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Income Taxes | 12 Months Ended
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Dec. 31, 2017
Income Tax Disclosure [Abstract] |
Income Taxes | Income Taxes U.S. and foreign income before taxes are set forth below:
|  | 2017 |  | 2016 |  | 2015
U.S. |  | $ | 662 |  |  | $ | 366 |  |  | $ | 480 |
Foreign |  | 1,612 |  |  | 979 |  |  | 773 |
|  | $ | 2,274 |  |  | $ | 1,345 |  |  | $ | 1,253 |
The details of our income tax provision (benefit) are set forth below:
|  |  |  | 2017 |  | 2016 |  | 2015
Current: |  | Federal |  | $ | (2 | ) |  | $ | 126 |  |  | $ | 267 |
|  | Foreign |  | 290 |  |  | 160 |  |  | 133 |
|  | State |  | 12 |  |  | 13 |  |  | 28 |
|  |  |  | $ | 300 |  |  | $ | 299 |  |  | 428 |
Deferred: |  | Federal |  | $ | 603 |  |  | $ | 19 |  |  | (116 | )
|  | Foreign |  | 19 |  |  | 3 |  |  | 15 |
|  | State |  | 12 |  |  | 6 |  |  | — |
|  |  |  | $ | 634 |  |  | $ | 28 |  |  | $ | (101 | )
|  |  |  | $ | 934 |  |  | $ | 327 |  |  | $ | 327 |
The reconciliation of income taxes calculated at the U.S. federal statutory rate to our effective tax rate is set forth below:
|  | 2017 |  | 2016 |  | 2015
U.S. federal statutory rate |  | $ | 797 |  |  | 35.0 | % |  | $ | 473 |  |  | 35.0 | % |  | $ | 438 |  |  | 35.0 | %
State income tax, net of federal tax benefit |  | 11 |  |  | 0.5 |  |  | 15 |  |  | 1.1 |  |  | 12 |  |  | 0.9 |
Statutory rate differential attributable to foreign operations |  | (212 | ) |  | (9.3 | ) |  | (143 | ) |  | (10.5 | ) |  | (175 | ) |  | (13.7 | )
Adjustments to reserves and prior years |  | 12 |  |  | 0.5 |  |  | (11 | ) |  | (0.8 | ) |  | 13 |  |  | 1.0 |
Share-based payments |  | (117 | ) |  | (5.1 | ) |  | — |  |  | — |  |  | — |  |  | — |
Change in valuation allowances |  | 34 |  |  | 1.5 |  |  | (3 | ) |  | (0.2 | ) |  | 41 |  |  | 3.0 |
Other, net |  | (25 | ) |  | (1.1 | ) |  | (4 | ) |  | (0.3 | ) |  | (2 | ) |  | (0.1 | )
Tax Act Enactment |  | 434 |  |  | 19.1 |  |  | — |  |  | — |  |  | — |  |  | — |
Effective income tax rate |  | $ | 934 |  |  | 41.1 | % |  | $ | 327 |  |  | 24.3 | % |  | $ | 327 |  |  | 26.1 | %
Statutory rate differential attributable to foreign operations. This item includes local taxes, withholding taxes, and shareholder-level taxes, net of foreign tax credits. The favorable impact is primarily attributable to a majority of our income being earned outside of the U.S. where tax rates are generally lower than the U.S. rate. In 2015, this benefit was positively impacted by the repatriation of current year foreign earnings as we recognized excess foreign tax credits, resulting from the related effective foreign tax rate being higher than the U.S. federal statutory rate. Adjustments to reserves and prior years. This item includes: (1) changes in tax reserves, including interest thereon, established for potential exposure we may incur if a taxing authority takes a position on a matter contrary to our position; and (2) the effects of reconciling income tax amounts recorded in our Consolidated Statements of Income to amounts reflected on our tax returns, including any adjustments to the Consolidated Balance Sheets. The impact of certain effects or changes may offset items reflected in the 'Statutory rate differential attributable to foreign operations' line. In 2016, this item was favorably impacted by the resolution of uncertain tax positions in the U.S. Share-based payments. 2017 includes a $117 million tax benefit related to the excess tax benefits from share-based payments. These excess benefits were largely associated with deferred compensation payouts to recently retired employees. See Note 2 for discussion related to the adoption of a new accounting standard for share based payments in 2017. Change in valuation allowances. This item relates to changes for deferred tax assets generated or utilized during the current year and changes in our judgment regarding the likelihood of using deferred tax assets that existed at the beginning of the year. The impact of certain changes may offset items reflected in the 'Statutory rate differential attributable to foreign operations' line. In 2017, $34 million of net tax expense was driven by valuation allowances recorded against deferred tax assets generated in the current year. This amount excludes a valuation allowance of $189 million related to the Tax Act. In 2016, $3 million of net tax benefit was driven by $14 million in net tax expense for valuation allowances recorded against deferred tax assets generated in the current year and $17 million in net tax benefit for valuation allowances resulting from a change in judgment regarding the future use of certain deferred tax assets that existed at the beginning of