Taxes on Earnings

The provision for income taxes on earnings from continuing operations consists of the following:



	2019			2018			2017
Income taxes:
Currently payable:
Federal	$	104		$	93		$	241
State	19			26			39
Non-U.S.	5			11			2
	128			130			282
Deferred:
Federal	19			(26		)	97
State	7			14			2
Non-U.S.	(3		)	(12		)	11
	23			(24		)	110
	$	151		$	106		$	392



	2019		2018			2017
Earnings from continuing operations before income taxes:
United States	$	624	$	832		$	1,264
Non-U.S.	1		(2		)	52
	$	625	$	830		$	1,316

The following is a reconciliation of the effective income tax rate on continuing operations to the U.S. federal statutory income tax rate:



	2019		2018		2017
Federal statutory income tax rate	21.0	%	21.0	%	35.0	%
State income taxes (net of federal tax benefit)	2.2		3.0		2.1
Tax effect of international items	—		(0.5	)	(0.4	)
Federal manufacturing deduction	—		(1.4	)	(2.2	)
Tax Reform - impact on U.S. deferred tax assets and liabilities⁽¹⁾	—		(21.7	)	—
Tax Reform - transition tax⁽¹⁾	0.3		6.4		—
Effect of higher U.S. federal statutory tax rate⁽¹⁾	—		5.3		—
Foreign exchange losses⁽²⁾	—		—		(3.8	)
Divestiture impact on deferred taxes	1.2		—		—
Other	(0.5	)	0.7		(0.9	)
Effective income tax rate	24.2	%	12.8	%	29.8	%

_______________________________________


⁽¹⁾	The Tax Cuts and Jobs Act of 2017 (the Act) was enacted into law on December 22, 2017, and made significant changes to corporate taxation. Changes under the Act included:


•	Reducing the federal corporate tax rate from 35% to 21% effective January 1, 2018. A blended rate applied for fiscal 2018 non-calendar year end companies for the fiscal periods that included the effective date of the rate change. The impact of this is shown as "Effect of higher U.S. federal statutory tax rate;"


•	Repealing the exception for deductibility of performance-based compensation to covered employees, which impacted us beginning in 2019, along with expanding the number of covered employees;


•	Transitioning to a territorial system for taxation on foreign earnings along with the imposition of a transition tax in 2018 on the deemed repatriation of unremitted foreign earnings;


•	Immediate expensing of machinery and equipment placed into service after September 27, 2017;


•	Eliminating the deduction for domestic manufacturing activities, which impacted us beginning in 2019;


•	Changes to the taxation of multinational companies, including a new minimum tax on Global Intangible Low-Taxed Income, a new Base Erosion Anti-Abuse Tax, and a new U.S. corporate deduction for Foreign-Derived Intangible Income, all of which were effective for us beginning in 2019; and


•	Limiting the deductibility of interest expense to 30% of adjusted taxable income, which was effective for us beginning in 2019.

As a result of the Act, we recognized a benefit of $179 in 2018 on the remeasurement of deferred tax assets and liabilities and expenses of $2 in 2019 and $53 in 2018 on the transition tax on unremitted foreign earnings.


⁽²⁾	The 2017 rate was favorably impacted by a $52 benefit primarily related to the sale of intercompany notes receivable to a financial institution, which resulted in the recognition of foreign exchange losses.

Deferred tax liabilities and assets of continuing operations and discontinued operations are comprised of the following:



	2019			2018
Depreciation	$	336		$	342
Amortization	877			868
Other	16			35
Deferred tax liabilities	1,229			1,245
Benefits and compensation	157			144
Pension benefits	46			24
Tax loss carryforwards	43			65
Capital loss carryforwards	287			88
Outside basis difference	116			—
Other	82			92
Gross deferred tax assets	731			413
Deferred tax asset valuation allowance	(427		)	(133		)
Deferred tax assets, net of valuation allowance	304			280
Net deferred tax liability	$	925		$	965

