Entity information:
INCOME TAXES
Our tax provision includes federal, state, local, and foreign income taxes.
 
Years Ended December 31,
2017
 
2016
 
2015
U.S. income before tax
$
500

 
$
180

 
$
119

Foreign income before tax
73

 
109

 
75

Income before income taxes
$
573

 
$
289

 
$
194


The provision (benefit) for income taxes from continuing operations is comprised of the following:
 
Years Ended December 31,
2017
 
2016
 
2015
Current:
 
 
 
 
 
Federal
$
201

 
$
66

 
$
134

State
45

 
15

 
18

Foreign
30

 
7

 
21

Total Current
$
276

 
$
88

 
$
173

Deferred:
 
 
 
 
 
Federal
$
48

 
$
(12
)
 
$
(78
)
State
(14
)
 
(2
)
 
(20
)
Foreign
13

 
11

 
(5
)
Total Deferred
$
47

 
$
(3
)
 
$
(103
)
Total
$
323

 
$
85

 
$
70


On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act ("Tax Act"). The Tax Act made broad and significant changes to the U.S. tax code that affects the year ended December 31, 2017, including, but not limited to, the requirement to pay a one-time transition tax ("deemed repatriation tax") on all undistributed earnings of foreign subsidiaries and bonus depreciation that will allow for full expensing of qualified property.
The Tax Act also establishes new tax laws that will affect future periods, including, but not limited to: (1) reducing the U.S. federal corporate tax rate; (2) limiting deductible interest expense; (3) modifying the tax treatment of like-kind exchanges; (4) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries; (5) imposing a new provision designed to tax global intangible low-tax income ("GILTI"); (6) creating the base erosion anti-abuse tax, a new minimum tax; (7) limiting the use of net operating loss carryforwards created in tax years beginning after December 31, 2017; (8) modifying the limitations on the use of foreign tax credits ("FTCs") to reduce our U.S. income tax liability; and (9) further restricting the deductibility of certain executive compensation and fringe benefits.
The following is a reconciliation of the statutory federal income tax rate to the effective tax rate from continuing operations:
 
Years Ended December 31,
2017
 
2016
 
2015
Statutory U.S. federal income tax rate
35.0
 %
 
35.0
 %
 
35.0
 %
State income taxes—net of federal tax benefit
3.4

 
3.4

 
3.5

Impact of foreign operations (excluding unconsolidated hospitality ventures losses)
(6.8
)
 
(5.4
)
 
(13.8
)
Tax Act deferred rate change
16.9

 
—

 
—

Tax Act deemed repatriation tax
2.3

 
—

 
—

Change in valuation allowances
3.8

 
3.6

 
3.1

Foreign unconsolidated hospitality ventures
1.1

 
1.2

 
10.0

Playa foreign tax credit benefit
(1.3
)
 
(2.6
)
 
—

Tax contingencies
1.3

 
(5.2
)
 
(1.5
)
Equity based compensation
0.7

 
0.4

 
(0.5
)
General business credits
(0.4
)
 
(0.8
)
 
(1.9
)
Other
0.3

 
(0.1
)
 
