Income Taxes

Income before income tax and the provision for income tax consist of the following (in millions):



Years ended December 31	2016			2015			2014
Income before income taxes:
U.K.	$	(202	)	$	149		$	347
U.S.	(104		)	(51		)	(55		)
Other	1,975			1,591			1,473
Total	$	1,669		$	1,689		$	1,765
Income tax expense (benefit):
Current:
U.K.	$	(54	)	$	43		$	1
U.S. federal	94			137			156
U.S. state and local	—			54			75
Other	223			256			236
Total current tax expense	$	263		$	490		$	468
Deferred tax expense (benefit):
U.K.	$	59		$	(39	)	$	38
U.S. federal	(47		)	(140		)	(133		)
U.S. state and local	6			(14		)	(24		)
Other	(42		)	(30		)	(15		)
Total deferred tax benefit	$	(24	)	$	(223	)	$	(134	)
Total income tax expense	$	239		$	267		$	334

Income before income taxes shown above is based on the location of the business unit to which such earnings are attributable for tax purposes. In addition, because the earnings shown above may in some cases be subject to taxation in more than one country, the income tax provision shown above as U.K., U.S. or Other may not correspond to the geographic attribution of the earnings.

The Company performs a reconciliation of the income tax provisions based on its domicile and statutory rate at each reporting period. The 2016, 2015, and 2014 reconciliations are based on the U.K. statutory corporate tax rate of 20.0%, 20.3%, and 21.5%, respectively. The reconciliation to the provisions reflected in the Consolidated Financial Statements is as follows:



Years ended December 31	2016	2015	2014
Statutory tax rate	20.0%	20.3%	21.5%
U.S. state income taxes, net of U.S. federal benefit	0.7	0.5	1.5
Taxes on international operations (1)	(8.5)	(6.0)	(8.9)
Nondeductible expenses	1.2	2.2	1.7
Adjustments to prior year tax requirements	(1.0)	(1.3)	0.9
Adjustments to valuation allowances	(1.8)	(1.2)	0.6
Change in uncertain tax positions	3.0	1.4	1.7
Other — net	0.7	(0.1)	(0.1)
Effective tax rate	14.3%	15.8%	18.9%

(1)

The Company determines the adjustment for taxes on international operations based on the difference between the statutory tax rate applicable to earnings in each foreign jurisdiction and the enacted rate of 20.0%, 20.3% and 21.5% at December 31, 2016, 2015, and 2014, respectively. The benefit to the Company’s effective income tax rate from taxes on international operations relates to benefits from lower-taxed global operations, primarily due to the use of global funding structures.

The components of the Company’s deferred tax assets and liabilities are as follows (in millions):



As of December 31	2016			2015
Deferred tax assets:
Employee benefit plans	$	661		$	635
Net operating/capital loss and tax credit carryforwards	399			336
Accrued interest	166			293
Other accrued expenses	102			98
Brokerage fee arrangements (1)	66			66
Deferred revenue	57			65
Investment basis differences	48			56
Other	60			57
Total	1,559			1,606
Valuation allowance on deferred tax assets	(130		)	(162		)
Total	$	1,429		$	1,444
Deferred tax liabilities:
Intangibles and property, plant and equipment	$	(982	)	$	(961	)
Other accrued expenses	(101		)	(99		)
Deferred costs	(20		)	(30		)
Unrealized foreign exchange gains	(26		)	(29		)
Unremitted earnings	(29		)	(18		)
Other	(50		)	(44		)
Total	$	(1,208	)	$	(1,181	)
Net deferred tax asset	$	221		$	263

(1) Refer to Note 1 “Basis of Presentation” for details regarding the Revision of Previously Issued Financial Statements.

Deferred income taxes (assets and liabilities have been netted by jurisdiction) have been classified in the Consolidated Statements of Financial Position as follows (in millions):



As of December 31	2016			2015
Deferred tax assets — non-current (2)	$	322		$	300
Deferred tax liabilities — non-current (2)	(101		)	(37		)
Net deferred tax asset	$	221		$	263

(2) For the year ended December 31, 2015, Aon reclassified its current deferred tax positions to non-current and netted the new balances by jurisdiction. Refer to Note 2 “Summary of Significant Accounting Principles and Practices” for additional details.

