INCOME TAXES

On December 22, 2017, President Trump signed into law the Tax Act. The Tax Act includes significant changes to the U.S. tax code that affected our fiscal year ended September 29, 2018 and will affect future periods. Changes include, but are not limited to, (1) reducing the corporate federal income tax rate from 35% to 21%, (2) bonus depreciation that allows for full expensing of qualified property in the year placed in service and (3) a general elimination of U.S. federal income taxes on dividends from foreign subsidiaries. Section 15 of the Internal Revenue Code (the "Code") stipulates that our fiscal year ended September 29, 2018, has a blended corporate tax rate of 24.5%, which is based on the applicable tax rates before and after the Tax Act and the number of days in the year. Additionally, the Tax Act includes the repeal of the domestic production activity deduction, a new provision designed to tax global intangible low-taxed income ("GILTI"), a new provision which allows a deduction for foreign-derived intangible income ("FDII"), and a new provision which institutes a base erosion and anti-abuse tax ("BEAT"), beginning with our fiscal year 2019. We are still evaluating these new international provisions; however, we do not expect them to have a material impact to our financial statements.

Changes in the Code from the Tax Act had a material impact on our financial statements in fiscal 2018. Under generally accepted accounting principles ("U.S. GAAP"), specifically ASC Topic 740, Income Taxes, the tax effects of changes in tax laws must be recognized in the period in which the law is enacted, or December 22, 2017, for the Tax Act. ASC 740 also requires deferred tax assets and liabilities to be measured at the enacted tax rate expected to apply when temporary differences are to be realized or settled. Thus, at the date of enactment, the Company’s deferred taxes were remeasured based upon the new tax rates. The change in deferred taxes was recorded as an adjustment to our deferred tax provision.

The staff of the U.S. Securities and Exchange Commission recognized the complexity of reflecting the impacts of the Tax Act and issued guidance in Staff Accounting Bulletin 118 ("SAB 118"), which clarifies accounting for income taxes under ASC 740 if information is not yet available or complete and provides for up to a one year period in which to complete the required analyses and accounting (the "measurement period"). SAB 118 describes three scenarios (or "buckets") associated with a company’s status of accounting for income tax reform: (1) a company is complete with its accounting for certain effects of tax reform, (2) a company is able to determine a reasonable estimate for certain effects of tax reform and records that estimate as a provisional amount, or (3) a company is not able to determine a reasonable estimate and therefore continues to apply ASC 740, based on the provisions of the tax laws that were in effect immediately prior to the Tax Act being enacted. The FASB also issued guidance that essentially adopts the SEC guidance (see Note 2: Changes in Accounting Principles).

Transition Tax: The Tax Act requires a one-time Deemed Repatriation Transition Tax on previously untaxed net accumulated and current earnings and profits of our foreign subsidiaries. Based on our analysis of our foreign earnings and profits, net of deficits and foreign tax credits, no transition tax is due for the Company. Our accounting for this element of the Tax Act is complete.

Corporate Tax Rate Reduction: The Tax Act reduced the corporate tax rate from 35% to 21%, effective January 1, 2018. This results in a blended corporate tax rate of 24.5% in fiscal year 2018 and 21% thereafter. We analyzed our domestic deferred tax balances to estimate which of those balances were expected to reverse in fiscal 2018 or thereafter, and we remeasured the deferred taxes at 24.5% or 21% accordingly. In fiscal 2018, we recorded a discrete net deferred income tax benefit of $1,004 million with a corresponding provisional reduction to our net deferred income tax liability. Our accounting for this element of the Tax Act is incomplete; however, we were able to make reasonable estimates of the effects, and therefore, recorded the provisional adjustment. Remeasurement may continue to change as we receive additional information about the timing of deferred income tax reversals; however, we do not expect any additional changes to be material.

GILTI: The Tax Act created a new requirement in tax years beginning after December 31, 2017 (our fiscal 2019) that certain income (i.e., GILTI) earned by controlled foreign corporations ("CFCs") must be included currently in the gross income of the CFCs’ U.S. shareholder. Under U.S. GAAP, we are allowed to make an accounting policy choice of either (1) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred (the “period cost method”) or (2) factoring such amounts into a company’s measurement of its deferred taxes (the “deferred method”). We have elected to account for the tax using the period cost method and have, therefore, not recorded any adjustments in our fiscal 2018 financial statements. Our accounting for this component of tax reform is incomplete; however, based upon our initial analysis, the GILTI tax is not expected to have a material impact on our financial statements.

The changes included in the Tax Act are broad and complex. The final transition impacts of the Tax Act may differ from the above estimates due to, among other things, changes in interpretations of the Tax Act, any legislative action to address questions that arise because of the Tax Act, any changes in accounting standards for income taxes or related interpretations in response to the Tax Act, or any updates or changes to estimates the Company has utilized to calculate the impacts.

