Income Taxes:

Earnings before income taxes and provision for income taxes consisted of the following for the years ended December 31, 2017, 2016 and 2015:



(in millions)	2017			2016			2015
Earnings before income taxes	$	10,589		$	9,924		$	9,615
Provision for income taxes:
United States federal and state:
Current	$	1,662		$	(39	)	$	(56	)
Deferred	(384		)	293			117
Total United States	1,278			254			61
Outside United States:
Current	3,146			2,625			2,762
Deferred	(117		)	(111		)	(135		)
Total outside United States	3,029			2,514			2,627
Total provision for income taxes	$	4,307		$	2,768		$	2,688

United States income tax is primarily attributable to repatriation costs.

In December 2017, the Tax Cuts and Jobs Act was signed into law. The principal elements of the Tax Cuts and Jobs Act relevant to PMI’s consolidated financial statements for the year ended December 31, 2017, were:


•	A reduction of the U.S. federal corporate tax rate from 35% to 21%; and


•	The requirement to pay a one-time transition tax on accumulated foreign earnings, including 2017 earnings ("transition tax").

In connection with these elements of the Tax Cuts and Jobs Act, PMI recognized a provisional expense of $1.6 billion, which was included as a component of income tax expense as follows:


•	A provisional charge of $1.4 billion, which represents the transition tax of $2.2 billion, net of a reversal of $0.7 billion of previously recorded deferred tax liabilities on part of the accumulated foreign earnings, and other items of $0.1 billion.


•	Re-measurement of U.S. deferred tax assets and liabilities using a rate of 21%, which, under the Tax Cuts and Jobs Act, is expected to be in place when such deferred assets and liabilities reverse in the future. In connection with this re-measurement, PMI recorded a provisional charge of $0.2 billion.

Other provisions of the Tax Cuts and Jobs Act did not have a significant impact on PMI’s consolidated financial statements for the year ended December 31, 2017, but may impact the effective tax rate in subsequent periods.

The Tax Cuts and Jobs Act has significant complexity and our final tax liability may materially differ from these estimates, due to, among other things, changes in PMI's assumptions, guidance that may be issued by the U.S. Treasury Department and the Internal Revenue Service and related interpretations and clarifications of tax law. For the transition tax, further information is required to finalize the estimated amount of accumulated foreign earnings as well as to validate the amount of earnings represented by the aggregate foreign cash position as defined in the Tax Cuts and Jobs Act. For the re-measurement of the deferred tax assets and liabilities, further analysis will be required to refine PMI's calculations and related account balances.

PMI will complete the remaining elements of its analysis during 2018, and any adjustments to the provisional charges will be included in income tax expense or benefit in the appropriate period, in accordance with guidance provided by Staff Accounting Bulletin No. 118 (SAB 118).

At December 31, 2017, U.S. federal and foreign deferred income taxes have been provisionally provided on all accumulated earnings of PMI's foreign subsidiaries.

At December 31, 2017, PMI recorded an income tax payable of $1.7 billion attributable to the Tax Cuts and Jobs Act, of which $1.6 billion was recorded in "income taxes and other liabilities" on PMI's consolidated balance sheet. The income tax payable of $1.7 billion represented the transition tax of $2.2 billion, partially offset by foreign tax credits related to foreign withholding taxes previously paid of $0.5 billion. The income tax payable is due over an 8-year period beginning in 2018.

A reconciliation of the beginning and ending amount of unrecognized tax benefits was as follows:



(in millions)	2017			2016			2015
Balance at January 1,	$	79		$	88		$	123
Additions based on tax positions related to the current year	71			13			17
Additions for tax positions of previous years	5			1			6
Reductions for tax positions of prior years	—			(7		)	(42		)
Reductions due to lapse of statute of limitations	(7		)	(14		)	(7		)
Settlements	(4		)	(2		)	(1		)
Other	1			—			(8		)
Balance at December 31,	$	145		$	79		$	88

Unrecognized tax benefits and PMI’s liability for contingent income taxes, interest and penalties were as follows:



(in millions)	December 31, 2017			December 31, 2016			December 31, 2015
Unrecognized tax benefits	$	145		$	79		$	88
Accrued interest and penalties	23			15			28
Tax credits and other indirect benefits	(35		)	(31		)	(40		)
Liability for tax contingencies	$	133		$	63		$	76

The amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate was $110 million at December 31, 2017. The remainder, if recognized, would principally affect deferred taxes.

