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Income Taxes | 12 Months Ended
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Dec. 31, 2017
Income Tax Disclosure [Abstract] |
Income Taxes | Income Taxes On December 22, 2017, the Tax Reform Act was enacted. The Tax Reform Act includes a number of changes to existing U.S. tax laws that impact the Company, most notably a reduction of the U.S. corporate income tax rate from 35% to 21% for tax years beginning after December 31, 2017 and the Transition Tax. On December 22, 2017, the SEC staff issued SAB 118 to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Reform Act in the reporting period in which the Tax Reform Act was enacted. SAB 118 allows registrants to record provisional amounts during a one year “measurement period”. However, the measurement period is deemed to have ended earlier when the registrant has obtained, prepared, and analyzed the information necessary to finalize its accounting. During the measurement period, impacts of the law are expected to be recorded at the time a reasonable estimate for all or a portion of the effects can be made, and provisional amounts can be recognized and adjusted as information becomes available, prepared, or analyzed. SAB 118 summarizes three categories to be applied to each component of tax reform at each reporting period to account for and qualitatively disclose: (1) the effects of the change in tax law for which accounting is complete; (2) provisional amounts (or adjustments to provisional amounts) for the effects of the tax law where accounting is not complete, but that a reasonable estimate has been determined; and (3) a reasonable estimate cannot yet be made and therefore taxes are reflected in accordance with law prior to the enactment of the Tax Reform Act. The Company has recognized provisional estimates in its consolidated financial statements for the year ended December 31, 2017 for the items described below. The ultimate impact may differ from these provisional amounts, possibly by a material amount, due to additional analysis of the law, changes in interpretations and assumptions the Company has made, additional regulatory guidance that may be issued, and/or actions the Company may take as a result of the Tax Reform Act.
• | The Company recorded a provisional estimate of $264 million income tax expense for the Transition Tax. The Company expects to pay additional U.S. federal cash taxes of approximately $264 million on the deemed mandatory repatriation, payable over eight years. The Transition Tax is based on estimates of post-1986 earnings and profits and related foreign tax credits of its U.S.-owned foreign subsidiaries as of November 2, 2017 and December 31, 2017, whichever amount is higher, and may change materially as the Company refines those estimates and as the Company further analyzes present and future regulations and other guidance interpreting the Transition Tax provision. It could also change depending on certain events that could occur after December 31, 2017
• | The Company recorded a provisional estimate of $86 million income tax expense for the re-measurement of deferred tax assets and liabilities as a result of the reduction in the U.S. corporate income tax rate from 35% to 21%. The Company continues to refine its calculation as it gains a more thorough understanding of the impact of the Tax Reform Act, particularly as it applies to deductions related to executive compensation and purchased assets.
• | The Company has changed its assertion and is no longer permanently reinvested on the earnings subject to the Transition Tax. The Company has recorded a provisional estimate of local country income taxes, state income taxes, and withholding taxes in the amount of $39 million as of December 31, 2017. The tax estimate is provisional due to the fact that additional analysis of the Company’s complex legal entity structure is required as well as a more detailed analysis of the local country tax laws where the pools of undistributed earnings exist.
