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INCOME TAXES | 12 Months Ended
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Dec. 31, 2019
Income Tax Disclosure [Abstract] |
INCOME TAXES | INCOME TAXES The income tax expense (benefit) for the years ended December 31, 2019, 2018 and 2017 consists of the following (in millions):
| 2019 |  | 2018 |  | 2017
Current: |  |  |  |  |
U.S. Federal | $ | 570 |  |  | $ | 89 |  |  | $ | 671 |
U.S. State and Local | 183 |  |  | 7 |  |  | 49 |
Non-U.S. | 359 |  |  | 374 |  |  | 288 |
Total Current | 1,112 |  |  | 470 |  |  | 1,008 |
Deferred: |  |  |  |  |
U.S. Federal | 255 |  |  | 668 |  |  | 1,115 |
U.S. State and Local | (93 | ) |  | 75 |  |  | 118 |
Non-U.S. | (62 | ) |  | 15 |  |  | (9 | )
Total Deferred | 100 |  |  | 758 |  |  | 1,224 |
Total Income Tax Expense | $ | 1,212 |  |  | $ | 1,228 |  |  | $ | 2,232 |
Income before income taxes includes the following components (in millions):
| 2019 |  | 2018 |  | 2017
United States | $ | 3,972 |  |  | $ | 4,307 |  |  | $ | 5,987 |
Non-U.S. | 1,680 |  |  | 1,712 |  |  | 1,150 |
Total Income Before Income Taxes: | $ | 5,652 |  |  | $ | 6,019 |  |  | $ | 7,137 |
A reconciliation of the statutory federal income tax rate to the effective income tax rate for the years ended December 31, 2019, 2018 and 2017 consists of the following:
| 2019 |  | 2018 |  | 2017
Statutory U.S. federal income tax rate | 21.0 | % |  | 21.0 | % |  | 35.0 | %
U.S. state and local income taxes (net of federal benefit) | 1.4 |  |  | 1.4 |  |  | 1.5 |
Non-U.S. tax rate differential | 0.3 |  |  | 0.2 |  |  | (2.0 | )
U.S. federal tax credits | (1.4 | ) |  | (1.1 | ) |  | (1.8 | )
Income tax benefit from the Tax Cuts and Jobs Act and other non-U.S. tax law changes | — |  |  | — |  |  | (3.6 | )
Defined benefit plans mark-to-market charge tax rate differential (1) | — |  |  | — |  |  | 1.5 |
Non-U.S. valuation allowance release | (1.2 | ) |  | — |  |  | — |
Other | 1.3 |  |  | (1.1 | ) |  | 0.7 |
Effective income tax rate | 21.4 | % |  | 20.4 | % |  | 31.3 | %
(1) Impact of applying Tax Act corporate rate enacted of 21% versus 35% Our effective tax rate is affected by recurring factors, such as statutory tax rates in the jurisdictions in which we operate and the relative amounts of taxable income we earn in those jurisdictions. It is also affected by discrete items that may occur in any given year, but may not be consistent from year to year. Our effective tax rate was 21.4% in 2019, compared with 20.4% in 2018 and 31.3% in 2017, primarily due to the effects of the aforementioned recurring factors and the following discrete tax items. Tax Cuts and Jobs Act On December 22, 2017, the United States enacted into law the Tax Act. The Tax Act made broad and complex changes to the U.S. tax code, including a permanent corporate rate reduction to 21% and a transition to a territorial international system effective in 2018. The Tax Act includes provisions that affected 2017, including: (1) requiring a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries (“Transition Tax”) that is payable over eight years; (2) requiring a remeasurement of all U.S. deferred tax assets and liabilities to the newly enacted corporate tax rate of 21% and (3) providing for additional first-year depreciation that allows full expensing of qualified property placed into service after September 27, 2017. In late December 2017, the SEC staff issued Staff Accounting Bulletin ("SAB") 118, which provided guidance on accounting for the tax effects of the Tax Act. SAB 118 provided a measurement period up to one year from the Tax Act enactment date for companies to complete the related accounting under GAAP. We recorded a $272 million provisional benefit inclusive of our Transition Tax liability, the change in our indefinite reinvestment assertion for certain foreign subsidiaries and the remeasurement of our U.S. net deferred tax liabilities for the year ended December 31, 2017. During the fourth quarter of 2018, we completed our accounting for the Tax Act based on the current regulatory guidance available at the end of the SAB 118 measurement period and recorded no material net adjustments to our provisional estimate. The Tax Act also enacted provisions that took effect in 2018 including but not limited to: (1) a