21. Income Taxes
U.S. Tax Reform
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “2017 Tax Act”). The 2017 Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to, (1) reducing the U.S. federal corporate tax rate from 35 percent to 21 percent, (2) requiring companies to pay a one-time tax on certain unrepatriated earnings of foreign subsidiaries, (3) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries, (4) creating new taxes on certain earnings of controlled foreign corporations, and (5) creating a new limitation on deductible net interest expense.
For 2017, the Company recorded a net tax benefit of $1,175 million, based on a reasonable estimate, related to the impact of the 2017 Tax Act. The tax benefit primarily consists of a $1,652 million tax benefit related to the revaluation of deferred tax assets and liabilities and $477 million tax expense related to the mandatory deemed repatriation tax. As of December 31, 2017, the Company has not completed the accounting for the income tax effects of certain elements of the 2017 Tax Act; however, as described below, reasonable estimates of the effects were determined, and therefore, have been recorded as provisional adjustments as follows:
Reduction of U.S. federal corporate tax rate: The 2017 Tax Act reduces the U.S. corporate tax rate to 21 percent. As a result of revaluing deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, the Company recorded a $1,652 million tax benefit for the reduction in the net deferred tax liabilities for 2017.
Mandatory deemed repatriation tax: The mandatory deemed repatriation tax is a tax on previously untaxed accumulated and current earnings and profits of foreign subsidiaries. Based on a reasonable estimate, the Company recorded a tax expense of $477 million related to the mandatory deemed repatriation tax, which is payable over eight years.
Global intangible low taxed income (“GILTI”): The 2017 Tax Act creates a new requirement that the income (i.e., GILTI) earned by foreign subsidiaries must be included in the taxable income of the entity’s U.S. shareholder. The Company has not yet adopted an accounting policy for GILTI, as it is still not clear whether to 1) treat the taxes (if any) resulting from the GILTI inclusion as a current-period expense when incurred or 2) factoring such amounts into the Company’s measurement of its deferred taxes is the appropriate accounting.
While the Company was able to make a reasonable estimate of the impact related the 2017 Tax Act, the provisional amounts may require further adjustments as additional guidance from the U.S. Department of the Treasury is provided, as changes in the Company’s assumptions occur, and as further information and interpretations become available.
The components of income tax expense for 2017, 2016 and 2015, are as follows:
|
(in millions) |
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Current income tax expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
1,166 |
|
|
$ |
858 |
|
|
$ |
937 |
|
|
State and local |
|
|
36 |
|
|
|
61 |
|
|
|
74 |
|
|
Foreign |
|
|
289 |
|
|
|
385 |
|
|
|
395 |
|
|
Total net current income tax expense |
|
|
1,491 |
|
|
|
1,304 |
|
|
|
1,406 |
|
|
Deferred income tax expense (benefit): |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
(1,382 |
) |
|
|
31 |
|
|
|
(13 |
) |
|
State and local |
|
|
81 |
|
|
|
14 |
|
|
|
(19 |
) |
|
Foreign |
|
|
80 |
|
|
|
(59 |
) |
|
|
(124 |
) |
|
Total net deferred income tax expense (benefit) |
|
|
(1,221 |
) |
|
|
(14 |
) |
|
|
(156 |
) |
|
Total income tax expense |
|
$ |
270 |
|
|
$ |
1,290 |
|
|
$ |
1,250 |
|
Income tax expense has been based on the following components of income before taxes, less net income (loss) attributable to noncontrolling interests:
|
(in millions) |
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Domestic |
|
$ |
3,298 |
|
|
$ |
2,837 |
|
|
$ |
2,840 |
|
|
Foreign |
|
|
1,942 |
|
|
|
1,625 |
|
|
|
1,755 |
|
|
Total |
|
$ |
5,240 |
|
|
$ |
4,462 |
|
|
$ |
4,595 |
|
The foreign income before taxes includes countries that have statutory tax rates that are lower than the U.S. federal statutory tax rate of 35%, such as the United Kingdom, Channel Islands, Ireland and Netherlands.
