Income Taxes

9 Months Ended

Sep. 30, 2019



	Three Months Ended September 30,		Nine Months Ended September 30,
	2019	2018	2019	2018
	(In percentages)
Effective income tax rate	16	12	13	16

The higher effective income tax rate for the three months ended September 30, 2019 compared to the same period in 2018 was primarily due to the impact of functional currency differences in offshore jurisdictions, partially offset by the release of the valuation allowance on foreign tax credit carryforwards due to a change in the sourcing of US earnings between domestic and foreign sources.

The lower effective income tax rate for the nine months ended September 30, 2019 compared to the same period in 2018 was primarily due to 2019 reductions in the valuation allowance on foreign tax credits that resulted from greater forecasted utilization of credits prior to the expiration of the carryforward period. During the nine months ended September 30, 2018, and prior to the receipt of any regulatory guidance from the US Department of Treasury ("US Treasury") related to various provisions of the Tax Cuts and Jobs Act ("TCJA"), the Company recorded additional valuation allowances on prior year foreign tax credit carryforwards due to uncertainty regarding the treatment of future income and credits generated under the global low-taxed intangible income ("GILTI") provisions, which were enacted as part of TCJA.

The Company evaluates its deferred tax assets on a quarterly basis to determine whether a valuation allowance is necessary. Realization of deferred tax assets ultimately depends on the existence of sufficient taxable income in the applicable carryback or carryforward periods. Changes in the Company's estimates of future taxable income and prudent and feasible tax planning strategies will affect the estimate of the realization of the tax benefits of these foreign tax credit carryforwards. Due to the TCJA and uncertainty as to future sources of general limitation foreign source income to allow for the utilization of these credits, the Company recorded a valuation allowance on a substantial portion of its foreign tax credits upon the enactment of the TCJA. The Company is currently evaluating tax planning strategies that would utilize the Company's foreign tax credit carryforwards. Implementation of these strategies in future periods could reduce the level of valuation allowance that is needed, thereby decreasing the Company's effective tax rate.

On March 6, 2019, the US Treasury issued proposed regulations clarifying the deduction for GILTI and Foreign-Derived Intangible Income ("FDII"), which were enacted as part of the TCJA. The Company currently does not expect these regulations

to have a material impact on its tax expense upon final adoption and will evaluate the impact of final guidance once it is released.

On June 14, 2019, the US Treasury released proposed and final regulations clarifying the GILTI inclusion and temporary and proposed regulations clarifying the dividends received deduction for foreign dividends paid to the US that were enacted as part of the TCJA. The Company currently does not expect these regulations to have a material impact on tax expense and will evaluate the impact of further guidance as it is released.

During the three months ended September 30, 2019, the US Treasury released proposed regulations related to bonus depreciation, net operating loss limitations and revenue recognition rules for advanced payments. The Company does not expect these regulations to have a material impact on its tax expense and will evaluate the impact of further guidance as it is released.

In connection with the Company's US federal income tax audit for 2009 and 2010, the Company entered into a closing agreement during the three months ended March 31, 2019, which did not impact any previously recorded amounts based on settlement discussions prior to the formal closing agreement.

In January 2018, the Company received proposed pre-tax adjustments for its 2011 and 2012 audit cycle in the amount of $198 million. In the event the Company is wholly unsuccessful in its defense and absent expected offsetting adjustments from foreign tax authorities, the proposed adjustments would result in the consumption of approximately $69 million of prior foreign tax credit carryforwards, which are substantially offset with a valuation allowance due to uncertain recoverability. The Company believes these proposed adjustments to be without merit and is vigorously defending its position.