provision that imposes U.S. tax on certain foreign subsidiary income known as GILTI, (2) a new deduction for Foreign-Derived Intangible Income ("FDII"), (3) additional limitations on tax deductions for expenses such as interest and executive compensation and (4) a new minimum tax based on certain payments from a U.S. company to foreign related parties known as the Base Erosion and Anti-Abuse Tax ("BEAT"). We included the impact of each of the newly effective Tax Act provisions in our computation of the 2018 and 2019 income tax expense. Throughout 2018 and 2019, the U.S. Department of the Treasury and IRS issued regulatory guidance clarifying certain provisions of the Tax Act, and we anticipate additional regulatory guidance and technical clarifications during future years. When additional guidance is issued, we will recognize the related tax impact in the quarter of enactment. 2019 Discrete Items In the fourth quarter of 2019, we recognized an income tax benefit of $571 million related to pre-tax mark-to-market losses of $2.387 billion on our pension and postretirement defined benefit plans. This income tax benefit was generated at a higher average tax rate than the 2019 U.S. federal statutory tax rate because it included the effect of U.S. state and local and foreign taxes. We recorded pre-tax transformation strategy costs of $255 million during the year ended December 31, 2019. As a result, we recorded an additional income tax benefit of $59 million. This income tax benefit was generated at a higher average tax rate than the 2019 U.S. federal statutory tax rate due to the effect of U.S. state and local and foreign taxes. As discussed in note 9, $97 million of legal contingencies and expenses were accrued during 2019 in respect of certain legal proceedings for which we recorded an additional income tax benefit of $6 million. This income tax benefit was generated at a lower average tax rate than the U.S. federal statutory tax rate due to the portion of the accrual related to penalties, which are not deductible for tax purposes. As of December 31, 2018, we maintained a valuation allowance against certain deferred tax assets, primarily related to foreign net operating loss carryforwards. As of each reporting date, we consider new evidence, both positive and negative, that could affect the future realization of deferred tax assets. During 2019, we determined that there is sufficient positive evidence to conclude that it is more likely than not that the deferred tax assets related to certain foreign net operating loss carryforwards will be realized. This conclusion is primarily related to achieving cumulative three-year income and anticipated future earnings within the relevant jurisdiction. Accordingly, we reversed the related valuation allowance and recognized a discrete tax benefit of approximately $68 million. Other factors that impacted our 2019 effective tax rate include favorable tax provisions enacted in the Taxpayer Certainty and Disaster Tax Relief Act of 2019. 2018 Discrete Items The decrease in our effective tax rate from 2017 to 2018 was primarily due to the impact of the Tax Act which reduced the U.S. federal corporate income tax rate from 35% to 21% effective January 1, 2018. In the fourth quarter of 2018, we recognized an income tax benefit of $390 million related to pre-tax mark-to-market losses of $1.627 billion on our pension and postretirement defined benefit plans. This income tax benefit was generated at a higher average tax rate than the 2018 U.S. federal statutory tax rate because it included the effect of U.S. state and local and foreign taxes. We recorded pre-tax transformation strategy costs of $360 million during the year ended December 31, 2018. As a result, we recorded an additional income tax benefit of $87 million. This income tax benefit was generated at a higher average tax rate than the 2018 U.S. federal statutory tax rate due to the effect of U.S. state and local and foreign taxes. The recognition of excess tax benefits and deficiencies related to share-based compensation in income tax expense resulted in a net tax benefit of $38 million and reduced our effective tax rate by 0.6% during the year ended December 31, 2018. Other factors that impacted our 2018 effective tax rate include favorable resolutions of uncertain tax positions, favorable U.S. state and local tax law changes, favorable tax provisions enacted in the Bipartisan Budget Act of 2018 and discrete tax credits associated with the filing of our 2017 U.S. federal income tax return. 