At July 28, 2019, our U.S. and non-U.S. subsidiaries had tax loss carryforwards of approximately $438. Of these carryforwards, $48 may be carried forward indefinitely, and $390 expire between 2020 and 2037, with the majority expiring after 2028. At July 28, 2019, deferred tax asset valuation allowances have been established to offset $165 of these tax loss carryforwards. Additionally, as of July 28, 2019, our U.S. and non-U.S. subsidiaries had capital loss carryforwards of approximately $1,096, of which $1,060 were offset by valuation allowances. We may use a portion of our capital losses to offset the capital gain anticipated from the pending sale of the Arnott's and international operations, which could result in a U.S. valuation allowance release and recognition of a material income tax benefit in 2020. The sale of the Arnott's and international operations, which has not been finalized, is expected to be completed in the first half of 2020. After considering all available evidence, we concluded that we should maintain a valuation allowance as of July 28, 2019.

The net change in the deferred tax asset valuation allowance in 2019 was an increase of $294. The increase was primarily due to the sale of Bolthouse Farms and the pending sale of the Arnott's and international operations. The net change in the deferred tax asset valuation allowance in 2018 was an increase of $13. The increase was primarily due to the acquisition of Snyder's-Lance and the impact of currency. The net change in the deferred tax asset valuation allowance in 2017 was an increase of $2. The increase was primarily due to the impact of currency and the recognition of additional valuation allowances on tax loss carryforwards, partially offset by the expiration of tax losses.

As of July 28, 2019, other deferred tax assets included $13 of state tax credit carryforwards related to various states that expire between 2021 and 2031. As of July 28, 2019, deferred tax asset valuation allowances have been established to offset $13 of the state credit carryforwards. The decrease in state tax credit carryforwards was primarily due to the utilization of credits and the sale of Bolthouse Farms. As of July 29, 2018, other deferred tax assets included $23 of state tax credit carryforwards related to various states that expire between 2021 and 2031. As of July 29, 2018, deferred tax asset valuation allowances have been established to offset $15 of the state credit carryforwards.

As of July 28, 2019, we had approximately $156 of undistributed earnings of subsidiaries, most of which were subject to U.S. tax under the transition tax on foreign earnings due under the Act. Consistent with prior years, these unremitted earnings and the investment in our foreign subsidiaries are deemed to be permanently reinvested and no additional tax has been provided. It is not practical to estimate the tax liability that might be incurred if such earnings were remitted to the U.S.

A reconciliation of the activity related to unrecognized tax benefits follows:



	2019			2018			2017
Balance at beginning of year	$	32		$	64		$	63
Increases related to prior-year tax positions	1			—			4
Decreases related to prior-year tax positions	(1		)	(37		)	—
Increases related to current-year tax positions	2			2			4
Settlements	(9		)	(1		)	(7		)
Lapse of statute	(1		)	—			—
Increase due to acquisitions	—			4			—
Balance at end of year	$	24		$	32		$	64

The amount of unrecognized tax benefits that, if recognized, would impact the annual effective tax rate was $17 as of July 28, 2019, $23 as of July 29, 2018, and $19 as of July 30, 2017. The total amount of unrecognized tax benefits can change due to audit settlements, tax examination activities, statute expirations and the recognition and measurement criteria under accounting for uncertainty in income taxes.

Our accounting policy with respect to interest and penalties attributable to income taxes is to reflect any expense or benefit as a component of our income tax provision. The total amount of interest and penalties recognized in the Consolidated Statements of Earnings were earnings of $1 in 2019, and expense of $1 in 2018 and $4 in 2017. The total amount of interest and penalties recognized in the Consolidated Balance Sheets in Other liabilities was $4 as of July 28, 2019, and $5 as of July 29, 2018.

We do business internationally and, as a result, file income tax returns in the U.S. federal jurisdiction and various state and non-U.S. jurisdictions. In the normal course of business, we are subject to examination by taxing authorities throughout the world, including such major jurisdictions as the U.S., Australia, Canada and Denmark. The 2019 tax year is currently under audit by the Internal Revenue Service. In addition, several state income tax examinations are in progress for the years 2006 to 2017.

With limited exceptions, we have been audited for income tax purposes in Australia through 2014, in Denmark through 2015, and in Canada through 2014.