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Income Taxes | 12 Months Ended
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Dec. 31, 2019
Income Tax Disclosure [Abstract] |
Income Taxes | Income Taxes U.S. and foreign income before taxes are set forth below:
|  | 2019 |  | 2018 |  | 2017
U.S. |  | $ | 466 |  |  | $ | 726 |  |  | $ | 662 |
Foreign |  | 907 |  |  | 1,113 |  |  | 1,612 |
|  | $ | 1,373 |  |  | $ | 1,839 |  |  | $ | 2,274 |
The details of our income tax provision (benefit) are set forth below:
|  |  |  | 2019 |  | 2018 |  | 2017
Current: |  | Federal |  | $ | 129 |  |  | $ | 102 |  |  | $ | (2 | )
|  | Foreign |  | 166 |  |  | 181 |  |  | 290 |
|  | State |  | 16 |  |  | 25 |  |  | 12 |
|  |  |  | $ | 311 |  |  | $ | 308 |  |  | $ | 300 |
Deferred: |  | Federal |  | $ | (16 | ) |  | $ | (24 | ) |  | $ | 603 |
|  | Foreign |  | (213 | ) |  | 5 |  |  | 19 |
|  | State |  | (3 | ) |  | 8 |  |  | 12 |
|  |  |  | $ | (232 | ) |  | $ | (11 | ) |  | $ | 634 |
|  |  |  | $ | 79 |  |  | $ | 297 |  |  | $ | 934 |
The reconciliation of income taxes calculated at the U.S. federal statutory rate to our effective tax rate is set forth below:
|  | 2019 |  | 2018 |  | 2017
U.S. federal statutory rate |  | 21.0 | % |  | 21.0 | % |  | 35.0 | %
State income tax, net of federal tax |  | 0.8 |  |  | 1.0 |  |  | 0.5 |
Statutory rate differential attributable to foreign operations |  | 1.6 |  |  | (12.3 | ) |  | (9.3 | )
Adjustments to reserves and prior years |  | 4.2 |  |  | 2.8 |  |  | 0.5 |
Share-based compensation |  | (4.0 | ) |  | (2.5 | ) |  | (5.1 | )
Change in valuation allowances |  | (2.6 | ) |  | 8.5 |  |  | 1.5 |
Intercompany restructuring |  | (16.1 | ) |  | — |  |  | — |
Tax Act Enactment |  | — |  |  | (1.9 | ) |  | 19.1 |
Other, net |  | 0.8 |  |  | (0.4 | ) |  | (1.1 | )
Effective income tax rate |  | 5.7 | % |  | 16.2 | % |  | 41.1 | %
Statutory rate differential attributable to foreign operations. This item includes local country taxes, withholding taxes, and shareholder-level taxes, net of foreign tax credits. In 2019, this expense included the full year impact of the global intangible low-taxed income (GILTI) provisions of the Tax Cuts and Jobs Act of 2017. In 2018, this benefit was positively impacted by approximately 8 percentage points due to a transaction resulting in the recognition of excess foreign tax credits that were fully offset by expense included in 'Change in valuation allowances'. 2017 is favorably impacted by a majority of our income being earned outside of the U.S. where tax rates were generally lower than the U.S. 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. In 2019, this item was unfavorably impacted by $31 million in reserves related to the inclusion of stock based compensation in cost sharing arrangements that was largely offset by the benefit from the utilization of foreign tax credits included in 'Change in valuation allowances' as well as $34 million in reserves related to taxes recorded associated with a prior year divestiture. This unfavorable impact was partially offset by the reversal of a $20 million reserve established in 2018 due to the favorable resolution of an income tax rate dispute in a foreign market. In 2018, this item was unfavorably impacted by the aforementioned $20 million reserve and a $19 million charge for the correction of an error associated with the tax recorded on a prior year divestiture. Share-based compensation. 2019, 2018 and 2017 includes $55 million, $47 million and $117 million, respectively, of excess tax benefit related to share-based compensation. The 2017 excess tax benefits were largely associated with deferred compensation payouts to recently retired employees. 