The Company was not able to make a reasonable estimate of the allocation between continuing and discontinued operations of the tax benefit from foreign tax credits and related valuation allowance release. As a result, the Company continued to account for this item based on our existing accounting under GAAP and the provisions of the tax laws that were in effect prior to enactment of the Tax Reform Act. Other significant provisions of the Tax Reform Act that are not yet effective but may impact income taxes in future years include: an exemption from U.S. tax on dividends of future foreign earnings, additional limitations on deductibility of interest payable to related and unrelated lenders, further limitations on the deductibility of executive compensation, an alternative Base Erosion and Anti-Abuse Tax that limits deductions for certain amounts payable to foreign affiliates, and an additional U.S. tax on certain future foreign subsidiary earnings, whether or not distributed, (i.e., global intangible low-taxed income or “GILTI”). The Company has elected to account for GILTI tax in the period in which it is incurred, and therefore has not provided any deferred tax impacts of GILTI in its consolidated financial statements for the year ended December 31, 2017. Income before income tax from continuing operations and the provision for income tax from continuing operations consist of the following (in millions):
Years ended December 31 | 2017 |  | 2016 |  | 2015
Income before income taxes: |  |  |  |  |
U.K. | $ | (420 | ) |  | $ | (201 | ) |  | $ | 144 |
U.S. | (765 | ) |  | (329 | ) |  | (283 | )
Other | 1,870 |  |  | 1,931 |  |  | 1,567 |
Total | $ | 685 |  |  | $ | 1,401 |  |  | $ | 1,428 |
Income tax expense (benefit): |  |  |  |  |
Current: |  |  |  |  |
U.K. | $ | 1 |  |  | $ | (54 | ) |  | $ | 42 |
U.S. federal | 48 |  |  | 88 |  |  | 22 |
U.S. state and local | 18 |  |  | 7 |  |  | 32 |
Other | 201 |  |  | 207 |  |  | 245 |
Total current tax expense | $ | 268 |  |  | $ | 248 |  |  | $ | 341 |
Deferred tax expense (benefit): |  |  |  |  |
U.K. | $ | (5 | ) |  | $ | 59 |  |  | $ | (39 | )
U.S. federal | 12 |  |  | (110 | ) |  | (94 | )
U.S. state and local | (35 | ) |  | (9 | ) |  | (4 | )
Other | 10 |  |  | (40 | ) |  | (29 | )
Total deferred tax benefit | $ | (18 | ) |  | $ | (100 | ) |  | $ | (166 | )
Total income tax expense | $ | 250 |  |  | $ | 148 |  |  | $ | 175 |
Income before income taxes shown above is based on the location of the business unit to which such earnings are attributable for tax purposes. In addition, because the earnings shown above may, in some cases, be subject to taxation in more than one country, the income tax provision shown above as U.K., U.S. or Other may not correspond to the geographic attribution of the earnings. The Company performs a reconciliation of the income tax provisions based on its domicile and statutory rate at each reporting period. The 2017, 2016, and 2015 reconciliations are based on the U.K. statutory corporate tax rate of 19.3%, 20.0%, and 20.3%, respectively. The reconciliation to the provisions from continuing operations reflected in the Consolidated Financial Statements is as follows:
Years ended December 31 | 2017 |  | 2016 |  | 2015
Statutory tax rate | 19.3% |  | 20.0% |  | 20.3%
U.S. state income taxes, net of U.S. federal benefit | (1.5) |  | 0.4 |  | 0.1
Taxes on international operations (1) | (30.3) |  | (12.2) |  | (8.8)
Nondeductible expenses | 3.4 |  | 1.4 |  | 2.5
Adjustments to prior year tax requirements | 2.0 |  | (1.2) |  | (1.5)
Adjustments to valuation allowances | (1.8) |  | (2.2) |  | (1.4)
Change in uncertain tax positions | 1.6 |  | 3.2 |  | 1.4
Excess tax benefits related to shared based compensation (2) | (8.0) |  | — |  | —
U.S. Tax Reform impact (3) | 51.2 |  | — |  | —
Other — net | 0.6 |  | 1.2 |  | (0.3)
Effective tax rate | 36.5% |  | 10.6% |  | 12.3%
(1) | The Company determines the adjustment for taxes on international operations based on the difference between the statutory tax rate applicable to earnings in each foreign jurisdiction and the enacted rate of 19.3%, 20.0% and 20.3% at December 31, 2017, 2016, and 2015, respectively. The benefit to the Company’s effective income tax rate from taxes on international operations relates to benefits from lower-taxed global operations, primarily due to the use of global funding structures. Restructuring charges and the impairment and amortization of tradenames, primarily in the U.S., were the significant drivers of the change from 2016 to 2017.
(2) | With the adoption of ASU 2016-09 in 2017, excess tax benefits and deficiencies from share-based payment transactions are recognized as income tax expense or benefit in the Company’s Consolidated Statements of Income. Refer to Note 2 “Summary of Significant Accounting Principles and Practices” for additional details.
(3) | Due to the Tax Reform Act, provisional estimates were accrued as of December 31, 2017 for the Transition Tax and the re-measurement of U.S. deferred tax assets and liabilities from 35% to 21%.
