Income taxes
The components of the income tax provision are as follows:
|
| | | | | | | | | |
Provision for income taxes | Year ended Dec. 31, |
(in millions) | 2017 |
| 2016 |
| 2015 |
|
Current taxes (benefits): | | | |
Federal | $ | (99 | ) | $ | 823 |
| $ | 551 |
|
Foreign | 388 |
| 327 |
| 306 |
|
State and local | 74 |
| 153 |
| 109 |
|
Total current tax expense | 363 |
| 1,303 |
| 966 |
|
Deferred tax expense (benefit): | | | |
Federal | 36 |
| (75 | ) | 114 |
|
Foreign | 14 |
| (14 | ) | (1 | ) |
State and local | 83 |
| (37 | ) | (66 | ) |
Total deferred tax expense (benefit) | 133 |
| (126 | ) | 47 |
|
Provision for income taxes | $ | 496 |
| $ | 1,177 |
| $ | 1,013 |
|
Due to the timing of the enactment and the complexity involved in applying the provisions of the U.S. tax legislation, we have calculated a reasonable estimate and recorded a provisional benefit of $710 million. The provisional benefit is based on a number of estimates and assumptions, including but not limited to our interpretation of the U.S. tax legislation and analysis of foreign earnings and profits. The provisional amount may change, possibly materially, based on additional guidance or analysis of the U.S. tax legislation and final foreign earnings and profits. In addition the filing of our 2017 income tax returns could impact the remeasurement of our deferred tax assets and liabilities; we expect to complete our analysis in the second half of 2018.
|
| | | |
Income tax (benefit) expense | 2017 |
|
(estimated in millions) |
Remeasurement of net deferred tax liabilities | $ | (1,472 | ) |
Repatriation tax | 723 |
|
Other items | 39 |
|
Net income tax (benefit) | $ | (710 | ) |
The components of income before taxes are as follows:
|
| | | | | | | | | |
Income before taxes | Year ended Dec. 31, |
(in millions) | 2017 |
| 2016 |
| 2015 |
|
Domestic | $ | 2,699 |
| $ | 3,147 |
| $ | 2,698 |
|
Foreign | 1,911 |
| 1,578 |
| 1,537 |
|
Income before taxes | $ | 4,610 |
| $ | 4,725 |
| $ | 4,235 |
|
The components of our net deferred tax liability are as follows:
|
| | | | | | |
Net deferred tax liability | Dec. 31, |
(in millions) | 2017 |
| 2016 |
|
Depreciation and amortization | $ | 1,960 |
| $ | 2,694 |
|
Repatriation | 617 |
| — |
|
Lease financings | 151 |
| 391 |
|
Pension obligation | 283 |
| 184 |
|
Renewable energy investment | 278 |
| 179 |
|
Equity investments | 65 |
| 104 |
|
Employee benefits | (287 | ) | (471 | ) |
Reserves not deducted for tax | (103 | ) | (136 | ) |
Credit losses on loans | (55 | ) | (100 | ) |
Securities valuation | 11 |
| (55 | ) |
Other assets | (85 | ) | (101 | ) |
Other liabilities | 186 |
| 162 |
|
Net deferred tax liability | $ | 3,021 |
| $ | 2,851 |
|
As of Dec. 31, 2017, we have an available German net operating loss carryforward of $145 million with an indefinite life. We believe it is more likely than not that we will fully realize our deferred tax assets.
The U.S. tax legislation provides a one-time deemed repatriation tax on undistributed foreign earnings and profits (“repatriation tax”). In 2017, we recorded $723 million provisional repatriation tax. Management continues to evaluate the impact of the U.S. tax legislation on its foreign earnings and related repatriation tax. As of Dec. 31, 2017, we had approximately $200 million of earnings attributable to foreign subsidiaries that have been permanently reinvested abroad and for which no local distribution tax provision has been recorded. If these earnings were to be repatriated, the estimated tax liability as of Dec. 31, 2017 would be up to $40 million. The amount of foreign earnings considered permanently reinvested may change once our analysis is completed in the second half of 2018.
The statutory federal income tax rate is reconciled to our effective income tax rate below:
|
| | | | | | |
Effective tax rate | Year ended Dec. 31, |
| 2017 |
| 2016 |
| 2015 |
|
Federal rate | 35.0 | % | 35.0 | % | 35.0 | % |
State and local income taxes, net of federal income tax benefit | 1.8 |
| 1.6 |
| 0.6 |
|
Foreign operations | (4.2 | ) | (5.6 | ) | (6.6 | ) |
Tax credits | (3.7 | ) | (2.2 | ) | (1.4 | ) |
Tax-exempt income | (1.9 | ) | (1.8 | ) | (2.5 | ) |
Leverage lease adjustment | (1.4 | ) | (0.9 | ) | (1.3 | ) |
Stock compensation | (1.1 | ) | — |
| — |
|
U.S. tax legislation | (13.3 | ) | — |
| — |
|
Other – net | (0.4 | ) | (1.2 | ) | 0.1 |
|
Effective tax rate | 10.8 | % | 24.9 | % | 23.9 | % |
|
| | | | | | | | | |
Unrecognized tax positions | | | |
(in millions) | 2017 |
| 2016 |
| 2015 |
|
Beginning balance at Jan. 1, – gross | $ | 146 |
| $ | 649 |
| $ | 669 |
|
Prior period tax positions: | | | |
Increases | 20 |
| 8 |
| 13 |
|
Decreases | (4 | ) | (40 | ) | (21 | ) |
Current period tax positions | 10 |
| 16 |
| 14 |
|
Settlements | (44 | ) | (477 | ) | (26 | ) |
Statute expiration | — |
| (10 | ) | — |
|
Ending balance at Dec. 31, – gross | $ | 128 |
| $ | 146 |
| $ | 649 |
|
Our total tax reserves as of Dec. 31, 2017 were $128 million compared with $146 million at Dec. 31, 2016. If these tax reserves were unnecessary, $128 million would affect the effective tax rate in future periods. We recognize accrued interest and penalties, if applicable, related to income taxes in income tax expense. Included in the balance sheet at Dec. 31, 2017 is accrued interest, where applicable, of $17 million. The additional tax expense related to interest for the year ended Dec. 31, 2017 was $12 million, compared with $2 million for the year ended Dec. 31, 2016.
It is reasonably possible the total reserve for uncertain tax positions could decrease within the next 12 months by approximately $7 million as a result of adjustments related to tax years that are still subject to examination.
Our federal income tax returns are closed to examination through 2013. Our New York State, New York City and UK income tax returns are closed to examination through 2012.