A reconciliation of income tax expense with expected federal income tax expense computed at the applicable federal income tax rate of 35% is as follows:
|
(in millions) |
|
2017 |
|
|
% |
|
|
2016 |
|
|
% |
|
|
2015 |
|
|
% |
|
||||||
|
Statutory income tax expense |
|
$ |
1,834 |
|
|
|
35 |
% |
|
$ |
1,562 |
|
|
|
35 |
% |
|
$ |
1,608 |
|
|
|
35 |
% |
|
Increase (decrease) in income taxes resulting from: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and local taxes (net of federal benefit) |
|
|
60 |
|
|
|
1 |
|
|
|
69 |
|
|
|
2 |
|
|
|
42 |
|
|
|
1 |
|
|
Impact of federal, foreign, state, and local tax rate changes on deferred taxes |
|
|
(1,637 |
) |
|
|
(31 |
) |
|
|
(33 |
) |
|
|
(1 |
) |
|
|
(45 |
) |
|
|
(1 |
) |
|
Mandatory deemed repatriation tax |
|
|
477 |
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation awards |
|
|
(159 |
) |
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of foreign tax rates |
|
|
(337 |
) |
|
|
(6 |
) |
|
|
(329 |
) |
|
|
(7 |
) |
|
|
(385 |
) |
|
|
(8 |
) |
|
Other |
|
|
32 |
|
|
|
— |
|
|
|
21 |
|
|
|
— |
|
|
|
30 |
|
|
|
— |
|
|
Income tax expense |
|
$ |
270 |
|
|
|
5 |
% |
|
$ |
1,290 |
|
|
|
29 |
% |
|
$ |
1,250 |
|
|
|
27 |
% |
Deferred income taxes are provided for the effects of temporary differences between the tax basis of an asset or liability and its reported amount in the consolidated financial statements. These temporary differences result in taxable or deductible amounts in future years.
The components of deferred income tax assets and liabilities are shown below:
|
|
|
December 31, |
|
|||||
|
(in millions) |
|
2017 |
|
|
2016 |
|
||
|
Deferred income tax assets: |
|
|
|
|
|
|
|
|
|
Compensation and benefits |
|
$ |
187 |
|
|
$ |
399 |
|
|
Unrealized investment losses |
|
|
28 |
|
|
|
42 |
|
|
Loss carryforwards |
|
|
84 |
|
|
|
85 |
|
|
Foreign tax credit carryforwards |
|
|
— |
|
|
|
118 |
|
|
Other |
|
|
116 |
|
|
|
216 |
|
|
Gross deferred tax assets |
|
|
415 |
|
|
|
860 |
|
|
Less: deferred tax valuation allowances |
|
|
(22 |
) |
|
|
(22 |
) |
|
Deferred tax assets net of valuation allowances |
|
|
393 |
|
|
|
838 |
|
|
Deferred income tax liabilities: |
|
|
|
|
|
|
|
|
|
Goodwill and acquired indefinite-lived intangibles |
|
|
3,810 |
|
|
|
5,568 |
|
|
Acquired finite-lived intangibles |
|
|
40 |
|
|
|
36 |
|
|
Other |
|
|
62 |
|
|
|
54 |
|
|
Gross deferred tax liabilities |
|
|
3,912 |
|
|
|
5,658 |
|
|
Net deferred tax (liabilities) |
|
$ |
(3,519 |
) |
|
$ |
(4,820 |
) |
Deferred income tax assets and liabilities are recorded net when related to the same tax jurisdiction. At December 31, 2017, the Company recorded on the consolidated statement of financial condition deferred income tax assets, within other assets, and deferred income tax liabilities of $19 million and $3,538 million, respectively. At December 31, 2016, the Company recorded on the consolidated statement of financial condition deferred income tax assets, within other assets, and deferred income tax liabilities of $20 million and $4,840 million, respectively.
The 2017 Tax Act resulted in a $106 million tax expense related to the revaluation of certain deferred income tax assets and $1,758 million noncash tax benefit related to the revaluation of certain deferred income tax liabilities. In addition, mandatory deemed repatriation of undistributed foreign earnings and profits with respect to the 2017 Tax Act resulted in a $477 million tax expense.
Income tax expense for 2017 included a $16 million noncash tax expense related to the revaluation of certain deferred income tax liabilities as a result of domestic state and local tax changes and a $173 million discrete tax benefit, primarily related to stock-based compensation awards.
During 2016, tax legislation enacted in the United Kingdom and domestic state and local tax changes resulted in a $30 million net noncash benefit related to the revaluation of certain deferred income tax liabilities.
At December 31, 2017 and 2016, the Company had available state net operating loss carryforwards of $1.7 billion and $1.6 billion, respectively, which will begin to expire in 2019. At both December 31, 2017 and 2016, the Company had foreign net operating loss carryforwards of $90 million of which $3 million will begin to expire in 2021.