For the tax impact of discontinued operations, see Note 4. The components of the Company’s deferred tax assets and liabilities are as follows (in millions):
As of December 31 | 2017 |  | 2016
Deferred tax assets: |  |  |
Employee benefit plans | $ | 424 |  |  | $ | 661 |
Net operating/capital loss and tax credit carryforwards | 362 |  |  | 398 |
Other accrued expenses | 65 |  |  | 102 |
Investment basis differences | 35 |  |  | 48 |
Deferred revenue | 20 |  |  | 57 |
Tradename Liability | 12 |  |  | — |
Lease and Service Guarantees | 6 |  |  | — |
Brokerage fee arrangements | 4 |  |  | 66 |
Accrued Interest | 1 |  |  | 166 |
Other | 48 |  |  | 60 |
Total | 977 |  |  | 1,558 |
Valuation allowance on deferred tax assets | (136 | ) |  | (130 | )
Total | $ | 841 |  |  | $ | 1,428 |
Deferred tax liabilities: |  |  |
Intangibles and property, plant and equipment | $ | (436 | ) |  | $ | (978 | )
Unremitted earnings | (39 | ) |  | (29 | )
Deferred costs | (32 | ) |  | (20 | )
Unrealized foreign exchange gains | (22 | ) |  | (26 | )
Other accrued expenses | (12 | ) |  | (101 | )
Other | (38 | ) |  | (50 | )
Total | $ | (579 | ) |  | $ | (1,204 | )
Net deferred tax asset | $ | 262 |  |  | $ | 224 |
Deferred income taxes (assets and liabilities have been netted by jurisdiction) have been classified in the Consolidated Statements of Financial Position as follows (in millions):
As of December 31 | 2017 |  | 2016
Deferred tax assets — non-current | $ | 389 |  |  | $ | 325 |
Deferred tax liabilities — non-current | (127 | ) |  | (101 | )
Net deferred tax asset | $ | 262 |  |  | $ | 224 |
Valuation allowances have been established primarily with regard to the tax benefits of certain net operating loss and capital loss carryforwards. Valuation allowances increased by $6 million as of December 31, 2017, when compared to December 31, 2016. The change is primarily attributable to a capital loss generated by the liquidation of an entity which required a valuation allowance offset by the release of certain valuation allowances. As a result of the deemed mandatory repatriation provisions in the Tax Reform Act, the Company included an estimated $3.2 billion of undistributed earnings from foreign subsidiaries in income subject to U.S. tax at reduced tax rates. The Company intends to limit distributions to earnings previously taxed in the U.S. or to earnings that would qualify for the 100% dividends received deduction provided for in the Tax Reform Act. As of December 31, 2017, the Company has accrued a provisional estimate of $39 million for local country income and withholding taxes on those undistributed earnings that are not permanently reinvested. The Company had the following operating and capital loss carryforwards (in millions):
As of December 31 | 2017 |  | 2016
U.K. |  |  |
Operating loss carryforwards | $ | 675 |  |  | $ | 325 |
Capital loss carryforwards | 415 |  |  | 294 |
U.S. |  |  |
Federal operating loss carryforwards | $ | 36 |  |  | $ | 193 |
State operating loss carryforwards | 412 |  |  | 474 |
Other Non-US |  |  |
Operating loss carryforwards | $ | 392 |  |  | $ | 350 |
Capital loss carryforwards | 232 |  |  | 218 |
The U.K. operating losses and capital losses have an indefinite carryforward. The federal operating loss carryforwards as of December 31, 2017 expire at various dates from 2020 to 2036 and the state operating losses as of December 31, 2017 expire at various dates from 2018 to 2036. Operating and capital losses in other non-US jurisdictions have various carryforward periods and will begin to expire in 2019. During 2012, the Company was granted a tax holiday for the period from October 1, 2012 through September 30, 2022, with respect to withholding taxes and certain income derived from services in Singapore. This tax holiday and reduced withholding tax rate may be extended when certain conditions are met or may be terminated early if certain conditions are not met. The benefit realized was approximately $45 million, $46 million, and $23 million during the years ended December 31, 2017, 2016, and 2015, respectively. The impact of this tax holiday on diluted earnings per share was $0.17, $0.17, and $0.08 during the years ended December 31, 2017, 2016, and 2015, respectively. Uncertain Tax Positions The following is a reconciliation of the Company’s beginning and ending amount of uncertain tax positions (in millions):
| 2017 |  | 2016
Balance at January 1 | $ | 278 |  |  | $ | 238 |
Additions based on tax positions related to the current year | 25 |  |  | 36 |
Additions for tax positions of prior years | 12 |  |  | 20 |
Reductions for tax positions of prior years | (26 | ) |  | (12 | )
Settlements | (6 | ) |  | — |
Business combinations | — |  |  | 2 |
Lapse of statute of limitations | (7 | ) |  | (5 | )
Foreign currency translation | 4 |  |  | (1 | )
Balance at December 31 | $ | 280 |  |  | $ | 278 |
The Company’s liability for uncertain tax positions as of December 31, 2017, 2016, and 2015, includes $219 million, $240 million, and $200 million, respectively, related to amounts that would impact the effective tax rate if recognized. It is possible that the amount of unrecognized tax benefits may change in the next twelve months; however, the Company does not expect the change to have a significant impact on its consolidated statements of income or consolidated balance sheets. These changes may be the result of settlements of ongoing audits. At this time, an estimate of the range of the reasonably possible outcomes within the twelve months cannot be made. The Company recognizes interest and penalties related to uncertain tax positions in its provision for income taxes. The Company accrued potential interest and penalties of $11 million, $15 million, and $2 million in 2017, 2016, and 2015, respectively. The Company recorded a liability for interest and penalties of $55 million, $48 million, and $33 million as of December 31, 2017, 2016, and 2015, respectively. The Company and its subsidiaries file income tax returns in their respective jurisdictions. The Company has substantially concluded all U.S. federal income tax matters for years through 2007. Material U.S. state and local income tax jurisdiction examinations have been concluded for years through 2005. The Company has concluded income tax examinations in its primary non-U.S. jurisdictions through 2005.

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- Definition The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -URI http://asc.fasb.org/topic&trid=2144680 + Details
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