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 and the 'Adjustments to reserves and prior years' line. In 2019, $35 million of net tax benefit was driven by a $45 million tax benefit attributable to changes in judgment regarding deferred tax assets that existed at the beginning of the year largely resulting from the utilization of foreign tax credits as discussed in 'Adjustments to reserves and prior years' sections above. This benefit was partially offset by $9 million of expense for valuation allowances recorded against deferred tax assets generated in the current year. This amount excludes a valuation allowance of $373 million which is included in the 'Intercompany Restructuring' line. In 2018, $156 million of net tax expense was driven by valuation allowances recorded against deferred tax assets generated in the current year. This expense was largely offset by a benefit related to a transaction resulting in the recognition of excess foreign tax credits in 'Statutory rate differential attributable to foreign operations'. This amount also excludes a valuation allowance release of $78 million, which is included in the 'Tax Act Enactment' 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, which is included in the 'Tax Act Enactment' line. Intercompany Restructuring. In December 2019, we completed an intercompany restructuring that resulted in the transfer of certain intellectual property rights held by wholly owned foreign subsidiaries primarily to the U.S. and the United Kingdom (UK). The intellectual property rights transferred to the UK resulted in a step up in the tax basis for UK tax purposes resulting in a deferred tax asset of $586 million. The deferred tax asset was analyzed for realizability and a valuation allowance of $366 million was established representing the portion of the deferred tax asset not likely to be realized. The recognized tax benefit of $220 million is amortizable for UK tax purposes over a twenty year period. The transfer of certain intellectual property rights to other non-UK jurisdictions resulted in the recording of deferred tax assets of $13 million and related valuation allowances of $7 million for deferred tax assets that are not likely to be realized, for a net tax benefit of $6 million. 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 foreign earnings are subject to U.S. tax. On December 22, 2017, the SEC staff issued Staff Accounting Bulletin 118 which allowed 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. As a result, we recorded a $434 million provisional estimate of the effect of the Tax Act in 2017. This expense was comprised of an estimate of our deemed repatriation tax, the remeasurement of net deferred tax assets resulting from the permanent reduction in the U.S. tax rate to 21%, and establishment of a valuation allowance on foreign tax credit carryforwards which are unlikely to be realized under the U.S. territorial tax system. In 2018, we completed the accounting for the tax effects of the enactment of the Tax Act. As a result of the Tax Act, we recorded cumulative net tax expense of $399 million ($35 million benefit in 2018 and $434 million expense in 2017). This net expense was comprised of $241 million for our deemed repatriation tax liability, $47 million related to the remeasurement of our net deferred tax assets to the 21% U.S. tax rate and $111 million to establish a valuation allowance on foreign tax credits that are unlikely to be realized under the U.S. territorial tax system. Other. This item primarily includes the net impact of permanent differences related to current year earnings as well as U.S. tax credits. In 2018 and 2017, this item was primarily driven by the favorable impact of certain international refranchising gains. Companies subject to the Global Intangible Low-Taxed Income provision (GILTI) have the option to account for the GILTI tax as a period cost if and when incurred, or to recognize deferred taxes for outside basis temporary differences expected to reverse as GILTI. The Company has elected to account for GILTI as a period cost. The details of 2019 and 2018 deferred tax assets (liabilities) are set forth below:
|  | 2019 |  | 2018
Operating losses |  | $ | 176 |  |  | $ | 180 |
Capital losses |  | 3 |  |  | 3 |
Tax credit carryforwards |  | 230 |  |  | 266 |
Employee benefits |  | 85 |  |  | 72 |
Share-based compensation |  | 55 |  |  | 62 |
Self-insured casualty claims |  | 6 |  |  | 7 |
Lease-related liabilities |  | 199 |  |  | 43 |
Various liabilities |  | 43 |  |  | 43 |
Intangible assets |  | 602 |  |  | 8 |
Property, plant and equipment |  | 21 |  |  | 19 |
Deferred income and other |  | 85 |  |  | 45 |
Gross deferred tax assets |  | 1,505 |  |  | 748 |
Deferred tax asset valuation allowances |  | (787 | ) |  | (454 | )
Net deferred tax assets |  | $ | 718 |  |  | $ | 294 |
Intangible assets, including goodwill |  | $ | (40 | ) |  | $ | (42 | )
Property, plant and equipment |  | (44 | ) |  | (33 | )
