Athene Holding Ltd

15. Income Taxes

Income tax expense consists of the following:



	Years ended December 31,
(In millions)	2017		2016			2015
Current	$	5	$	(33	)	$	(19	)
Deferred	82		(19		)	31
Income tax expense (benefit)	$	87	$	(52	)	$	12

Income tax expense was calculated based on the following components of income before income taxes:



	Years ended December 31,
(In millions)	2017		2016		2015
Income before income taxes – Bermuda	$	1,237	$	565	$	508
Income before income taxes – Germany	25		16		8
Income before income taxes – U.S.	273		135		74
Income before income taxes	$	1,535	$	716	$	590

The expected tax provision computed on pre-tax income at the weighted average tax rate has been calculated as the sum of the pre-tax income in each jurisdiction multiplied by that jurisdiction’s applicable statutory tax rate. Statutory tax rates of 0%, 31% and 35% have been used for Bermuda, Germany and the United States, respectively, for the years ended December 31, 2017, 2016 and 2015. A reconciliation of the difference between the expected tax provision at the weighted average tax rate and income tax expense (benefit) is as follows:



	Years ended December 31,
(In millions)	2017			2016			2015
Expected tax provision computed on pre-tax income at weighted average income tax rate	$	104		$	52		$	28
Increase (decrease) in income taxes resulting from:
Deferred tax valuation allowance	(5		)	(116		)	(6		)
Prior year true-up	(6		)	8			2
Corporate owned life insurance	(8		)	(7		)	(7		)
Stock compensation expense	5			5			—
Change in statutory tax rates	(7		)	—			—
State taxes and other	4			6			(5		)
Income tax expense (benefit)	$	87		$	(52	)	$	12
Effective tax rate	6		%	(7		)%	2		%

The Tax Act was enacted on December 22, 2017 and made key changes to the U.S. tax law, including the reduction of the U.S. statutory tax rate from 35% to 21%. As such, the December 31, 2017 deferred tax balances were remeasured to reflect the reduction in rate and the resulting decrease to the net deferred tax liability is included in change in statutory tax rates of the reconciliation above.

Total income taxes were as follows:



	Years ended December 31,
(In millions)	2017		2016			2015
Income tax expense (benefit)	$	87	$	(52	)	$	12
Income tax expense (benefit) from OCI	326		259			(424		)
Total income taxes	$	413	$	207		$	(412	)

Current income tax recoverable and deferred tax assets are included in other assets on the consolidated balance sheets, and current income tax payable and deferred tax liabilities are included in other liabilities on the consolidated balance sheets. Current and deferred income tax assets and liabilities were as follows:



	December 31,
(In millions)	2017			2016
Current income tax recoverable	$	29		$	107
Current income tax payable	9			1
Net current income tax recoverable	$	20		$	106

Deferred tax assets	$	3		$	372
Deferred tax liabilities	41			4
Net deferred tax assets (liabilities)	$	(38	)	$	368

Deferred income tax assets and liabilities consisted of the following:



	December 31,
(In millions)	2017¹			2016
Deferred tax assets
Insurance liabilities	$	1,322		$	1,483
Net operating and capital loss carryforwards	151			221
Tax credits	6			18
VOBA	78			69
Fixed assets	26			—
Employee benefits	36			52
Other	10			27
Total deferred tax assets	1,629			1,870
Valuation allowance²	(64		)	(72		)
Deferred tax assets, after valuation allowance	1,565			1,798
Deferred tax liabilities
Investments, including derivatives	781			668
Net unrealized gains on AFS	317			178
VOBA	328			346
DAC	174			232
Other	3			6
Total deferred tax liabilities	1,603			1,430
Net deferred tax assets (liabilities)	$	(38	)	$	368

¹ Deferred tax balances were remeasured as of December 22, 2017 using the reduced U.S. statutory income tax rate as a result of the Tax Act.
² A portion of the valuation allowance reduction was recorded in other comprehensive income.

As of December 31, 2017, we have gross deferred tax assets associated with U.S. federal and state net operating losses of $721 million, which will begin to expire in 2024.

The valuation allowance consists of the following:



	December 31,
(In millions)	2017		2016
U.S. federal and state net operating losses and other deferred tax assets	$	14	$	22
German other deferred tax assets	50		50
Total valuation allowance	$	64	$	72

During the third quarter of 2016, we identified a tax plan that, when implemented, will allow us to use a significant portion of the U.S. non-life insurance companies’ net operating losses and other deductible temporary differences. As a result, we released the corresponding deferred tax valuation allowance of $102 million, as it is more likely than not that these attributes will be realized.

AHL and its Bermuda subsidiaries file protective U.S. income tax returns and its U.S. subsidiaries file income tax returns with the U.S. federal government and various U.S. state governments. AADE is not subject to U.S. federal and state examinations by tax authorities for years prior to 2007, while Athene Annuity & Life Assurance Company of New York (AANY) and Athene Life Insurance Company (ALIC) are not subject to examinations for years prior to 2011 and 2014, respectively. The Internal Revenue Service is currently auditing the 2013 consolidated tax return filed by Athene USA Corporation, and recently initiated a limited scope audit of the 2015 consolidated tax return filed by AADE. No material adverse proposed adjustments have been issued with respect to either exam. See discussion of ongoing tax examinations relating to Aviva USA and subsidiaries in Note 18 – Commitments and Contingencies.

Under current Bermuda law, we are not required to pay any taxes in Bermuda on either income or capital gains. We have received an undertaking from the Bermuda Minister of Finance that, in the event of any such taxes being imposed, the Company will be exempted from taxation until the year 2035.

Withholding taxes have not been provided on undistributed earnings of AHL’s U.S. and German subsidiaries as of December 31, 2017 or 2016. Although withholding taxes may apply in the event a dividend is paid by AHL’s U.S. or German subsidiaries, we have not accrued withholding taxes as we do not intend to remit these earnings. The cumulative amount subject to withholding tax, if distributed, as well as the determination of the associated tax liability, is not practicable to compute; however, it may be material to the Company’s financial position and results of operations. Any dividends remitted to AHL from ALRe are not subject to withholding tax.