8. INCOME TAXES

On December 22, 2017, the U.S. government enacted tax reform. The primary provisions of tax reform affecting the company in 2018 were a reduction to the corporate income tax rate from 35 percent to 21 percent and a transition from a worldwide corporate tax system to a primarily territorial tax system. The reduction in the corporate income tax rate required the company to remeasure its U.S. net deferred tax assets to the new corporate tax rate and the transition to a territorial tax system requires payment of a one-time tax on the deemed repatriation of undistributed and previously untaxed non-U.S. earnings. Under current tax law, the company plans to pay the deemed earnings repatriation tax (repatriation tax) in 2019 with an expected U.S. income tax overpayment.

The income tax expense (benefit) for the net deferred tax asset remeasurement and the repatriation tax in 2018 in millions of dollars follow:


	Equipment		Financial
	Operations		Services		Total
Net deferred tax asset remeasurement	$	768	$	(354)	$	414
Deemed earnings repatriation tax		277		13		290
Total discrete tax expense (benefit)	$	1,045	$	(341)	$	704

Included in the Equipment Operations’ repatriation tax amount is an accrual of approximately $63 million for foreign withholding taxes on earnings of subsidiaries outside the U.S. that were previously expected to be indefinitely reinvested outside the U.S. The provision for income taxes was also affected primarily by the lower corporate income tax rate on current year income.

The 21 percent corporate income tax rate was effective January 1, 2018. Based on the company’s October fiscal year end, the U.S. statutory income tax rate for fiscal year 2018 was approximately 23.3 percent.

The 2018 repatriation tax expense is based on interpretations of existing laws, regulations, and certain assumptions. Further regulatory guidance is expected, which could affect the recorded expense. The company continues to analyze the repatriation tax provisions, and monitor legislative and regulatory developments.

The provision for income taxes by taxing jurisdiction and by significant component consisted of the following in millions of dollars:


	2018		2017		2016
Current:
U.S.:
Federal	$	(268)	$	360	$	51
State		123		48		26
Foreign		392		463		340
Total current		247		871		417
Deferred:
U.S.:
Federal		1,233		59		297
State		(40)		7		11
Foreign		287		34		(25)
Total deferred		1,480		100		283
Provision for income taxes	$	1,727	$	971	$	700

Based upon the location of the company’s operations, the consolidated income before income taxes in the U.S. in 2018, 2017, and 2016 was $2,275 million, $1,607 million, and $967 million, respectively, and in foreign countries was $1,796 million, $1,547 million, and $1,257 million, respectively. Certain foreign operations are branches or partnerships of Deere & Company and are subject to U.S. as well as foreign income tax regulations. The pretax income by location and the preceding analysis of the income tax provision by taxing jurisdiction are not directly related.

A comparison of the statutory and effective income tax provision and reasons for related differences in millions of dollars follow:


	2018		2017		2016
U.S. federal income tax provision at the U.S. statutory rate (2018 - 23.3 percent, 2017 and 2016 - 35 percent)	$	950	$	1,104	$	778
Increase (decrease) resulting from:
Net deferred tax asset remeasurement		414
Deemed earnings repatriation tax		290
Other effects of tax reform		42
Differences in taxability of foreign earnings		(92)		(83)		(107)
Valuation allowance on deferred taxes		50		89		79
Research and business tax credits		(43)		(63)		(57)
State and local income taxes, net of federal income tax benefit		59		37		26
Excess tax benefits on equity compensation		(49)		(30)
Tax rates on foreign earnings		44		(84)		(27)
Unrecognized tax benefits		30		9		11
Nondeductible impairment charges						4
Other - net		32		(8)		(7)
Provision for income taxes	$	1,727	$	971	$	700

At October 28, 2018, accumulated earnings in certain subsidiaries outside the U.S. totaled $2,559 million, which were subject to the repatriation tax. No provision for foreign withholding taxes has been made because it is expected that these earnings will remain indefinitely reinvested outside the U.S. Determination of the amount of a foreign withholding tax liability on these unremitted earnings is not practicable.

An additional $4,270 million of earnings in subsidiaries outside the U.S., which were previously expected to be reinvested outside the U.S., were also subject to the repatriation tax. In the fourth quarter of 2018, the company reviewed its global funding requirements and determined those earnings would no longer be indefinitely reinvested. Although the earnings will not be subject to U.S. income tax when repatriated to the U.S., in the fourth quarter of 2018 an accrual of $63 million was recorded for foreign withholding taxes.