the year. In 2015, $41 million of net tax expense was driven by $17 million for valuation allowances recorded against deferred tax assets generated in the current year and $24 million in net tax expense resulting from a change in judgment regarding the future use of certain deferred tax assets that existed at the beginning of the year. Other. This item primarily includes the impact of permanent differences related to current year earnings as well as U.S. tax credits and deductions. In 2017, this item was primarily driven by the favorable impact of certain international refranchising gains. Tax Act Enactment. On December 22, 2017, the U.S. government enacted comprehensive Federal tax legislation commonly referred to as the Tax Cuts and Jobs Act of 2017 (the "Tax Act"). The Tax Act significantly modifies the U.S. corporate income tax system by, among other things, reducing the federal income tax rate from 35% to 21%, limiting certain deductions, including limiting the deductibility of interest expense to 30% of U.S. Earnings Before Interest, Taxes, Depreciation and Amortization, imposing a mandatory one-time deemed repatriation tax on accumulated foreign earnings and creating a territorial tax system that changes the manner in which future foreign earnings are subject to U.S. tax. On December 22, 2017, the SEC staff issued Staff Accounting Bulletin 118 that allows us to record provisional amounts related to the impacts of the Tax Act during a measurement period not to extend beyond one year of the enactment date. We currently are analyzing the Tax Act and have made reasonable estimates of the effects on our Consolidated Financial Statements and tax disclosures, including the amount of the deemed repatriation tax and changes to our existing deferred tax balances. The deemed repatriation tax is based on our accumulated foreign earnings and profits that we previously deferred from U.S. income taxes. We recorded an estimated amount for our repatriation tax liability of $170 million as of December 31, 2017. In addition, we remeasured certain net deferred tax assets and liabilities based on the tax rates at which they are expected to reverse in the future. The estimated amount recorded related to the remeasurement of these balances was a net expense of $75 million. Lastly, we recorded a valuation allowance of $189 million on our remaining foreign tax credit carryforwards which are unlikely to be realized under the U.S. territorial tax system. The estimated total impact upon enactment of the Tax Act is $434 million. We consider the key estimates on the deemed repatriation tax, net deferred tax remeasurement and the impact on our foreign tax credit carryforwards to be incomplete due to our continuing analysis of final year-end data and tax positions. Our analysis could affect the measurement of these balances and give rise to new deferred and other tax assets and liabilities. Since the Tax Act was passed late in the fourth quarter of 2017, and further guidance and accounting interpretation is expected over the next 12 months, our review is still pending. We expect to complete our analysis of the amounts recorded upon enactment of the Tax Act within the measurement period of one year. The details of 2017 and 2016 deferred tax assets (liabilities) are set forth below:
|  | 2017 |  | 2016
Operating losses |  | $ | 216 |  |  | $ | 172 |
Capital losses |  | 4 |  |  | 184 |
Tax credit carryforwards |  | 311 |  |  | 284 |
Employee benefits |  | 94 |  |  | 185 |
Share-based compensation |  | 58 |  |  | 100 |
Self-insured casualty claims |  | 7 |  |  | 32 |
Lease-related liabilities |  | 51 |  |  | 65 |
Various liabilities |  | 51 |  |  | 56 |
Property, plant and equipment |  | 24 |  |  | 37 |
Deferred income and other |  | 31 |  |  | 32 |
Gross deferred tax assets |  | 847 |  |  | 1,147 |
Deferred tax asset valuation allowances |  | (421 | ) |  | (195 | )
Net deferred tax assets |  | $ | 426 |  |  | $ | 952 |
Intangible assets, including goodwill |  | $ | (69 | ) |  | $ | (107 | )
Property, plant and equipment |  | (18 | ) |  | (46 | )
Deemed repatriation tax |  | (170 | ) |  | — |
Other |  | (36 | ) |  | (34 | )
Gross deferred tax liabilities |  | $ | (293 | ) |  | $ | (187 | )
Net deferred tax assets (liabilities) |  | $ | 133 |  |  | $ | 765 |
Reported in Consolidated Balance Sheets as: |  |  |  |
Deferred income taxes |  | $ | 139 |  |  | $ | 772 |
Other liabilities and deferred credits |  | (6 | ) |  | (7 | )
|  | $ | 133 |  |  | $ | 765 |
