctuations |
1 | – | 23 | |||||||||
|
Ending balance |
$ 665 | $ 852 | $ 825 | |||||||||
|
Related deferred income tax asset |
75 | 231 | 197 | |||||||||
|
Net unrecognized tax benefit |
$ 590 | $ 621 | $ 628 | |||||||||
Regulatory Tax Examinations
The firm is subject to examination by the U.S. Internal Revenue Service (IRS) and other taxing authorities in jurisdictions where the firm has significant business operations, such as the United Kingdom, Japan, Hong Kong and various states, such as New York. The tax years under examination vary by jurisdiction. The firm does not expect completion of these audits to have a material impact on the firm’s financial condition but it may be material to operating results for a particular period, depending, in part, on the operating results for that period.
The table below presents the earliest tax years that remain subject to examination by major jurisdiction.
| Jurisdiction |
|
As of December 2017 |
|
|
|
U.S. Federal |
2011 | |||
|
New York State and City |
2011 | |||
|
United Kingdom |
2014 | |||
|
Japan |
2014 | |||
|
Hong Kong |
2011 |
U.S. Federal examinations of 2011 and 2012 began in 2013. The firm has been accepted into the Compliance Assurance Process program by the IRS for each of the tax years from 2013 through 2018. This program allows the firm to work with the IRS to identify and resolve potential U.S. federal tax issues before the filing of tax returns. The 2013 through 2016 tax years remain subject to post-filing review.
During the fourth quarter of 2017, New York State and City examinations for the firm (excluding GS Bank USA) of fiscal 2007 through calendar 2010 were completed. The completion of these examinations did not have a material impact on the firm’s effective income tax rate. New York State and City examinations (excluding GS Bank USA) of 2011 through 2014 began in the fourth quarter of 2017. New York State and City examinations for GS Bank USA have been completed through 2014.
During the first quarter of 2017, the firm concluded examinations with the Hong Kong tax authorities related to 2007 through 2015, with 2011 through 2015 subject to final review. The completion of these examinations did not have a material impact on the firm’s effective income tax rate.
All years including and subsequent to the years in the table above remain open to examination by the taxing authorities. The firm believes that the liability for unrecognized tax benefits it has established is adequate in relation to the potential for additional assessments.