2.3

Effective income tax rate
56.3
 %
 
29.5
 %
 
36.2
 %

We have not completed our accounting for the income tax effects of the Tax Act and we recorded the following provisional estimates in accordance with SAB 118 at December 31, 2017:
•
The Tax Act reduces the U.S. corporate income tax rate from 35% to 21% effective January 1, 2018. We recorded a provisional expense of $97 million with a corresponding decrease to our net deferred tax assets. Our estimated impact may be affected by other analyses related to the Tax Act which are not complete, including, but not limited to, our calculation of deemed repatriation of deferred foreign income.
•
We estimated the deemed repatriation tax, including state tax impacts, and recorded a provisional expense of $13 million. The deemed repatriation tax is a tax on previously untaxed earnings and profits of certain foreign subsidiaries. To determine the amount of the tax, we must determine, in addition to other factors, the amount of earnings and profits subject to U.S. tax for the relevant subsidiaries, as well as the amount of non-U.S. income taxes paid on such earnings. We are continuing to gather additional information to more precisely compute the amount of deemed repatriation tax, inclusive of state tax implications, which may be impacted by further legislative technical corrections, amendments, and/or revised earnings and profits computations.
•
We must assess whether our valuation allowances are affected by various aspects of the Tax Act (e.g., deemed repatriation of deferred foreign income, GILTI inclusions, and new categories of FTCs). Therefore, any corresponding changes in our valuation allowances are also provisional. We recorded a provisional valuation allowance of $15 million related to FTCs that are not expected to be utilized in the future as a result of our interpretation of the Tax Act.
•
Under U.S. GAAP, we are allowed to make an accounting policy election to treat taxes due as a current period expense when incurred or to factor such amounts into our measurement of our deferred taxes. Our accounting policy election with respect to the new GILTI rules will depend, in part, on completing an analysis of our global income to determine whether we expect to have future U.S. inclusions in taxable income related to GILTI and the expected impact. Whether we expect to have future U.S. inclusions in taxable income related to GILTI depends not only on our current structure and estimated future global results, but also on our intent and ability to modify our structure and/or our business. We are not yet able to reasonably estimate the effect of this provision of the Tax Act. As a result, we have not made adjustments related to potential GILTI tax in our financial statements and have not made a policy election.

At December 31, 2017, we have not made a change to our assertion that undistributed net earnings with respect to certain foreign subsidiaries are indefinitely reinvested outside the United States. All undistributed net earnings have been taxed in the U.S. as a result of the Tax Act, and consistent with our assertion, the Company intends to limit any future distributions to previously taxed income for which relevant taxes have been recorded. However, we are continuing to analyze the impact of the Tax Act on our assertion, and thus the recording of related deferred taxes is provisional as of December 31, 2017.
Additional items that impacted the 2017 effective tax rate include certain foreign net operating losses generated in the current year that are not expected to be utilized in the future. These losses were partially offset by the benefit related to the rate differential of foreign operations and the recognition of foreign tax credits in the amount of $10 million generated by distributions from certain foreign subsidiaries.
Significant items affecting the 2016 effective tax rate include benefits related to the rate differential of foreign operations, foreign tax credit benefits associated with the Playa foreign unconsolidated hospitality venture, and a $15 million benefit (including $4 million of interest and penalties) primarily related to the reversal of uncertain tax positions for certain foreign filing positions. These benefits are partially offset by the impact of certain foreign net operating losses generated that are not expected to be utilized in the future.
Significant items affecting the 2015 effective tax rate include a benefit related to the impact of global transfer pricing changes implemented during 2015 to better align the Company’s transfer pricing with the Company’s global business operating model. This benefit is offset by the effect of certain foreign unconsolidated hospitality venture losses that are not fully benefited. The impact of tax contingencies includes a benefit of $10 million (including $5 million of interest and penalties) due to statute expirations with respect to state and foreign tax filing positions and an expense of $7 million due to an uncertain tax position recorded during 2015 related to transfer pricing positions.
The components of the net deferred tax assets and deferred tax liabilities are comprised of the following:
 
December 31, 2017
 
December 31, 2016
Deferred tax assets related to:
 
 
 
Employee benefits
$
128

 
$
202

Foreign and state net operating losses and credit carryforwards
65

 
46

Investments
36

 
55

Allowance for uncollectible assets
31

 
36

Deferred gains on sales of hotel properties
132

 
134

Loyalty program
58

 
81

Interest and state benefits
1

 
2

Unrealized losses
2

 
5

Other
40

 
54

Valuation allowance
(51
)
 
(27
)
Total deferred tax asset
$
442

 
$
588

Deferred tax liabilities related to:
 
 
 
Property and equipment
$
(157
)
 
$
(224
)
Investments
(19
)
 
(28
)
Intangibles
(32
)
 
(14
)
Unrealized gains
(35
)
 
(39
)
Prepaid expenses
(8
)
 
(12
)
Other
(11
)
 
(15
)
Total deferred tax liabilities
$
(262
)
 
$
(332
)
Net deferred tax assets
$
180

 
$
256

Recognized in the balance sheet as:
 
 
 
Deferred tax assets—noncurrent
$
242

 
$
313

Deferred tax liabilities—noncurrent
(62
)
 