As of December 31, 2017, we had approximately $3.2 billion of unremitted foreign earnings. We have historically reinvested all the unremitted earnings of our foreign subsidiaries and affiliates, and therefore have not recognized any U.S. deferred tax liability on these earnings. However, upon the enactment of the Tax Act, the unremitted earnings of our foreign subsidiaries and affiliates are subject to U.S. tax due to the mandatory deemed repatriation tax on accumulated foreign earnings provision. As a result, we recognized a one-time income tax expense of $170 million. Our intent is to indefinitely reinvest our unremitted earnings outside the U.S. and our current plans do not demonstrate a need to repatriate these amounts to fund our U.S. operations. Thus, for our investments in foreign subsidiaries where the carrying values for financial reporting exceed the tax basis, we have not provided taxes, other than U.S. federal taxes, for the portion of the excess that we believe is permanently invested, as we have the ability and intent to indefinitely postpone these basis differences from reversing with a tax consequence. However, if these funds were repatriated, we would be required to accrue and pay applicable income taxes (if any) and withholding taxes payable to various countries. A determination of the deferred tax liability on this amount is not practicable. At December 31, 2017, the Company has foreign operating and capital loss carryforwards of $0.5 billion and U.S. state operating loss and tax credit carryforwards of $1.1 billion and U.S. federal tax credit carryforwards of $0.3 billion. A valuation allowance of $434 million has been recorded against the carryforwards that are not likely to be realized. These losses are being carried forward in jurisdictions where we are permitted to use tax losses from prior periods to reduce future taxable income and will expire as follows:
|  | Year of Expiration |  |
|  | 2018 |  | 2019-2022 |  | 2023-2036 |  | Indefinitely |  | Total
Foreign |  | $ | 9 |  |  | $ | 46 |  |  | $ | 85 |  |  | $ | 376 |  |  | $ | 516 |
U.S. state |  | — |  |  | 61 |  |  | 1,012 |  |  | — |  |  | 1,073 |
U.S. federal |  | — |  |  | 67 |  |  | 238 |  |  | — |  |  | 305 |
|  | $ | 9 |  |  | $ | 174 |  |  | $ | 1,335 |  |  | $ | 376 |  |  | $ | 1,894 |
We recognize the benefit of positions taken or expected to be taken in tax returns in the Consolidated Financial Statements when it is more likely than not that the position would be sustained upon examination by tax authorities. A recognized tax position is measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon settlement. The Company had $100 million and $91 million of unrecognized tax benefits at December 31, 2017 and December 31, 2016, respectively, $10 million and $87 million of which are temporary in nature and if recognized, would not impact the effective income tax rate. A reconciliation of the beginning and ending amount of unrecognized tax benefits follows:
|  | 2017 |  | 2016
Beginning of Year |  | $ | 91 |  |  | $ | 98 |
Additions on tax positions - current year |  | 3 |  |  | — |
Additions for tax positions - prior years |  | 8 |  |  | 1 |
Reductions for tax positions - prior years |  | — |  |  | (5 | )
Reductions for settlements |  | (1 | ) |  | (1 | )
Reductions due to statute expiration |  | (1 | ) |  | (2 | )
Foreign currency translation adjustment |  | — |  |  | — |
End of Year |  | $ | 100 |  |  | $ | 91 |
The Company believes its unrecognized tax benefits will not materially increase or decrease in the next 12 months. The Company’s income tax returns are subject to examination in the U.S. federal jurisdiction and numerous U.S. state and foreign jurisdictions. The Company has settled audits with the IRS through fiscal year 2010. Our operations in certain foreign jurisdictions remain subject to examination for tax years as far back as 2006, some of which years are currently under audit by local tax authorities. The accrued interest and penalties related to income taxes at December 31, 2017 and December 31, 2016 are set forth below:
|  | 2017 |  | 2016
Accrued interest and penalties |  | $ | 14 |  |  | $ | 9 |
During 2017, 2016 and 2015, a net expense of $5 million, a net benefit of $4 million and a net expense of $5 million, respectively, for interest and penalties was recognized in our Consolidated Statements of Income as components of its Income tax provision. In October 2016, the Company completed the separation of its China business into an independent publicly-traded company. The transaction has been treated as qualifying as a tax-free reorganization for U.S. income tax purposes. In addition, the Company considered the China indirect income tax on indirect transfers of assets by nonresident enterprises and concluded that it does not apply to the separation transaction.

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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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