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Income Taxes

12 Months Ended

Dec. 31, 2019

Note 21 – Income Taxes

Accounting policy. Deferred income taxes are reflected in the Consolidated Balance Sheets for differences between the financial and income tax reporting bases of the Company’s underlying assets and liabilities, and established based upon enacted tax rates and laws. Deferred income tax assets are recognized when available evidence indicates that realization is more likely than not, and a valuation allowance is established to the extent this standard is not met. The deferred income tax provision generally represents the net change in deferred income tax assets and liabilities during the reporting period excluding adjustments to accumulated other comprehensive income or amounts recorded in connection with a business combination. The current income tax provision generally represents estimated amounts due on income tax returns for the year reported to various jurisdictions plus the effect of any uncertain tax positions. The Company recognizes a liability for uncertain tax positions if management believes the probability that the positions will be sustained is less than 50 percent. The liabilities for uncertain tax positions are classified as current when the position is expected to be settled within 12 months or the statute of limitation expires within 12 months.

Income taxes attributable to the Company’s foreign operations are generally provided using the respective foreign jurisdictions’ tax rate.

Our capital management strategy to support the liquidity and regulatory capital requirements of our foreign operations and certain international growth initiatives is to retain overseas a significant portion of the earnings generated by our foreign operations. This strategy does not materially limit our ability to meet our liquidity and capital needs in the United States. The Company generally does not intend to repatriate these earnings.

A.Income Tax Expense

The components of income taxes for the years ended December 31 were as follows:

(In millions)	2019		2018		2017
Current taxes
U.S. income taxes	$	1,476	$	804	$	974
Foreign income taxes		173		185		122
State income taxes		114		47		36
Total current taxes		1,763		1,036		1,132
Deferred taxes (benefits)
U.S. income taxes (benefits)		(236)		(75)		204
Foreign income taxes		16		8		39
State income tax (benefits)		(93)		(34)		(1)
Total deferred taxes (benefits)		(313)		(101)		242
Total income taxes	$	1,450	$	935	$	1,374

Total income taxes for the years ended December 31 were different from the amount computed using the nominal federal income tax rate for the following reasons:

		2019			2018				2017
(In millions)		$	%			$	%			$	%
Tax expense at nominal rate	$	1,380	21.0	%	$	752	21.0	%	$	1,262	35.0	%
Effect of U.S. tax reform legislation		-	-			(4)	(0.1)			232	6.4
Effect of foreign earnings		24	0.4			74	2.1			(70)	(1.9)
Health insurance industry tax		-	-			78	2.2			-	-
State income tax (net of federal income tax benefit)		32	0.5			10	0.3			23	0.6
Other		14	0.2			25	0.6			(73)	(2.0)
Total income taxes	$	1,450	22.1	%	$	935	26.1	%	$	1,374	38.1	%

The decrease in the 2019 effective tax rate was due primarily to the suspension of the health insurance industry tax. Tax expense in 2017 was based on a federal income tax rate of 35% and included a $232 million charge due to U.S. tax reform, driven by revaluation of deferred tax balances and the deemed repatriation tax on accumulated foreign earnings.

Consolidated pre-tax income from the Company’s foreign operations was approximately 12% of the Company’s pre-tax income in 2019. The comparable amounts in prior years were 15% in 2018 and 14% in 2017. South Korean operations produced a majority of the Company’s foreign pre-tax earnings.

B. Deferred Income Taxes

Deferred income tax assets and liabilities as of December 31 were as follows:

(In millions)	2019		2018
Deferred tax assets ⁽¹⁾
Employee and retiree benefit plans	$	511	$	411
Other insurance and contractholder liabilities		282		396
Loss carryforwards		260		255
Other accrued liabilities		183		341
Other		218		187
Deferred tax assets before valuation allowance		1,454		1,590
Valuation allowance for deferred tax assets		(196)		(199)
Deferred tax assets, net of valuation allowance		1,258		1,391
Deferred tax liabilities ⁽¹⁾
Depreciation and amortization		630		744
Acquisition-related basis differences		9,386		9,863
Policy acquisition expenses		113		211
Unrealized appreciation on investments and foreign currency translation		223		(29)
Other		293		55
Total deferred tax liabilities		10,645		10,844
Net deferred income tax (liabilities) assets	$	(9,387)	$	(9,453)
(1) Certain prior year balances have been reclassified to align with the year end 2019 presentation.

Management believes that future results will be sufficient to realize a majority of the Company’s gross deferred tax assets. We establish valuation allowances against deferred tax assets when we determine that it is more likely than not that the asset will not be recognized. Valuation allowances have been established against certain federal, state and foreign capital and operating losses. There are multiple expiration dates associated with these losses, though a significant portion expire in 2021.

C. Uncertain Tax Positions and Other Tax Matters

Reconciliations of unrecognized tax benefits for the years ended December 31 follow:

(In millions)	2019		2018		2017
Balance at January 1,	$	928	$	35	$	31
Increase due to prior year positions		68		40		-
Increase due to business combinations		-		860		-
Increase due to current year positions		29		6		7
Reduction related to settlements with taxing authorities		-		(1)		(1)
Reduction related to lapse of applicable statute of limitations		(7)		(12)		(2)
Balance at December 31,	$	1,018	$	928	$	35

Substantially all unrecognized tax benefits would impact shareholders’ net income if recognized. The increase in the liability for uncertain tax positions from 2017 to 2018 was largely due to matters related to Health Services.

The Company classifies net interest expense on uncertain tax positions as a component of income tax expense, but excludes this amount from the disclosed liability for uncertain tax positions. The liability for net interest expense on uncertain tax positions was approximately $100 million as of December 31, 2019, and immaterial for the prior two years.

D.Other Tax Matters

The statute of limitations for Cigna's consolidated federal income tax returns through 2015 has closed and there are no pending examinations. The Internal Revenue Service (“IRS”) has examined Express Scripts’ tax returns for 2010 through 2012, for which there is a significant disputed tax matter, and is currently examining returns for 2013 through 2015. In addition, the Company has pending refund claims for various years. The Company conducts business in a number of state and foreign jurisdictions and may be engaged in multiple audit proceedings at any given time. Generally, no further state or foreign audit activity is expected for tax years prior to 2011 for Cigna’s entities and 2006 for Express Scripts’ entities.