Income Taxes

12 Months Ended

Dec. 31, 2016

NOTE 14. INCOME TAXES

GE and GE Capital file a consolidated U.S. federal income tax return. This enables GE and GE Capital to use tax deductions and credits of one member of the group to reduce the tax that otherwise would have been payable by another member of the group. The effective tax rate reflects the benefit of these tax reductions in the consolidated return. GE makes cash payments to GE Capital for tax reductions and GE Capital pays for tax increases at the time GE’s tax payments are due.

Our businesses are subject to regulation under a wide variety of U.S. federal, state and foreign tax laws, regulations and policies. Changes to these laws or regulations may affect our tax liability, return on investments and business operations.

THE GE Capital Exit Plan

In conjunction with the GE Capital Exit Plan, GE Capital significantly reduced its non-U.S. assets while continuing to operate appropriately capitalized non-U.S. businesses with substantial assets related to GE Capital’s vertical financing businesses, including Energy Financial Services, GECAS and Healthcare Equipment Finance. As a result of the GE Capital Exit Plan, GE Capital recognized a tax expense of $6,327 million in continuing operations during 2015. This primarily consisted of $3,548 million of tax expense related to the repatriation of excess foreign cash and the write-off of deferred tax assets of $2,779 million that will no longer be supported under this plan.

The repatriation of cash included approximately $10 billion of foreign earnings that, prior to the approval of the GE Capital Exit Plan, were indefinitely reinvested in GE Capital’s international operations. GE Capital’s indefinitely reinvested earnings were also reduced by charges recognized in connection with the disposition of international assets. The remainder of the indefinitely reinvested earnings will continue to be reinvested in the significant international base of assets that will remain after the GE Capital Exit Plan is fully executed. The write-off of deferred tax assets largely related to our Treasury operations in Ireland where it was no longer apparent that the tax benefits would be realized upon implementation of the GE Capital Exit Plan. These charges, which increased the 2015 Consolidated effective tax rate by 77.3 percentage points, are reported in the lines “Tax on global activities including exports”, and “All other-net” in the Reconciliation of U.S. federal statutory income tax rate to actual income tax rate.”

(BENEFIT) PROVISION FOR INCOME TAXES

(In millions)		2016		2015		2014

GE
Current tax expense (benefit)	$	(140)	$	3,307	$	2,110
Deferred tax expense (benefit) from temporary differences		1,107		(1,800)		(476)
		967		1,506		1,634
GE Capital
Current tax expense (benefit)		(1,138)		2,796		(455)
Deferred tax expense (benefit) from temporary differences		(293)		2,183		(406)
		(1,431)		4,979		(861)
Consolidated
Current tax expense (benefit)		(1,278)		6,103		1,655
Deferred tax expense (benefit) from temporary differences		814		383		(882)
Total	$	(464)	$	6,485	$	773

CONSOLIDATED EARNINGS (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES

(In millions)		2016		2015		2014

U.S. earnings	$	2,145	$	(309)	$	3,176
Non-U.S. earnings		6,885		8,495		7,087
Total	$	9,030	$	8,186	$	10,263

CONSOLIDATED (BENEFIT) PROVISION FOR INCOME TAXES

(In millions)			2016		2015		2014

U.S. Federal
	Current	$	(2,646)	$	1,549	$	(122)
	Deferred		(754)		492		261
Non - U.S.
	Current		1,730		4,867		2,035
	Deferred		1,239		(121)		(982)
Other			(33)		(302)		(419)
Total		$	(464)	$	6,485	$	773

RECONCILIATION OF U.S. FEDERAL STATUTORY INCOME TAX RATE TO ACTUAL INCOME TAX RATE

	Consolidated						GE						GE Capital
	2016		2015		2014		2016		2015		2014		2016		2015		2014


