INCOME TAX

The Tax Cuts and Jobs Act (“U.S. Tax Reform”) was signed into law on December 22, 2017. U.S. Tax Reform made broad changes to the U.S. tax code, including (1) reducing the U.S. federal corporate tax rate from 35 percent to 21 percent; (2) imposed a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries; (3) generally eliminated U.S. federal income taxes on dividends from foreign subsidiaries; (4) eliminated the corporate alternative minimum tax (“AMT”) and changed how existing AMT credits can be realized; (5) created the base erosion anti-abuse tax (“BEAT”); (6) established a new provision designed to tax global intangible low-taxed income (“GILTI”), which allows for the possibility of using foreign tax credits and a deduction of up to 50% to offset the income tax liability (subject to some limitations); and (7) modified the rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017.

In connection with the Company’s initial analysis of the impact of U.S. Tax Reform, it recorded a discrete provisional net tax benefit of $1,033.8 million in the period ending December 31, 2017. This estimated net benefit primarily consisted of the U.S. federal rate reduction from 35% to 21% applied to the net deferred tax liability. The Company provisionally estimated there would be no one-time transition tax on unrepatriated earnings of foreign subsidiaries. Further, as a result of U.S. Tax Reform, the Company established a valuation allowance of $58.9 million related to U.S. foreign tax credit carryforwards. The valuation allowance related to the Company’s interpretation of the changes in the ability to use existing foreign tax credit carryforwards against future foreign branch profits.

The SEC issued Staff Accounting Bulletin 118 (“SAB 118”), which provides guidance on accounting for the tax effects of U.S. Tax Reform. SAB 118 provides a measurement period that should not extend beyond one year from U.S. Tax Reform enactment date for companies to complete the accounting under ASC 740. The Company completed its accounting for the effects of U.S. Tax Reform within the measurement period during the fourth quarter of 2018.

The Company’s refinement of the provisional estimates for the impact of U.S. Tax Reform resulted in the aforementioned valuation allowance adjustment and other immaterial adjustments to the amounts originally estimated. Upon review of the Proposed Treasury Regulations issued during the year and completion of the accumulated and current earnings and profits calculations of the Company’s foreign subsidiaries, no adjustment to the provisional estimate of the transition tax on unrepatriated earnings was necessary.

The valuation allowance established with U.S. Tax Reform was released in 2018. The Company recognized an uncertain tax position due to the expiration of the statute of limitations. Concurrent with this recognition of a prior year tax position, the Company established a new uncertain tax liability. The foreign tax credits were used to offset the new uncertain tax liability, hence a valuation allowance was no longer necessary.

Under GAAP, the Company is allowed to make an accounting policy choice of either (1) treating taxes due on future U.S. inclusions in taxable income related to the 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”). The Company made a policy election to account for GILTI as a period cost.

For the year ended December 31, 2018, the Company is not subject to the BEAT. The Company continues to monitor guidance as it is issued; however, it does not expect changes in guidance to result in a BEAT liability.

The effective tax rate for 2018 was lower than the U.S. Statutory rate of 21.0% primarily as a result of the release of a valuation allowance on foreign tax credits, which partially offset tax expense related to GILTI and valuation allowance increases. The effective tax rate for 2017 was lower than the U.S. Statutory rate of 35% primarily as a result of accounting for the effects of U.S. Tax Reform and income generated in non-U.S. jurisdictions with lower tax rates than the U.S. See the table below for additional information.

Pre-tax income for the years ended December 31, 2018, 2017 and 2016 consists of the following (dollars in thousands):



	2018		2017		2016
Pre-tax income - U.S.	$	626,197	$	870,532	$	758,496
Pre-tax income - foreign	219,623		272,283		285,450
Total pre-tax income	$	845,820	$	1,142,815	$	1,043,946

The provision for income tax expense for the years ended December 31, 2018, 2017 and 2016 consists of the following (dollars in thousands):



	2018			2017			2016
Current income tax expense (benefit):
U.S.	$	78,431		$	131,108		$	1,020
U.S. Tax Reform	(68,080		)	—			—
Foreign	43,120			36,830			47,706
Total current	53,471			167,938			48,726
Deferred income tax expense (benefit):
U.S.	62,890			159,853			273,928
U.S. Tax Reform	5,907			(1,033,755		)	—
Foreign	7,710			26,598			19,849
Total deferred	76,507			(847,304		)	293,777
Total provision for income taxes	$	129,978		$	(679,366	)	$	342,503