Valuation allowances have been established primarily with regard to the tax benefits of certain net operating loss, capital loss and interest expense carryforwards. Valuation allowances decreased by $32 million as of December 31, 2016, when compared to December 31, 2015, primarily attributable to the reversal of a valuation allowance and the impact of foreign currency translation.

The Company recognized, as an adjustment to additional paid-in-capital, income tax benefits attributable to employee stock compensation of $(4) million, $126 million and $89 million in 2016, 2015, and 2014, respectively. The year-over-year change is primarily attributable to excess tax benefits not recorded in 2016 because the deduction did not decrease income taxes payable.

Deferred income taxes of $11 million were accrued in 2016 on undistributed earnings that are not permanently reinvested. Undistributed earnings of non-U.S. entities were approximately $2.3 billion at December 31, 2016. U.S. income taxes have not been provided on these undistributed earnings because they are considered to be permanently reinvested in those subsidiaries. It is not practicable to estimate the amount of unrecognized deferred tax liabilities, if any, for these undistributed foreign earnings.

The Company had the following operating and capital loss carryforwards (in millions):



As of December 31	2016		2015
UK
Operating loss carryforwards	$	325	$	449
Capital loss carryforwards	294		360

US
Federal operating loss carryforwards	$	196	$	8
State operating loss carryforwards	474		443

Other Non-US
Operating loss carryforwards	$	350	$	245
Capital loss carryforwards	218		206

As of December 31, 2016, the Company had $126 million of federal operating loss carryforwards and $110 million of state operating loss carryforwards for which a benefit will be recorded in APIC when realized.

The U.K. operating losses and capital losses have an indefinite carryforward. The federal operating loss carryforwards as of December 31, 2016 expire at various dates from 2020 to 2036 and the state operating losses as of December 31, 2016 expire at various dates from 2017 to 2036. Operating and capital losses in other non-US jurisdictions have various carryforward periods and will begin to expire in 2019.

During 2012, the Company was granted a tax holiday for the period from October 1, 2012 through September 30, 2022, with respect to withholding taxes and certain income derived from services in Singapore. This tax holiday and reduced withholding tax rate may be extended when certain conditions are met or may be terminated early if certain conditions are not met. The benefit realized was approximately $46 million, $23 million, and $7 million during the years ended December 31, 2016, 2015, and 2014, respectively. The impact of this tax holiday on diluted earnings per share was $0.17, $0.08, and $0.02 during the years ended December 31, 2016, 2015, and 2014, respectively.

Uncertain Tax Positions

The following is a reconciliation of the Company’s beginning and ending amount of uncertain tax positions (in millions):



	2016			2015
Balance at January 1	$	238		$	211
Additions based on tax positions related to the current year	36			31
Additions for tax positions of prior years	20			53
Reductions for tax positions of prior years	(12		)	(18		)
Settlements	—			(32		)
Business combinations	2			—
Lapse of statute of limitations	(5		)	(5		)
Foreign currency translation	(1		)	(2		)
Balance at December 31	$	278		$	238

The Company’s liability for uncertain tax positions as of December 31, 2016, 2015, and 2014, includes $240 million, $200 million, and $174 million, respectively, related to amounts that would impact the effective tax rate if recognized. It is possible that the amount of unrecognized tax benefits may change in the next twelve months; however, the Company does not expect the change to have a significant impact on its consolidated statements of income or consolidated balance sheets. These changes may be the result of settlements of ongoing audits. At this time, an estimate of the range of the reasonably possible outcomes within the twelve months cannot be made.

The Company recognizes interest and penalties related to uncertain tax positions in its provision for income taxes. The Company accrued potential interest and penalties of $15 million, $2 million, and $4 million in 2016, 2015, and 2014, respectively. The Company recorded a liability for interest and penalties of $48 million, $33 million, and $31 million as of December 31, 2016, 2015, and 2014, respectively.

The Company and its subsidiaries file income tax returns in their respective jurisdictions. The Company has substantially concluded all U.S. federal income tax matters for years through 2007. Material U.S. state and local income tax jurisdiction examinations have been concluded for years through 2005. The Company has concluded income tax examinations in its primary non-U.S. jurisdictions through 2005.