At both December 31, 2017 and 2016, the Company had $22 million of valuation allowances for deferred income tax assets, respectively, recorded on the consolidated statements of financial condition.
Goodwill recorded in connection with the Quellos Transaction has been reduced during the period by the amount of tax benefit realized from tax-deductible goodwill. See Note 9, Goodwill, for further discussion.
Current income taxes are recorded net on the consolidated statements of financial condition when related to the same tax jurisdiction. At December 31, 2017, the Company had current income taxes receivable and payable of $142 million and $256 million, respectively, recorded in other assets and accounts payable and accrued liabilities, respectively. At December 31, 2016, the Company had current income taxes receivable and payable of $247 million and $75 million, respectively, recorded in other assets and accounts payable and accrued liabilities, respectively.
As a result of the 2017 Tax Act and the one-time mandatory deemed repatriation tax, previously undistributed foreign earnings for which no U.S. deferred tax liability had been recognized have now been subject to U.S. income tax. No additional income or withholding taxes were provided for with respect to the financial statement basis in excess of tax basis of its foreign subsidiaries as these amounts remain indefinitely reinvested in foreign operations. The Company will continue to evaluate its indefinite reinvestment assertion based on additional guidance from the U.S. Department of the Treasury and as further information and interpretations become available.
The following tabular reconciliation presents the total amounts of gross unrecognized tax benefits:
|
(in millions) |
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Balance at January 1 |
|
$ |
410 |
|
|
$ |
466 |
|
|
$ |
379 |
|
|
Additions for tax positions of prior years |
|
|
161 |
|
|
|
3 |
|
|
|
39 |
|
|
Reductions for tax positions of prior years |
|
|
(3 |
) |
|
|
(78 |
) |
|
|
(25 |
) |
|
Additions based on tax positions related to current year |
|
|
67 |
|
|
|
37 |
|
|
|
75 |
|
|
Lapse of statute of limitations |
|
|
(6 |
) |
|
|
— |
|
|
|
(2 |
) |
|
Settlements |
|
|
— |
|
|
|
(18 |
) |
|
|
— |
|
|
Balance at December 31 |
|
$ |
629 |
|
|
$ |
410 |
|
|
$ |
466 |
|
Included in the balance of unrecognized tax benefits at December 31, 2017, 2016 and 2015, respectively, are $316 million, $284 million and $320 million of tax benefits that, if recognized, would affect the effective tax rate.
The Company recognizes interest and penalties related to income tax matters as a component of income tax expense. Related to the unrecognized tax benefits noted above, the Company accrued interest and penalties of $17 million during 2017 and in total, as of December 31, 2017, had recognized a liability for interest and penalties of $76 million. The Company accrued interest and penalties of $3 million during 2016 and in total, as of December 31, 2016, had recognized a liability for interest and penalties of $59 million. The Company accrued interest and penalties of $12 million during 2015 and in total, as of December 31, 2015, had recognized a liability for interest and penalties of $56 million.
BlackRock is subject to U.S. federal income tax, state and local income tax, and foreign income tax in multiple jurisdictions. Tax years after 2009 remain open to U.S. federal income tax examination.
In June 2014, the IRS commenced its examination of BlackRock’s 2010 through 2012 tax years, and while the impact on the consolidated financial statements is undetermined, it is not expected to be material.
The Company is currently under audit in several state and local jurisdictions. The significant state and local income tax examinations are in New York State and New York City for tax years 2009 through 2011, and California for tax years 2013 through 2014. No state and local income tax audits cover years earlier than 2008. No state and local income tax audits are expected to result in an assessment material to BlackRock’s consolidated financial statements.
Upon conclusion of its examination, Her Majesty’s Revenue and Customs’ (‘HMRC’) issued a closure notice during 2017 for various U.K. BlackRock subsidiaries for tax years 2009 and years after. The Company made a decision to pursue litigation for the tax matters included on such notice. BlackRock does not expect the ultimate resolution to result in a material impact to the consolidated financial statements.
From time to time, BlackRock may receive or be subject to tax authorities’ assessments and challenges related to income taxes. BlackRock does not currently expect the ultimate resolution of any existing matters to be material to the consolidated financial statements.
At December 31, 2017, it is reasonably possible the total amounts of unrecognized tax benefits will change within the next twelve months due to completion of tax authorities’ exams or the expiration of statues of limitations. Management estimates that the existing liability for uncertain tax positions could decrease by approximately $10 million to $40 million within the next twelve months.