2017 Discrete Item s In addition to the impact of the Tax Act described above, the following discrete items were recorded during the year ended December 31, 2017. In the fourth quarter of 2017, we recognized an income tax benefit of $193 million related to pre-tax mark-to-market losses of $800 million on our pension and postretirement defined benefit plans. This income tax benefit was generated at a lower average tax rate than the 2017 U.S. federal statutory tax rate due to future tax rate changes enacted by the Tax Act and differences between U.S. and foreign statutory rates, which was partially offset by the effect of U.S. state and local taxes. In the fourth quarter of 2017, tax law changes were enacted in certain non-U.S. jurisdictions in which we operate. As a result, we recorded a decrease to our foreign net deferred tax assets of $14 million with a corresponding net increase to deferred tax expense of $14 million. In the first quarter of 2017, we adopted a new accounting standard that requires the recognition of excess tax benefits related to share-based compensation in income tax expense, which resulted in tax benefits for the year ended December 31, 2017 of $71 million and reduced our effective tax rate by 1.0%. Other Items Beginning in 2012, we were granted a tax incentive for certain of our non-U.S. operations, which is effective through December 31, 2021. The tax incentive is conditional upon our meeting specific employment and investment thresholds. The impact of this tax incentive decreased non-U.S. tax expense by $27 million, $27 million and $24 million (increased diluted earnings per share by $0.03, $0.03 and $0.03) for 2019, 2018 and 2017, respectively. Deferred income tax assets and liabilities are comprised of the following at December 31, 2019 and 2018 (in millions):
| 2019 |  | 2018
Fixed assets and capitalized software | $ | (4,720 | ) |  | $ | (4,010 | )
Operating lease right-of-use assets | (685 | ) |  | — |
Other | (538 | ) |  | (493 | )
Deferred tax liabilities | (5,943 | ) |  | (4,503 | )
Pension and postretirement benefits | 2,522 |  |  | 1,743 |
Loss and credit carryforwards | 328 |  |  | 298 |
Insurance reserves | 413 |  |  | 437 |
Stock compensation | 249 |  |  | 189 |
Accrued employee compensation | 287 |  |  | 274 |
Operating lease liabilities | 691 |  |  | — |
Other | 205 |  |  | 196 |
Deferred tax assets | 4,695 |  |  | 3,137 |
Deferred tax assets valuation allowance | (54 | ) |  | (112 | )
Deferred tax asset (net of valuation allowance) | 4,641 |  |  | 3,025 |
Net deferred tax asset (liability) | $ | (1,302 | ) |  | $ | (1,478 | )
Amounts recognized in the consolidated balance sheets: |  |  |
Deferred tax assets | $ | 330 |  |  | $ | 141 |
Deferred tax liabilities | (1,632 | ) |  | (1,619 | )
Net deferred tax asset (liability) | $ | (1,302 | ) |  | $ | (1,478 | )
The valuation allowance changed by $(58), $(14) and $(33) million during the years ended December 31, 2019, 2018 and 2017, respectively. We have a U.S. federal capital loss carryforward of $21 million as of December 31, 2019, $20 million of which expires on December 31, 2021, and the remainder of which expires on December 31, 2022. In addition, we have U.S. federal tax credit carryforwards of $3 million, which can be carried forward for periods ranging from ten years to twenty years. Further, we have U.S. state and local operating loss and credit carryforwards as follows (in millions):
| 2019 |  | 2018
U.S. state and local operating loss carryforwards | $ | 1,374 |  |  | $ | 1,014 |
U.S. state and local credit carryforwards | $ | 110 |  |  | $ | 80 |
