20. Income Taxes
Provision for (Benefit from) Income Taxes
| Components of Provision for (Benefit from) Income Taxes | ||||||
| $ in millions | 2017 | 2016 | 2015 | |||
| Current | ||||||
| U.S.: | ||||||
| Federal | $ | 476 | $ | 330 | $ | 239 |
| State and local | 125 | 221 | 144 | |||
| Non-U.S.: | ||||||
| U.K. | 401 | 196 | 247 | |||
| Japan | 56 | 28 | 19 | |||
| Hong Kong | 48 | 14 | 24 | |||
| Other | 308 | 359 | 333 | |||
| Total | $ | 1,414 | $ | 1,148 | $ | 1,006 |
| Deferred | ||||||
| U.S.: | ||||||
| Federal | $ | 2,656 | $ | 1,336 | $ | 1,031 |
| State and local | 84 | 74 | 43 | |||
| Non-U.S.: | ||||||
| U.K. | 18 | 56 | (56) | |||
| Japan | (17) | 127 | 58 | |||
| Hong Kong | (2) | 31 | 50 | |||
| Other | 15 | (46) | 68 | |||
| Total | $ | 2,754 | $ | 1,578 | $ | 1,194 |
| Provision for income taxes | ||||||
| from continuing operations | $ | 4,168 | $ | 2,726 | $ | 2,200 |
| Provision for (benefit from) income taxes | ||||||
| from discontinued operations | $ | (7) | $ | 1 | $ | (7) |
| Selected Other Non-U.S. Tax Provisions | ||
| $ in millions | Tax Provisions | |
| 2017: | ||
| Brazil | $ | 82 |
| India | 49 | |
| Canada | 36 | |
| 2016: | ||
| Brazil | 125 | |
| India | 46 | |
| France | 38 | |
| 2015: | ||
| Mexico | 68 | |
| Brazil | 62 | |
| Netherlands | 58 | |
| India | 45 | |
| France | 42 | |
| Net Income Tax Provision (Benefit) Accrued in Additional Paid-in Capital Related to Employee Share-Based Compensation | |||||||
| $ in millions | 2017 | 2016 | 2015 | ||||
| Additional paid-in capital1 | $ | — | $ | 24 | $ | (203) | |
Effective Income Tax Rate
Reconciliation of the U.S. Federal Statutory Income Tax Rate to the Effective Income Tax Rate
| 2017 | 2016 | 2015 | |||||||
| U.S. federal statutory income tax rate | 35.0 | % | 35.0 | % | 35.0 | % | |||
| U.S. state and local income taxes, net of | |||||||||
| U.S. federal income tax benefits | 1.4 | 2.2 | 1.4 | ||||||
| Domestic tax credits | (1.6) | (2.5) | (1.5) | ||||||
| Tax exempt income | (0.1) | (0.1) | (0.2) | ||||||
| Non-U.S. earnings | |||||||||
| Foreign tax rate differential | (5.0) | (3.1) | (8.7) | ||||||
| Change in reinvestment assertion | — | — | 0.2 | ||||||
| Change in foreign tax rates | — | 0.1 | — | ||||||
| Tax Act enactment | 11.5 | — | — | ||||||
| Employee share-based awards | (1.5) | — | — | ||||||
| Other | 0.4 | (0.8) | (0.3) | ||||||
| Effective income tax rate | 40.1 | % | 30.8 | % | 25.9 | % | |||
The Firm’s effective tax rate from continuing operations for 2017 included an intermittent net discrete tax provision of $968 million, which included approximately $1.2 billion primarily related to the remeasurement of certain net deferred tax assets as a result of the Tax Act, partially offset by $233 million of net discrete tax benefits primarily associated with the remeasurement of reserves and related interest due to new information regarding the status of multi-year IRS tax examinations.
The Tax Act, enacted on December 22, 2017, significantly revised U.S. corporate income tax law by, among other things, reducing the corporate income tax rate to 21%, implementing a modified territorial tax system that includes a one-time transition tax on deemed repatriated earnings of foreign subsidiaries; imposes a minimum tax on GILTI and an alternative base erosion and anti-abuse tax (“BEAT”) on U.S. corporations that make deductible payments to non-U.S. related persons in excess of specified amounts; and broadens the tax base by partially or wholly eliminating tax deductions for certain historically deductible expenses (e.g., FDIC premiums and executive compensation).
The Firm’s effective tax rate from continuing operations for 2016 included intermittent net discrete tax benefits of $68 million. These net discrete tax benefits were primarily related to the remeasurement of reserves and related interest due to new information regarding the status of multi-year IRS tax examinations, partially offset by adjustments for other tax matters.
The Firm’s effective tax rate from continuing operations for 2015 included intermittent net discrete tax benefits of $564 million. These net discrete tax benefits were primarily associated with the repatriation of non-U.S. earnings at a cost lower than originally estimated due to an internal restructuring to simplify the Firm’s legal entity organization in the U.K.
Deferred Tax Assets and Liabilities
Deferred income taxes reflect the net tax effects of temporary differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when such differences are expected to reverse.