The Company’s effective tax rate differed from the U.S. federal income tax statutory rate of 21%, 35%, and 35% as a result of the following for the years ended December 31, 2018, 2017 and 2016 (dollars in thousands):



	2018			2017			2016
Tax provision at U.S. statutory rate	$	177,622		$	399,985		$	365,381
Increase (decrease) in income taxes resulting from:
U.S. Tax Reform	(62,173		)	(1,033,755		)	—
Foreign tax rate differing from U.S. tax rate	4,526			(21,867		)	(13,974		)
Differences in tax basis in foreign jurisdictions	(23,257		)	(23,324		)	(17,770		)
Deferred tax valuation allowance	23,144			29,458			10,963
Amounts related to audit contingencies	1,516			(7,184		)	111
Equity compensation excess benefit	(6,103		)	(10,532		)	—
Corporate rate changes	1,008			(6,065		)	—
GILTI, net of credits	10,400			—			—
Subpart F for non-full inclusion companies	583			1,528			1,783
Foreign tax credits	(2,544		)	(1,681		)	(1,683		)
Return to provision adjustments	(1,305		)	(4,674		)	(1,473		)
Other, net	6,561			(1,255		)	(835		)
Total provision for income taxes	$	129,978		$	(679,366	)	$	342,503
Effective tax rate	15.4		%	(59.4		)%	32.8		%

Total income taxes for the years ended December 31, 2018, 2017 and 2016 were as follows (dollars in thousands):



	2018			2017			2016
Provision for income taxes	$	129,978		$	(679,366	)	$	342,503
Income tax from OCI and additional paid-in-capital:
Net unrealized holding gain (loss) on debt and equity securities recognized for financial reporting purposes	(367,933		)	306,849			157,929
Exercise of stock options	—			—			(162		)
Foreign currency translation	19,101			(42,153		)	21,081
Unrealized pension and post retirement	134			404			1,772
Total income taxes provided	$	(218,720	)	$	(414,266	)	$	523,123

The tax effects of temporary differences that give rise to significant portions of the deferred income tax assets and liabilities at December 31, 2018 and 2017, are presented in the following tables (dollars in thousands):



	2018			2017
Deferred income tax assets:
Nondeductible accruals	$	86,092		$	80,905
Differences between tax and financial reporting amounts concerning certain reinsurance transactions	102,014			96,043
Differences in the tax basis of cash and invested assets	28,398			557
Investment income differences	80,200			43,230
Deferred acquisition costs capitalized for tax	124,707			88,531
Net operating loss carryforward	405,958			535,374
Capital loss and tax credit carryforwards	32,897			102,143
Subtotal	860,266			946,783
Valuation allowance	(181,110		)	(226,884		)
Total deferred income tax assets	679,156			719,899
Deferred income tax liabilities:
Deferred acquisition costs capitalized for financial reporting	843,328			627,378
Differences between tax and financial reporting amounts concerning certain reinsurance transactions	1,151,419			1,547,101
Differences in the tax basis of cash and invested assets	345,836			674,569
Investment income differences	9,493			1,858
Differences in foreign currency translation	52,928			33,803
Anticipated future tax credit reduction	25,433			—
Total deferred income tax liabilities	2,428,437			2,884,709
Net deferred income tax liabilities	$	1,749,281		$	2,164,810
Balance sheet presentation of net deferred income tax liabilities:
Included in other assets	$	49,519		$	33,499
Included in deferred income taxes	1,798,800			2,198,309
Net deferred income tax liabilities	$	1,749,281		$	2,164,810

As of December 31, 2018, the valuation allowance against deferred tax assets was $181.1 million. During 2018, a valuation allowance on the U.S. Foreign tax credit carryforwards of $65.1 million was released. This release partially offset a $24.5 million increase to the valuation allowance related to the net operating losses of RGA Reinsurance Company of Australia Limited (“RGA Australia”) and increases and decreases to the valuation allowance in jurisdictions where the Company does not have a history of earnings. Further movement in the valuation allowance includes foreign currency translation and reclassifications with other deferred tax assets of ($12.8) million.