Operating lease right-of-use assets |  | (156 | ) |  | — |
Other |  | (31 | ) |  | (31 | )
Gross deferred tax liabilities |  | $ | (271 | ) |  | $ | (106 | )
Net deferred tax assets (liabilities) |  | $ | 447 |  |  | $ | 188 |
Reported in Consolidated Balance Sheets as: |  |  |  |
Deferred income taxes |  | $ | 447 |  |  | $ | 195 |
Other liabilities and deferred credits |  | — |  |  | (7 | )
|  | $ | 447 |  |  | $ | 188 |
As of December 31, 2019, we had approximately $2.9 billion of unremitted foreign retained earnings. The Tax Act imposed U.S. federal tax on all post-1986 foreign Earnings and Profits accumulated through December 31, 2017. Repatriation of earnings generated after December 31, 2017, will generally be eligible for the 100% dividends received deduction or considered a distribution of previously taxed income and, therefore, exempt from U.S. tax. Undistributed foreign earnings may still be subject to certain foreign income and withholding taxes upon repatriation. Subject to limited exceptions, 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, we have not provided taxes, including U.S. federal and state income, foreign income, or foreign withholding taxes, for the unremitted earnings that we believe are permanently invested. However, if these funds were repatriated in taxable transactions, we would be required to accrue and pay applicable income taxes (if any) and foreign withholding taxes. A determination of the deferred tax liability on this amount is not practicable due to the complexities, variables and assumptions inherent in the hypothetical calculations. At December 31, 2019, the Company has foreign operating and capital loss carryforwards of $0.4 billion, U.S. state operating loss and tax credit carryforwards of $1.1 billion, and U.S. federal tax credit carryforwards of $0.2 billion. The tax losses are being carried forward in jurisdictions where we are permitted to use losses from prior periods to reduce future taxable income. The losses and tax credits will expire as follows:
|  | Year of Expiration |  |
|  | 2020 |  | 2021-2024 |  | 2025-2038 |  | Indefinitely |  | Total
Foreign |  | $ | 10 |  |  | $ | 26 |  |  | $ | 36 |  |  | $ | 336 |  |  | $ | 408 |
U.S. state |  | 2 |  |  | 111 |  |  | 1,021 |  |  | — |  |  | 1,134 |
U.S. federal |  | — |  |  | 36 |  |  | 178 |  |  | — |  |  | 214 |
|  | $ | 12 |  |  | $ | 173 |  |  | $ | 1,235 |  |  | $ | 336 |  |  | $ | 1,756 |
Valuation allowances of $0.1 billion, $0.1 billion and $0.2 billion have been recorded against the deferred tax assets established for foreign operating loss and capital loss carryforwards, the U.S. state operating loss and tax credit carryforwards, and the U.S. federal tax credit carryforwards, respectively, that are not likely to be realized. 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 $188 million and $113 million of unrecognized tax benefits at December 31, 2019 and December 31, 2018, respectively, $8 million and $10 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:
|  | 2019 |  | 2018
Beginning of Year |  | $ | 113 |  |  | $ | 100 |
Additions on tax positions - current year |  | 84 |  |  | 19 |
Additions for tax positions - prior years |  | 54 |  |  | — |
Reductions for tax positions - prior years |  | (30 | ) |  | (5 | )
Reductions for settlements |  | (31 | ) |  | — |
Reductions due to statute expiration |  | (2 | ) |  | (1 | )
Foreign currency translation adjustment |  | — |  |  | — |
End of Year |  | $ | 188 |  |  | $ | 113 |
The Company believes it is reasonably possible that its unrecognized tax benefits as of December 31, 2019 may decrease by approximately $26 million in the next 12 months due to settlements or statute of limitations expirations. 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 and is currently under IRS examination for 2011-2015. 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, 2019 and December 31, 2018 were $26 million and $12 million, respectively. During 2019, 2018 and 2017, the company recognized a net expense of $13 million, a net benefit of $2 million and a net expense of $5 million, respectively, for interest and penalties in our Consolidated Statements of Income as components of its Income tax provision.

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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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