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Income Taxes
12 Months Ended
Dec. 31, 2018
Income Tax Disclosure [Abstract]  
Income Taxes
INCOME TAXES
Our tax provision includes federal, state, local, and foreign income taxes.
 
Years Ended December 31,
2018
 
2017
 
2016
U.S. income before tax
$
652

 
$
650

 
$
157

Foreign income before tax
299

 
72

 
125

Income before income taxes
$
951

 
$
722

 
$
282


The provision (benefit) for income taxes from continuing operations is comprised of the following:
 
Years Ended December 31,
2018
 
2017
 
2016
Current:
 
 
 
 
 
Federal
$
140

 
$
201

 
$
66

State
50

 
45

 
15

Foreign
25

 
30

 
7

Total Current
$
215

 
$
276

 
$
88

Deferred:
 
 
 
 
 
Federal
$
(35
)
 
$
46

 
$
(20
)
State
(12
)
 
(3
)
 
(3
)
Foreign
14

 
13

 
11

Total Deferred
$
(33
)
 
$
56

 
$
(12
)
Total
$
182

 
$
332

 
$
76


The following is a reconciliation of the statutory federal income tax rate to the effective tax rate from continuing operations:
 
Years Ended December 31,
2018
 
2017
 
2016
Statutory U.S. federal income tax rate
21.0
 %
 
35.0
 %
 
35.0
 %
State income taxes—net of federal tax benefit
2.6

 
3.8

 
3.2

Impact of foreign operations (excluding unconsolidated hospitality ventures losses)
(5.6
)
 
(5.4
)
 
(7.5
)
U.S. foreign tax credits
(1.6
)
 
0.7

 
(2.6
)
Tax Act deferred rate change
(0.1
)
 
6.3

 

Tax Act deemed repatriation tax
0.3

 
1.8

 

Change in valuation allowances
0.9

 
1.0

 
3.7

Foreign unconsolidated hospitality ventures
0.9

 
0.9

 
1.2

Tax contingencies
1.0

 
1.0

 
(5.4
)
Equity based compensation
0.3

 
0.6

 
0.4

General business credits
(0.5
)
 
(0.3
)
 
(0.8
)
Other
(0.1
)
 
0.5

 
(0.2
)
Effective income tax rate
19.1
 %
 
45.9
 %
 
27.0
 %

During the year ended December 31, 2018, we completed our accounting for the 2017 Tax Act. As such, we finalized our measurement period adjustments in relation to SAB 118 and recognized measurement period adjustments related to our net deferred tax revaluation, deemed repatriation tax, and valuation allowance on certain foreign tax credits. We have not changed our indefinite reinvestment assertion, and we have elected to account for the impact of global intangible low tax income based on the period cost method. While we consider our accounting for the 2017 Tax Act to be complete, we continue to evaluate new guidance and legislation as it is issued. Below is a summary of our final measurement period adjustments as of December 31, 2018:

We recognized a $1 million decrease to our provisional expense related to our net deferred tax revaluation. During the year ended December 31, 2017, we recognized a provisional expense of $45 million;
We recognized an additional $2 million of provisional deemed repatriation tax expense, including state tax impacts. During the year ended December 31, 2017, we recognized a provisional expense of $13 million; and
We recognized a $15 million decrease to our provisional valuation allowance related to foreign tax credits that are now expected to be utilized in the future based on proposed Treasury regulations issued on November 28, 2018. During the year ended December 31, 2017, we recognized a provisional valuation allowance of $15 million.

Significant items affecting the 2018 effective tax rate include the decrease in the U.S. corporate income tax rate from 35% to 21% as part of the 2017 Tax Act, the low effective tax rate on the HRMC transaction, and the release of a valuation allowance on foreign tax credits expected to be utilized within the allowed carryforward period. These benefits are partially offset by the impact of certain foreign net operating losses generated that are not expected to be utilized in the future.

Significant items affecting the 2017 effective tax rate include a $45 million expense related to reducing our net deferred tax assets to the lower U.S. corporate income tax rate. Additional items that impacted the 2017 effective tax rate include certain foreign net operating losses generated that are not expected to be utilized in the future. These losses were partially offset by the benefit related to the rate differential of foreign operations and the recognition of $10 million of foreign tax credits generated by distributions from certain foreign subsidiaries.

Significant items affecting the 2016 effective tax rate include benefits related to the rate differential of foreign operations, foreign tax credit benefits associated with the Playa foreign unconsolidated hospitality venture, and a $15 million benefit (including $4 million of interest and penalties) primarily related to the reversal of uncertain tax positions for certain foreign filing positions. These benefits are partially offset by the impact of certain foreign net operating losses generated that are not expected to be utilized in the future.
The components of the net deferred tax assets and deferred tax liabilities are comprised of the following:
 
December 31, 2018
 
December 31, 2017
Deferred tax assets related to:
 
 
 
Employee benefits
$
133

 
$
128

Foreign and state net operating losses and credit carryforwards
57

 
65

Investments
37

 
30

Allowance for uncollectible assets
31

 
31

Loyalty program
99

 
89

Interest and state benefits
3

 
1

Unrealized losses
3

 
2

Other
41

 
46

Valuation allowance
(41
)
 
(51
)
Total deferred tax asset
$
363

 
$
341

Deferred tax liabilities related to:
 
 
 
Property and equipment
$
(131
)
 
$
(157
)
Investments
(16
)
 
(19
)
Intangibles
(49
)
 
(32
)
Unrealized gains
(24
)
 