Deferred Tax Assets and Liabilities
| At | At | |||
| December 31, | December 31, | |||
| $ in millions | 2017 | 2016 | ||
| Gross deferred tax assets | ||||
| Tax credits and net operating | ||||
| loss carryforwards | $ | 391 | $ | 731 |
| Employee compensation | ||||
| and benefit plans | 2,146 | 3,504 | ||
| Valuation and liability allowances | 377 | 656 | ||
| Valuation of inventory, investments | ||||
| and receivables | 645 | 1,062 | ||
| Other | — | 21 | ||
| Total deferred tax assets | 3,559 | 5,974 | ||
| Deferred tax assets valuation | ||||
| allowance | 144 | 164 | ||
| Deferred tax assets after | ||||
| valuation allowance | $ | 3,415 | $ | 5,810 |
| Gross deferred tax liabilities | ||||
| Non-U.S. operations | $ | 20 | $ | 270 |
| Fixed assets | 627 | 773 | ||
| Other | 194 | — | ||
| Total deferred tax liabilities | $ | 841 | $ | 1,043 |
| Net deferred tax assets | $ | 2,574 | $ | 4,767 |
The Firm had tax credit carryforwards for which a related deferred tax asset of $114 million and $465 million was recorded at December 31, 2017 and December 31, 2016, respectively. These carryforwards are subject to annual limitations on utilization, with the earliest expiration beginning in 2037, if not utilized.
The Firm believes the recognized net deferred tax assets (after valuation allowance) at December 31, 2017 are more likely than not to be realized based on expectations as to future taxable income in the jurisdictions in which it operates.
The earnings of certain foreign subsidiaries are indefinitely reinvested due to regulatory and other capital requirements in foreign jurisdictions. As a result of the Tax Act’s one-time transition tax on the earnings of foreign subsidiaries, as of December 31, 2017 the Firm expects the unrecognized deferred tax liability attributable to indefinitely reinvested earnings to be immaterial.
Unrecognized Tax Benefits
| Rollforward of Unrecognized Tax Benefits | ||||||
| $ in millions | 2017 | 2016 | 2015 | |||
| Balance at beginning of period | $ | 1,851 | $ | 1,804 | $ | 2,228 |
| Increase based on tax positions | ||||||
| related to the current period | 63 | 172 | 230 | |||
| Increase based on tax positions | ||||||
| related to prior periods | 170 | 14 | 114 | |||
| Decrease based on tax positions | ||||||
| related to prior periods | (312) | (134) | (753) | |||
| Decreases related to settlements | ||||||
| with taxing authorities | (155) | — | (7) | |||
| Decreases related to | ||||||
| lapse of statute of limitations | (23) | (5) | (8) | |||
| Balance at end of period | $ | 1,594 | $ | 1,851 | $ | 1,804 |
| Net unrecognized tax benefits1 | $ | 873 | $ | 1,110 | $ | 1,144 |
| Interest Expense (Benefit), Net of Federal and State Income Tax Benefits | |||||||
| $ in millions | 2017 | 2016 | 2015 | ||||
| Recognized in income | |||||||
| statements | $ | (3) | $ | 28 | $ | 18 | |
| Accrued at end of period | 147 | 150 | 122 | ||||
Interest and penalties related to unrecognized tax benefits are classified as provision for income taxes. Penalties related to unrecognized tax benefits for the years mentioned above were immaterial.
Tax Authority Examinations
The Firm is under continuous examination by the IRS and other tax authorities in certain countries, such as Japan and the U.K., and in states in which it has significant business operations, such as New York. The Firm has established a liability for unrecognized tax benefits, and associated interest, if applicable (“tax liabilities”), that it believes is adequate in relation to the potential for additional assessments. Once established, the Firm adjusts such tax liabilities only when new information is available or when an event occurs necessitating a change.
The Firm is currently at various levels of field examination with respect to audits by the IRS, as well as New York State and New York City, for tax years 2009-2012 and 2007-2014, respectively. During the fourth quarter of 2017, the Firm agreed to proposed adjustments associated with the expected closure of the field audits for tax years 2006-2008.
The Firm believes that the resolution of the above tax matters will not have a material effect on the annual financial statements, although a resolution could have a material impact in the income statements and effective tax rate for any period in which such resolution occurs.
Additionally, during the fourth quarter of 2017, the Firm received new information relating to the expected closure of the IRS field audits for tax years 2009-2012 resulting in a remeasurement and an overall net decrease in the Firm’s recorded tax liabilities.
Also, during the fourth quarter of 2017, the Firm reached agreement with the IRS on resolution of claims filed with the IRS to contest certain items associated with tax years 1999-2005, which did not have a material impact on the annual statements or effective tax rate. Furthermore, during the fourth quarter of 2017, the Firm reached a conclusion with the U.K. tax authorities on certain issues through tax year 2010, the resolution of which did not have a material impact on the annual financial statements or effective tax rate.
See Note 12 regarding the Dutch Tax Authority’s challenge, in the District Court in Amsterdam (matters styled Case number 15/3637 and Case number 15/4353), of the Firm’s entitlement to certain withholding tax credits which may impact the balance of unrecognized tax benefits.
It is reasonably possible that significant changes in the balance of unrecognized tax benefits occur within the next 12 months. At this time, however, it is not possible to reasonably estimate the expected change to the total amount of unrecognized tax benefits and the impact on the Firm’s effective tax rate over the next 12 months.
| Earliest Tax Year Subject to Examination in Major Tax Jurisdictions | ||
| Jurisdiction | Tax Year | |
| U.S. | 1999 | |
| New York State and New York City | 2007 | |
| Hong Kong | 2011 | |
| U.K. | 2010 | |
| Japan | 2015 | |
| Income from Continuing Operations Before Income Tax Expense (Benefit) | ||||||
| $ in millions | 2017 | 2016 | 2015 | |||
| U.S. | $ | 5,686 | $ | 5,694 | $ | 5,360 |
| Non-U.S.1 | 4,717 | 3,154 | 3,135 | |||
| Total | $ | 10,403 | $ | 8,848 | $ | 8,495 |
1. Non-U.S. income is defined as income generated from operations located outside the U.S.