The U.S. state and local operating loss carryforwards and credits can be carried forward for periods ranging from one year to indefinitely. We also have non-U.S. loss carryforwards of $670 million as of December 31, 2019, the majority of which may be carried forward indefinitely. As indicated in the table above, we have established a valuation allowance for certain U.S. federal, state and non-U.S. carryforwards due to the uncertainty resulting from a lack of previous taxable income within the applicable tax jurisdictions and other limitations. Undistributed earnings and profits ("E&P") of our foreign subsidiaries amounted to $6.060 billion at December 31, 2019. As a result of the Tax Act, during the year ended December 31, 2017, we changed our indefinite reinvestment assertion with respect to the earnings of certain foreign subsidiaries. For all other foreign subsidiaries, we continue to assert that these earnings are indefinitely reinvested. $1.597 billion of the undistributed E&P of our foreign subsidiaries is considered to be indefinitely reinvested and, accordingly, no deferred income taxes have been provided thereon. Upon distribution of those earnings in the form of dividends or otherwise, we would be subject to U.S. state and local taxes and withholding taxes payable in various jurisdictions. Determination of the amount of unrecognized deferred income tax liability is not practicable because of the complexities associated with its hypothetical calculation. The following table summarizes the activity related to our uncertain tax positions (in millions):
| Tax |  | Interest |  | Penalties
Balance at January 1, 2017 | $ | 144 |  |  | $ | 50 |  |  | $ | 6 |
Additions for tax positions of the current year | 16 |  |  | — |  |  | — |
Additions for tax positions of prior years | 33 |  |  | 14 |  |  | 3 |
Reductions for tax positions of prior years for: |  |  |  |  |
Changes based on facts and circumstances | (24 | ) |  | (18 | ) |  | — |
Settlements during the period | (6 | ) |  | (3 | ) |  | — |
Lapses of applicable statute of limitations | (3 | ) |  | — |  |  | — |
Balance at December 31, 2017 | 160 |  |  | 43 |  |  | 9 |
Additions for tax positions of the current year | 47 |  |  | — |  |  | 1 |
Additions for tax positions of prior years | 7 |  |  | 10 |  |  | — |
Reductions for tax positions of prior years for: |  |  |  |  |
Changes based on facts and circumstances | (43 | ) |  | (8 | ) |  | (5 | )
Settlements during the period | (1 | ) |  | (1 | ) |  | — |
Lapses of applicable statute of limitations | (3 | ) |  | — |  |  | — |
Balance at December 31, 2018 | 167 |  |  | 44 |  |  | 5 |
Additions for tax positions of the current year | 6 |  |  | — |  |  | — |
Additions for tax positions of prior years | 51 |  |  | 13 |  |  | — |
Reductions for tax positions of prior years for: |  |  |  |  |
Changes based on facts and circumstances | (45 | ) |  | (4 | ) |  | (1 | )
Settlements during the period | (3 | ) |  | (1 | ) |  | — |
Lapses of applicable statute of limitations | (4 | ) |  | — |  |  | — |
Balance at December 31, 2019 | $ | 172 |  |  | $ | 52 |  |  | $ | 4 |
The total amount of gross uncertain tax positions as of December 31, 2019, 2018 and 2017 that, if recognized, would affect the effective tax rate was $171, $165 and $159 million, respectively. Our continuing policy is to recognize interest and penalties associated with income tax matters as a component of income tax expense. We file income tax returns in the U.S. federal jurisdiction, most U.S. state and local jurisdictions, and many non-U.S. jurisdictions. We have substantially resolved all U.S. federal income tax matters for tax years prior to 2015. A number of years may elapse before an uncertain tax position is audited and ultimately settled. It is difficult to predict the ultimate outcome or the timing of resolution for uncertain tax positions. It is reasonably possible that the liability for uncertain tax positions could significantly increase or decrease within the next twelve months. Items that may cause changes to uncertain tax positions include the timing of interest deductions and the allocation of income and expense between tax jurisdictions. These changes could result from the settlement of ongoing litigation, the completion of ongoing examinations, the expiration of the statute of limitations, additional regulatory guidance on the Tax Act or other unforeseen circumstances. At this time, an estimate of the range of the reasonably possible change cannot be made.

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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://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -URI http://asc.fasb.org/topic&trid=2144680 + Details
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