For the years ended December 31, 2017, 2016 and 2015, PMI recognized income (expense) in its consolidated statements of earnings of $(11) million, $13 million and $3 million, respectively, related to interest and penalties.

PMI is regularly examined by tax authorities around the world and is currently under examination in a number of jurisdictions. The U.S. federal statute of limitations remains open for the years 2013 and onward. Foreign and U.S. state jurisdictions have statutes of limitations generally ranging from three to five years. Years still open to examination by foreign tax authorities in major jurisdictions include Germany (2015 onward), Indonesia (2014 onward), Russia (2015 onward) and Switzerland (2017 onward).

It is reasonably possible that within the next 12 months certain tax examinations will close, which could result in a change in unrecognized tax benefits, along with related interest and penalties. An estimate of any possible change cannot be made at this time.

The effective income tax rate on pre-tax earnings differed from the U.S. federal statutory rate for the following reasons for the years ended December 31, 2017, 2016 and 2015:



	2017		2016		2015
U.S. federal statutory rate	35.0	%	35.0	%	35.0	%
Increase (decrease) resulting from:
Foreign rate differences	(12.2	)	(12.6	)	(12.3	)
Dividend repatriation cost	16.4		5.8		5.7
Other	1.5		(0.3	)	(0.4	)
Effective tax rate	40.7	%	27.9	%	28.0	%

The 2017 effective tax rate increased 12.8 percentage points to 40.7%. The change in the effective tax rate for 2017, as compared to 2016, was primarily due to the Tax Cuts and Jobs Act. In addition to the transition tax, which resulted in a net tax charge of $1.4 billion, the Tax Cuts and Jobs Act also included a reduction in the U.S. income tax rate from 35% to 21%, as of January 1, 2018. This change in income tax rate required a re-measurement of PMI's U.S. deferred tax assets and liabilities at December 31, 2017, resulting in a tax charge of $0.2 billion.

The 2016 effective tax rate decreased 0.1 percentage point to 27.9%. The change in the effective tax rate for 2016, as compared to 2015, was primarily due to earnings mix by taxing jurisdiction and repatriation cost differences.

The 2015 effective tax rate decreased 1.1 percentage points to 28.0%. The effective tax rate for 2015 was unfavorably impacted by changes to repatriation assertions on certain foreign subsidiary historical earnings ($58 million), partially offset by the recognition of tax benefits of $41 million following the conclusion of the IRS examinations of Altria's consolidated tax returns for the years 2007 and 2008 and PMI's consolidated tax returns for the years 2009 through 2011. Prior to March 28, 2008, PMI was a wholly-owned subsidiary of Altria. Excluding the effect of these items, the change in the effective tax rate for 2015, as compared to 2014, was primarily due to earnings mix by taxing jurisdiction and repatriation cost differences.

The tax effects of temporary differences that gave rise to deferred income tax assets and liabilities consisted of the following:



	At December 31,
(in millions)	2017			2016
Deferred income tax assets:
Accrued postretirement and postemployment benefits	$	239		$	287
Accrued pension costs	334			256
Inventory	131			241
Accrued liabilities	117			137
Foreign exchange	91			—
Other	114			173
Total deferred income tax assets	1,026			1,094
Deferred income tax liabilities:
Trade names	(546		)	(554		)
Property, plant and equipment	(223		)	(217		)
Unremitted earnings	(49		)	(636		)
Foreign exchange	—			(725		)
Total deferred income tax liabilities	(818		)	(2,132		)
Net deferred income tax assets (liabilities)	$	208		$	(1,038	)