Detail of the provision for income taxes from continuing operations consists of the following:



							in millions
	2018			2017			2016
Federal	$	(426	)	$	755		$	710
State	118			81			118
Foreign	26			14			(2		)
	$	(282	)	$	850		$	826

Current	$	583		$	889		$	742
Deferred	(865		)	(39		)	84
	$	(282	)	$	850		$	826

The reasons for the difference between the statutory federal income tax rate and our effective income tax rate from continuing operations are as follows:



	2018		2017		2016
Federal income tax rate	24.5	%	35.0	%	35.0	%
State income taxes	3.3		2.3		2.7
Domestic production deduction	(1.7	)	(3.1	)	(2.6	)
Impairment and sale of non-protein businesses	3.1		—		—
Impact of the Tax Act	(37.9	)	—		—
Other	(1.6	)	(1.9	)	(3.3	)
	(10.3	)%	32.3	%	31.8	%

During fiscal 2018, the domestic production deduction decreased tax expense by $46 million, and state tax expense, net of federal tax benefit, was $90 million. The change in federal tax rate from the Tax Act resulted in a tax benefit of $1,004 million related to deferred tax remeasurement. Additionally, current year favorable timing differences currently deductible at the 24.5% blended tax rate but reversing in future years at 21% resulted in a $35 million tax benefit. The impacts of the non-deductible impairment and sale of certain assets in our non-protein businesses increased the effective tax rate by 3.1%.

During fiscal 2017, the domestic production deduction decreased tax expense by $80 million, and state tax expense, net of federal tax benefit, was $61 million.

During fiscal 2016, the domestic production deduction decreased tax expense by $68 million, and state tax expense, net of federal tax benefit, was $70 million.

Approximately $2,700 million, $2,603 million and $2,543 million of income from continuing operations before income taxes for fiscal 2018, 2017 and 2016, respectively, were from our operations based in the United States.

We recognize deferred income taxes for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

The fiscal 2018 deferred tax liability includes the effects of the Tax Act, including remeasurement of deferred taxes and bonus depreciation. The tax effects of major items recorded as deferred tax assets and liabilities as of September 29, 2018, and September 30, 2017, are as follows:



									in millions
	2018					2017
	Deferred Tax					Deferred Tax
	Assets			Liabilities		Assets			Liabilities
Property, plant and equipment	$	—		$	714	$	—		$	900
Intangible assets	—			1,533		—			2,424
Accrued expenses	230			—		400			—
Net operating loss and other carryforwards	92			—		97			—
Other	98			193		204			273
	$	420		$	2,440	$	701		$	3,597
Valuation allowance	$	(79	)			$	(75	)
Net deferred tax liability				$	2,099				$	2,971

At September 29, 2018, our gross state tax net operating loss carryforwards approximated $662 million and expire in fiscal years 2019 through 2038. Gross foreign net operating loss carryforwards approximated $46 million, of which $41 million expire in fiscal years 2019 through 2028, and the remainder has no expiration. We also have tax credit carryforwards of approximately $47 million, of which $43 million expire in fiscal years 2019 through 2031, and the remainder has no expiration.

We have accumulated undistributed earnings of foreign subsidiaries aggregating approximately $210 million and $182 million at September 29, 2018, and September 30, 2017, respectively. The Tax Act generally eliminates U.S. federal income taxes on dividends from foreign subsidiaries after December 31, 2017. As a result, our intention is that excess cash held by our foreign subsidiaries that is not subject to regulatory restrictions is expected to be repatriated net of applicable withholding taxes which are expected to be immaterial. The remainder of accumulated undistributed earnings are expected to be indefinitely reinvested outside of the United States. If these earnings were distributed in the form of dividends or otherwise, we could be subject to state income taxes and withholding taxes payable to various foreign countries. Due to the uncertainty of the manner in which the undistributed earnings would be brought back to the United States and the tax laws in effect at that time, it is not currently practicable to estimate the tax liability that might be payable on the repatriation of these foreign earnings.

The following table summarizes the activity related to our gross unrecognized tax benefits at September 29, 2018, September 30, 2017, and October 1, 2016:



							in millions
	2018			2017			2016
Balance as of the beginning of the year	$	316		$	305		$	306
Increases related to current year tax positions	19			38			35
Increases related to prior year tax positions	8			5			31
Increase related to AdvancePierre acquisition	—			9			—
Reductions related to prior year tax positions	(18		)	(27		)	(48		)
Reductions related to settlements	(8		)	(4		)	(7		)
Reductions related to expirations of statutes of limitations	(9		)	(10		)	(12		)
Balance as of the end of the year	$	308		$	316		$	305

The amount of unrecognized tax benefits, if recognized, that would impact our effective tax rate was $216 million at September 29, 2018 and $205 million at September 30, 2017. We classify interest and penalties on unrecognized tax benefits as income tax expense. At September 29, 2018, and September 30, 2017, before tax benefits, we had $73 million and $63 million, respectively, of accrued interest and penalties on unrecognized tax benefits.

As of September 29, 2018, we are subject to income tax examinations for United States federal income taxes for fiscal years 2013 through 2017. We are also subject to income tax examinations by major state and foreign jurisdictions for fiscal years 2007 through 2017 and 2002 through 2017, respectively. We estimate that during the next twelve months it is reasonably possible that unrecognized tax benefits could decrease by as much as $28 million primarily due to expiration of statutes and settlements in various jurisdictions.