Deferred income taxes arise because there are certain items that are treated differently for financial accounting than for income tax reporting purposes. An analysis of the deferred income tax assets and liabilities at October 28, 2018 and October 29, 2017 in millions of dollars follows:


	2018				2017
	Deferred		Deferred		Deferred		Deferred
	Tax		Tax		Tax		Tax
	Assets		Liabilities		Assets		Liabilities
OPEB liabilities	$	984			$	2,011
Lease transactions			$	850			$	933
Tax loss and tax credit carryforwards		713				677
Accrual for sales allowances		464				680
Tax over book depreciation				357				569
Goodwill and other intangible assets				458				130
Pension liability - net		45				420
Allowance for credit losses		115				107
Accrual for employee benefits		72				141
Share-based compensation		58				116
Deferred compensation		35				59
Undistributed foreign earnings				6				21
Foreign unrealized losses		10				7
Other items		346		261		432		172
Less valuation allowances		(658)				(620)
Deferred income tax assets and liabilities	$	2,184	$	1,932	$	4,030	$	1,825

Deere & Company files a consolidated federal income tax return in the U.S., which includes the wholly-owned financial services subsidiaries. These subsidiaries account for income taxes generally as if they filed separate income tax returns, with a modification for realizability of certain tax benefits.

At October 28, 2018, tax loss and tax credit carryforwards of $713 million were available with $289 million expiring from 2019 through 2038 and $424 million with an indefinite carryforward period.

A reconciliation of the total amounts of unrecognized tax benefits at October 28, 2018, October 29, 2017, and October 30, 2016 in millions of dollars follows:


	2018		2017		2016
Beginning of year balance	$	221	$	198	$	229
Increases to tax positions taken during the current year		36		35		14
Increases to tax positions taken during prior years		62		13		11
Decreases to tax positions taken during prior years		(39)		(17)		(36)
Decreases due to lapse of statute of limitations		(15)		(11)		(7)
Acquisitions*		31
Settlements		(5)		(1)		(5)
Foreign exchange		(12)		4		(8)
End of year balance	$	279	$	221	$	198

* See Note 4.

The amount of unrecognized tax benefits at October 28, 2018 and October 29, 2017 that would affect the effective tax rate if the tax benefits were recognized was $128 million and $86 million, respectively. The remaining liability was related to tax positions for which there are offsetting tax receivables, or the uncertainty was only related to timing. The company expects that any reasonably possible change in the amounts of unrecognized tax benefits in the next twelve months would not be significant.

The company files its tax returns according to the tax laws of the jurisdictions in which it operates, which includes the U.S. federal jurisdiction and various state and foreign jurisdictions. The U.S. Internal Revenue Service (IRS) has completed the examination of the company’s federal income tax returns for periods prior to 2015. The years 2008 through 2014 returns are subject to final approval on limited issues, of which the tax effects are recorded. The years 2015, 2016, and 2017 federal income tax return are currently under examination. Various state and foreign income tax returns, including major tax jurisdictions in Argentina, Australia, Brazil, Canada, China, Finland, France, Germany, India, Mexico, Russia, Singapore, and Spain also remain subject to examination by taxing authorities.

The company’s policy is to recognize interest related to income taxes in interest expense and interest income and recognize penalties in selling, administrative and general expenses. During 2018, 2017, and 2016, the total amount of expense from interest and penalties was $23 million, $6 million, and none and the interest income was $12 million, $6 million, and none, respectively. At October 28, 2018 and October 29, 2017, the liability for accrued interest and penalties totaled $90 million and $66 million, respectively, and there was no receivable for interest at either year-end.

The company will be subject to additional requirements of tax reform beginning in 2019. Those provisions include a tax on global intangible low-taxed income (GILTI), a tax determined by base erosion and anti-abuse tax benefits (BEAT) from certain payments between a U.S. corporation and foreign subsidiaries, a limitation of certain executive compensation, a deduction for foreign derived intangible income (FDII), and interest expense limitations. Through the preliminary review of these provisions, the company does not expect the net effect to be significant for the 2019 provision for income taxes.