As of December 31, 2017, the valuation allowance against deferred tax assets was approximately $226.9 million. During 2017 a valuation allowance was established on the U.S. Foreign tax credit carryforwards of $65.1 million, RGA Australia net operating losses of $20.1 million, as well as on the deferred tax assets of other jurisdictions of $3.3 million. Further movement in the valuation allowance includes foreign currency translation and reclassifications with other deferred tax assets of $10.6 million and ($5.6) million, respectively. The other significant components of the valuation allowance relate to a partial valuation allowance on the net operating loss carryforwards in RGA Australia and the foreign tax credit carryforwards in RGA International Reinsurance Company dac (“RGA International”). A valuation allowance also exists against the deferred tax assets of other branches and legal entities most of which there is no history of earnings in recent years.

The earnings of substantially all of the Company’s foreign subsidiaries have been permanently reinvested in foreign operations. No provision has been made for U.S. tax or foreign withholding taxes that may be applicable upon any repatriation or sale. At December 31, 2018 and 2017, the financial reporting basis in excess of the tax basis for which no deferred taxes have been recognized was approximately $1,364.1 million and $1,442.9 million, respectively. As U.S. Tax Reform generally eliminates U.S. federal income taxes on dividends from foreign subsidiaries, the Company does not expect to incur material income taxes if these funds are repatriated.

During 2018, 2017 and 2016, the Company received federal and foreign income tax refunds of approximately $2.4 million, $11.6 million and $6.9 million, respectively. The Company made cash income tax payments of approximately $144.1 million, $48.7 million and $68.0 million in 2018, 2017 and 2016, respectively.

The following table presents consolidated net operating losses (“NOL”) as of December 31, 2018 (dollars in millions):



	2018
NOL with no expiration and with no valuation allowance	$	52
NOL with a full valuation allowance	167
NOL with no expiration and a partial valuation allowance	396
NOL with expiration dates between 2029 & 2035 with no valuation allowance	1,118
Total net operating loss carryforwards	$	1,733

These net operating losses, other than the net operating losses for which there is a valuation allowance, are expected to be utilized in the normal course of business during the period allowed for carryforwards and in any event, are not expected to be lost, due to the application of tax planning strategies that management would utilize.

As of December 31, 2018 the Company had foreign tax credit carryforwards of $27.8 million in Ireland and as of December 31, 2017, the Company had $152.0 million of foreign tax credit carryforwards in the U.S. and Ireland. The Ireland foreign tax credit carryforward has a full valuation allowance.

The Company files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. The Company is under continuous examination by the Internal Revenue Service and is subject to audit by taxing authorities in other foreign jurisdictions in which the Company has significant business operations. The income tax years under examination vary by jurisdiction. The Company is no longer subject to U.S. federal income tax examinations by tax authorities for years prior to 2015, Canadian tax authorities for years prior to 2014 and with a few exceptions, the Company is no longer subject to state and foreign income tax examinations by tax authorities for years prior to 2013.

As of December 31, 2018, the Company’s total amount of unrecognized tax benefits was $324.6 million and the total amount of unrecognized tax benefits that would affect the effective tax rate, if recognized, was $12.8 million. Management believes there will be no material impact to the Company’s effective tax rate related to unrecognized tax benefits over the next 12 months.

A reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended December 31, 2018, 2017 and 2016, is as follows (dollars in thousands):



	Total Unrecognized Tax Benefits
	2018			2017			2016
Beginning balance, January 1	$	321,224		$	297,290		$	296,213
Accounting for business combinations	521			—			—
Additions for tax positions of prior years	255,970			247,596			226,720
Reductions for tax positions of prior years	(256,587		)	(246,894		)	(229,719		)
Additions for tax positions of current year	3,682			36,438			4,186
Payment on deposit	(185		)	—			—
Settlements with tax authorities	—			(13,206		)	(110		)
Ending balance, December 31	$	324,625		$	321,224		$	297,290

The Company recognized a benefit in interest expense associated with uncertain tax positions in 2018, 2017 and 2016 of $3.3 million, $5.0 million and $8.4 million, respectively. Additionally, the Company recognized penalties of $0.3 million in 2016. As of December 31, 2018 and 2017, the Company had $11.6 million and $15.1 million, respectively, of accrued interest related to unrecognized tax benefits. There are no penalties accrued as of December 31, 2018 or December 31, 2017.