U.S. federal statutory income tax rate	35.0	%	35.0	%	35.0	%	35.0	%	35.0	%	35.0	%	35.0	%	35.0	%	35.0	%
Increase (reduction) in rate resulting from
inclusion of after-tax earnings of GE Capital in
before-tax earnings of GE	-		-		-		4.5		82.4		(4.8)		-		-		-
Tax on global activities including exports	(23.7)		54.1		(17.7)		(20.8)		(52.8)		(12.0)		4.9		(224.5)		(72.0)
U.S. business credits(a)	(4.5)		(4.7)		(3.3)		(0.9)		(4.1)		(1.0)		15.7		9.2		(34.5)
All other – net(b)	(11.9)		(5.2)		(6.5)		(7.9)		(14.2)		(2.5)		14.7		(1.5)		(55.9)
	(40.1)		44.2		(27.5)		(25.1)		11.3		(20.3)		35.3		(216.8)		(162.4)
Actual income tax rate	(5.1)	%	79.2	%	7.5	%	9.9	%	46.3	%	14.7	%	70.3	%	(181.8)	%	(127.4)	%

U.S. general business credits, primarily the credit for energy produced from renewable sources, the advanced energy project credit and the credit for research performed in the U.S.
Included (7.7)% and (7.1)% in consolidated and GE, respectively, related to deductible stock losses in 2016. Included (4.2)% and (10.6)% in consolidated and GE, respectively, related to deductible stock losses in 2015. Also includes, for each period, the expense or (benefit) for “Other” taxes reported above in the consolidated (benefit) provision for income taxes, net of 35% federal effect.

UNRECOGNIZED TAX POSITIONS

Annually, we file over 6,000 income tax returns in over 300 global taxing jurisdictions. We are under examination or engaged in tax litigation in many of these jurisdictions. The Internal Revenue Service (IRS) is currently auditing our consolidated U.S. income tax returns for 2012-2013. In addition, certain other U.S. tax deficiency issues and refund claims for previous years are still unresolved. It is reasonably possible that a portion of the unresolved items could be resolved during the next 12 months, which could result in a decrease in our balance of “unrecognized tax benefits” – that is, the aggregate tax effect of differences between tax return positions and the benefits recognized in our financial statements. The IRS had disallowed the tax loss on our 2003 disposition of ERC Life Reinsurance Corporation. We contested the disallowance of this loss. In August 2016, the government approved a final settlement of the case and the balance of unrecognized tax benefits and associated interest was adjusted to reflect the agreed settlement. During 2015, the IRS completed the audit of our consolidated U.S. income tax returns for 2010-2011, except for certain issues that were completed in 2016. We believe that there are no other jurisdictions in which the outcome of unresolved issues or claims is likely to be material to our results of operations, financial position or cash flows. We further believe that we have made adequate provision for all income tax uncertainties. Resolution of audit matters, including the IRS audit of our consolidated U.S. income tax returns for 2010-2011 and the resolution of the ERC Life Reinsurance Corporation case, reduced our 2016 consolidated income tax rate by 5.3 percentage points. Resolution of audit matters, including the IRS audit of our consolidated U.S. income tax returns for 2010-2011, reduced our 2015 consolidated income tax rate by 4.4 percentage points.

The balance of unrecognized tax benefits, the amount of related interest and penalties we have provided and what we believe to be the range of reasonably possible changes in the next 12 months were:

UNRECOGNIZED TAX BENEFITS

December 31, (In millions)	2016		2015

Unrecognized tax benefits	$	4,692	$	6,778
Portion that, if recognized, would reduce tax expense and effective tax rate(a)		2,886		4,723
Accrued interest on unrecognized tax benefits		615		805
Accrued penalties on unrecognized tax benefits		118		98
Reasonably possible reduction to the balance of unrecognized tax benefits
in succeeding 12 months		0-600		0-700
Portion that, if recognized, would reduce tax expense and effective tax rate(a)		0-500		0-200

(a) Some portion of such reduction may be reported as discontinued operations.