(57
)
Total
$
180

 
$
256


During the year ended December 31, 2017, significant changes to our deferred tax assets and liabilities include the $97 million decrease to all U.S. deferred tax assets and liabilities as a result of the Tax Act, as discussed above. Other significant changes to our deferred assets and liabilities include a $64 million increase as a result of an increase in deferred gains related to the sales of hotels in 2017.
At December 31, 2017, we have $45 million of deferred tax assets related to foreign and state net operating losses and $20 million related to federal and state credits. We have recorded a valuation allowance of $51 million for certain deferred tax assets related to net operating losses and credits that we do not believe are more likely than not to be realized. These operating losses ($25 million deferred tax asset) are primarily foreign, do not expire, and may be carried forward indefinitely. The remaining losses expire over time through 2037.
At December 31, 2017 and December 31, 2016, total unrecognized tax benefits were $94 million and $86 million, respectively, of which $33 million and $5 million, respectively, would impact the effective tax rate if recognized. It is reasonably possible that a reduction of up to $3 million of unrecognized tax benefits could occur within 12 months resulting from the expiration of certain tax statutes of limitations.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
 
2017
 
2016
Unrecognized tax benefits—beginning balance
$
86

 
$
110

Total increases—current period tax positions
11

 
2

Total decreases—prior period tax positions
(1
)
 
(21
)
Lapse of statute of limitations
(3
)
 
(5
)
Foreign currency fluctuation
1

 
—

Unrecognized tax benefits—ending balance
$
94

 
$
86


In 2017, the $8 million net increase in uncertain tax positions is primarily related to an accrual for the U.S. tax treatment of the loyalty program. The $3 million decrease with respect to lapse of statute of limitations is due to various foreign tax filing positions.
In 2016, the $24 million decrease in uncertain tax positions primarily related to the reversal of uncertain tax positions for certain filing positions in foreign jurisdictions. The $5 million decrease with respect to lapse of statute of limitations was due to various state and foreign tax filing positions.
We recognize accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense. Total gross accrued interest and penalties were $14 million at both December 31, 2017 and December 31, 2016.
The amount of interest and penalties recognized as a component of income tax expense in 2017 was insignificant, comprised primarily of a benefit of $3 million resulting from the release of interest and penalties related to certain foreign tax positions and an additional interest and penalty accrual of $2 million on federal, state, and foreign tax matters.
The amount of interest and penalties recognized as a component of income tax expense in 2016 was a benefit of $4 million. This amount is comprised of a benefit of $9 million resulting from the release of interest and penalties related to certain foreign tax positions and an additional interest and penalty accrual of $5 million on federal, state, and foreign tax matters.
We are subject to audits by federal, state, and foreign tax authorities. U.S. tax years 2012, 2013, and 2014 are currently under field examination by the IRS. During the first quarter of 2017, the IRS issued a "Notice of Deficiency" for our 2009 through 2011 tax years. We disagree with the IRS’ assessment as it relates to the inclusion of loyalty program contributions as taxable income to the Company. In the second quarter of 2017, we filed a petition with the U.S. Tax Court for redetermination of the tax liability asserted by the IRS related to the loyalty program. If the IRS’ position is upheld, it would result in an income tax liability of $126 million (including $31 million of estimated interest, net of federal benefit) for these tax years that would be partially offset by a deferred tax asset. Future tax benefits will be recognized at the reduced U.S. corporate income tax rate, therefore, $60 million of the liability and related interest would have an impact on the effective tax rate if recognized. We believe we have an adequate liability recorded in connection with this matter. The statute of limitations for U.S. tax years 2005, 2006, 2007, and 2008 remain open for the computational impacts of net operating losses and general business credit carrybacks to those years which could be impacted by the final resolution of tax years 2009-2011.
We have several state and foreign audits pending. State income tax returns are generally subject to examination for a period of three to five years after filing of the return. However, the state impact of any federal changes remains subject to examination by various states for a period generally up to one year after formal notification to the states of the federal changes. The statute of limitations for the foreign jurisdictions ranges from three to ten years after filing the applicable tax return.