(35
)
Prepaid expenses
(7
)
 
(8
)
Other
(10
)
 
(11
)
Total deferred tax liabilities
$
(237
)
 
$
(262
)
Net deferred tax assets
$
126

 
$
79

Recognized in the balance sheet as:
 
 
 
Deferred tax assets—noncurrent
$
180

 
$
141

Deferred tax liabilities—noncurrent
(54
)
 
(62
)
Total
$
126

 
$
79


During the year ended December 31, 2018, significant changes to our deferred tax balances include a $26 million decrease in the property and equipment deferred tax liability as a result of the HRMC transaction and an $17 million increase in the intangible deferred tax liability primarily related to book basis in excess of tax basis as a result of intangible assets acquired in the Two Roads acquisition (see Note 7).
As of December 31, 2018, we have accumulated undistributed earnings generated by our foreign subsidiaries of approximately $538 million, of which $332 million have previously been taxed in the U.S. primarily due to the one-time transition tax on foreign earnings required by the 2017 Tax Act. Any additional taxes due with respect to such earnings or the excess of book basis over tax basis of our foreign investments would generally be limited to foreign withholding and U.S. state income taxes. We continue to assert that undistributed net earnings with respect to certain foreign subsidiaries that have not previously been taxed in the U.S. are indefinitely reinvested. 
At December 31, 2018, we have $44 million of deferred tax assets for future tax benefits related to foreign and state net operating losses and $13 million of benefits related to federal and state credits. Of these deferred tax assets, $33 million relate to net operating losses and federal and state credits that expire in 2019 through 2038. However, $24 million primarily relate to foreign net operating losses that have no expiration date and may be carried forward indefinitely. A valuation allowance of $41 million is recorded for certain deferred tax assets related to net operating losses and credits that we do not believe are more likely than not to be realized.
At December 31, 2018 and December 31, 2017, total unrecognized tax benefits were $116 million and $94 million, respectively, of which $15 million and $33 million, respectively, would impact the effective tax rate if recognized. It is reasonably possible that a reduction of up to $7 million of unrecognized tax benefits could occur within 12 months resulting from the expiration of certain tax statutes of limitations and tax settlements.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
 
2018
 
2017
Unrecognized tax benefits—beginning balance
$
94

 
$
86

Total increases—current-period tax positions
10

 
11

Total increases (decreases)—prior-period tax positions
18

 
(1
)
Settlements
(1
)
 

Lapse of statute of limitations
(4
)
 
(3
)
Foreign currency fluctuation
(1
)
 
1

Unrecognized tax benefits—ending balance
$
116

 
$
94


In 2018, the $22 million net increase in uncertain tax positions is primarily related to an accrual for the U.S. treatment of the loyalty program. The increase in prior period tax positions relates to local tax filing positions identified as a result of the Two Roads acquisition (see Note 7) and a state tax accrual related to filing positions taken on the 2017 state tax returns.
In 2017, the $8 million net increase in uncertain tax positions is primarily related to an accrual for the U.S. tax treatment of the loyalty program. The lapse of statute of limitations is due to various foreign tax filing positions.
We recognize accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense. Total gross accrued interest and penalties were $18 million and $14 million at December 31, 2018 and December 31, 2017, respectively.
The amount of interest and penalties recognized as a component of income tax expense in 2018 was insignificant, comprised primarily of a benefit of $2 million resulting from the release of interest and penalties related to certain foreign tax positions, offset by expense of $2 million on federal, state, and foreign tax matters.
The amount of interest and penalties recognized as a component of income tax expense in 2017 was insignificant and is comprised primarily of a benefit of $3 million resulting from the release of interest and penalties related to certain foreign tax positions and an additional interest and penalty accrual of $2 million on federal, state, and foreign tax matters.
We are subject to audits by federal, state, and foreign tax authorities. We are currently not under exam by the IRS. As discussed in more detail below, U.S. tax years 2009 through 2011 are before the U.S. Tax Court and tax years 2012 through 2014 are at the IRS appeals level. Additionally, we have a pending Advanced Pricing Agreement request with the U.S. related to tax years 2012 and forward. During the first quarter of 2017, the IRS issued a "Notice of Deficiency" for our 2009 through 2011 tax years. We disagree with the IRS' assessment related to the inclusion of loyalty program contributions as taxable income to the Company. In the second quarter of 2017, we filed a petition with the U.S. Tax Court for redetermination of the tax liability asserted by the IRS related to the loyalty program. During the year ended December 31, 2018, the IRS issued a Revenue Agent's Report for the subsequent audit period covering tax years 2012 through 2014, which reflected the carryover effect of the loyalty program issue currently before the U.S. Tax Court. We filed a formal protest with the IRS in October of 2018. If the IRS' position is upheld, it would result in an income tax payment of $179 million (including $35 million of estimated interest, net of federal tax benefit) for all assessed years that would be partially offset by a deferred tax asset. As future tax benefits will be recognized at the reduced U.S. corporate income tax rate, $61 million of the payment and related interest would have an impact on the effective tax rate, if recognized. We believe we have an adequate uncertain tax liability recorded in connection with this matter.
We have several state audits pending, specifically in Illinois and Florida. State income tax returns are generally subject to examination for a period of three to five years after filing of the return. However, the state impact of any federal changes remains subject to examination by various states for a period generally up to one year after formal notification to the states of the federal changes. We also have several foreign audits pending. The statutes of limitations for the foreign jurisdictions ranges from three to ten years after filing the applicable tax return.