UNRECOGNIZED TAX BENEFITS RECONCILIATION

(In millions)		2016		2015

Balance at January 1	$	6,778	$	5,619
Additions for tax positions of the current year		248		720
Additions for tax positions of prior years(a)		521		1,296
Reductions for tax positions of prior years		(2,016)		(754)
Settlements with tax authorities		(823)		(70)
Expiration of the statute of limitations		(16)		(33)
Balance at December 31	$	4,692	$	6,778

(a) For 2015, the amount shown as “additions for tax positions of prior years” relates primarily ($1,054 million) to the preliminary estimate of uncertain tax liabilities for acquired Alstom businesses. Of the total 2015 additions for tax positions of prior years, $445 million relates to amounts that would not affect tax expense if recognized.

We classify interest on tax deficiencies as interest expense; we classify income tax penalties as provision for income taxes. For the years ended December 31, 2016, 2015 and 2014, $(105) million, $48 million and $(68) million of interest expense (income), respectively, and $(4) million, $(4) million and (45) of tax expense (income) related to penalties, respectively, were recognized in the Statement of Earnings.

DEFERRED INCOME TAXES

Deferred income tax balances reflect the effects of temporary differences between the carrying amounts of assets and liabilities and their tax bases, as well as from net operating loss and tax credit carryforwards, and are stated at enacted tax rates expected to be in effect when taxes are actually paid or recovered. Deferred income tax assets represent amounts available to reduce income taxes payable on taxable income in future years. We evaluate the recoverability of these future tax deductions and credits by assessing the adequacy of future expected taxable income from all sources, including reversal of taxable temporary differences, forecasted operating earnings and available tax planning strategies. To the extent we do not consider it more likely than not that a deferred tax asset will be recovered, a valuation allowance is established.

We have not provided U.S. deferred taxes on cumulative earnings of non-U.S. affiliates and associated companies that have been reinvested indefinitely. These earnings relate to ongoing operations and, at December 31, 2016 and 2015, were approximately $82 billion and $104 billion, respectively. Most of these earnings have been reinvested in active non-U.S. business operations and we do not intend to repatriate these earnings to fund U.S. operations. Because of the availability of U.S. foreign tax credits, it is not practicable to determine the U.S. federal income tax liability that would be payable if such earnings were not reinvested indefinitely. Deferred taxes are provided for earnings of non-U.S. affiliates and associated companies when we plan to remit those earnings.

Aggregated deferred income tax amounts are summarized below.

December 31 (In millions)		2016		2015

Assets
GE	$	21,106	$	20,539
GE Capital		5,093		4,643
		26,199		25,182
Liabilities
GE		(14,440)		(12,873)
GE Capital		(9,926)		(9,204)
		(24,366)		(22,077)
Net deferred income tax asset (liability)	$	1,833	$	3,105

COMPONENTS OF THE NET DEFERRED INCOME TAX ASSET (LIABILITY)

December 31 (In millions)		2016		2015

GE
Principal pension plans	$	8,963	$	8,051
Other non-current compensation and benefits		4,230		4,133
Provision for expenses		2,633		2,827
Retiree insurance plans		2,000		2,122
Non-U.S. loss carryforwards(a)		1,444		1,940
Contract assets		(6,677)		(5,143)
Intangible assets		(2,962)		(3,192)
Depreciation		(1,755)		(1,688)
Investment in global subsidiaries		(899)		(915)
Other – net		(311)		(469)
		6,666		7,666
GE Capital
Operating leases		(3,582)		(3,863)
Financing leases		(1,632)		(1,665)
Energy investments		(1,410)		(1,276)
Investment in global subsidiaries		(343)		5
Intangible assets		(125)		(103)
Non-U.S. loss carryforwards(a)		1,323		2,262
Other – net		936		79
		(4,833)		(4,561)
Net deferred income tax asset (liability)	$	1,833	$	3,105

(a) Net of valuation allowances of $2,450 million and $2,184 million for GE and $391 million and $109 million for GE Capital, for 2016 and 2015, respectively. Of the net deferred tax asset as of December 31, 2016, of $2,767 million, $6 million relates to net operating loss carryforwards that expire in various years ending from December 31, 2016 through December 31, 2018; $472 million relates to net operating losses that expire in various years ending from December 31, 2020 through December 31, 2036 and $2,289 million relates to net operating loss carryforwards that may be carried forward indefinitely.