Income Taxes

12 Months Ended

Dec. 31, 2016

NOTE 21

Income Taxes

The components of income tax expense for the years ended December 31 included in the Consolidated Statements of Income were as follows:

(Millions)				2016		2015		2014
Current income tax expense:
	U.S. federal		$	2,179	$	2,107	$	2,136
	U.S. state and local			272		335		264
	Non-U.S.			342		416		412
		Total current income tax expense		2,793		2,858		2,812
Deferred income tax (benefit) expense:
	U.S. federal			(45)		(23)		352
	U.S. state and local			(8)		(5)		39
	Non-U.S.			(52)		(55)		(97)
		Total deferred income tax (benefit) expense		(105)		(83)		294
Total income tax expense			$	2,688	$	2,775	$	3,106

A reconciliation of the U.S. federal statutory rate of 35 percent to the Company’s actual income tax rate for the years ended December 31 on continuing operations was as follows:

			2016		2015		2014
U.S. statutory federal income tax rate			35.0	%	35.0	%	35.0	%
(Decrease) increase in taxes resulting from:
	Tax-exempt income		(1.7)		(1.7)		(1.5)
	State and local income taxes, net of federal benefit		2.7		2.8		2.7
	Non-U.S. subsidiaries earnings^(a)		(2.0)		(1.8)		(2.2)
	Tax settlements^(b)		(0.6)		(0.2)		(0.5)
	Non deductible expenses^(c)		―		0.9		―
	Other		(0.2)		―		1.0
		Actual tax rates^(a)	33.2	%	35.0	%	34.5	%

Results for all years primarily included tax benefits associated with the undistributed earnings of certain non-U.S. subsidiaries that were deemed to be reinvested indefinitely.
Relates to the resolution of tax matters in various jurisdictions.
Relates to the nondeductible portion of the Prepaid Services goodwill impairment in 2015.

The Company records a deferred income tax (benefit) provision when there are differences between assets and liabilities measured for financial reporting and for income tax return purposes. These temporary differences result in taxable or deductible amounts in future years and are measured using the tax rates and laws that will be in effect when such differences are expected to reverse.

The significant components of deferred tax assets and liabilities as of December 31 are reflected in the following table:

(Millions)				2016		2015
Deferred tax assets:
	Reserves not yet deducted for tax purposes		$	3,889	$	3,771
	Employee compensation and benefits			595		648
	Other			592		520
		Gross deferred tax assets		5,076		4,939
		Valuation allowance		(54)		(58)
		Deferred tax assets after valuation allowance		5,022		4,881
Deferred tax liabilities:
	Intangibles and fixed assets			1,691		1,547
	Deferred revenue			441		509
	Deferred interest			305		323
	Investment in joint ventures			209		231
	Other			121		120
		Gross deferred tax liabilities		2,767		2,730
Net deferred tax assets			$	2,255	$	2,151

A valuation allowance is established when management determines that it is more likely than not that all or some portion of the benefit of the deferred tax assets will not be realized. The valuation allowances as of December 31, 2016 and 2015 are associated with net operating losses and other deferred tax assets in certain non-U.S. operations of the Company.

Accumulated earnings of certain non-U.S. subsidiaries, which totaled approximately $10.4 billion as of December 31, 2016, are intended to be permanently reinvested outside the United States. The Company does not provide for federal income taxes on foreign earnings intended to be permanently reinvested outside the United States. Accordingly, federal taxes, which would have aggregated approximately $3.2 billion as of December 31, 2016, have not been provided on such earnings.

Net income taxes paid by the Company during 2016, 2015 and 2014, were approximately $3.0 billion, $3.4 billion and $2.5 billion, respectively. These amounts include estimated tax payments and cash settlements relating to prior tax years.

The Company is subject to the income tax laws of the United States, its states and municipalities and those of the foreign jurisdictions in which the Company operates. These tax laws are complex, and the manner in which they apply to the taxpayer’s facts is sometimes open to interpretation. Given these inherent complexities, the Company must make judgments in assessing the likelihood that a tax position will be sustained upon examination by the taxing authorities based on the technical merits of the tax position. A tax position is recognized only when, based on management’s judgment regarding the application of income tax laws, it is more likely than not that the tax position will be sustained upon examination. The amount of benefit recognized for financial reporting purposes is based on management’s best judgment of the largest amount of benefit that is more likely than not to be realized on ultimate settlement with the taxing authority given the facts, circumstances and information available at the reporting date. The Company adjusts the level of unrecognized tax benefits when there is new information available to assess the likelihood of the outcome.

The Company is under continuous examination by the Internal Revenue Service (IRS) and tax authorities in other countries and states in which the Company has significant business operations. The tax years under examination and open for examination vary by jurisdiction. The IRS has completed its field examination of the Company’s federal tax returns for years through 2007; however, refund claims for certain years continue to be reviewed by the IRS. In addition, the Company is currently under examination by the IRS for the years 2008 through 2014.

The following table presents changes in unrecognized tax benefits:

(Millions)			2016		2015		2014
Balance, January 1		$	870	$	909	$	1,044
Increases:
	Current year tax positions		167		81		4
	Tax positions related to prior years		117		177		111
Decreases:
	Tax positions related to prior years		(81)		(256)		(181)
	Settlements with tax authorities		(76)		(15)		(67)
	Lapse of statute of limitations		(22)		(26)		(1)
	Effects of foreign currency translations		(1)		―		(1)
Balance, December 31		$	974	$	870	$	909

Included in the unrecognized tax benefits of $1.0 billion, $0.9 billion and $0.9 billion for December 31, 2016, 2015 and 2014, respectively, are approximately $516 million, $502 million and $412 million, respectively, that, if recognized, would favorably affect the effective tax rate in a future period.

The Company believes it is reasonably possible that its unrecognized tax benefits could decrease within the next 12 months by as much as $449 million, principally as a result of potential resolutions of prior years’ tax items with various taxing authorities. The prior years’ tax items include unrecognized tax benefits relating to the deductibility of certain expenses or losses and the attribution of taxable income to a particular jurisdiction or jurisdictions. Of the $449 million of unrecognized tax benefits, approximately $309 million relates to amounts that, if recognized, would be recorded in shareholders’ equity and would not impact the Company’s results of operations or its effective tax rate. In January 2017, the Company reached resolution with the IRS on an item comprising approximately $289 million of the $309 million referenced above. As a result, $289 million will be recognized in shareholders’ equity in the first quarter of 2017.

Interest and penalties relating to unrecognized tax benefits are reported in the income tax provision. For the years ended December 31, 2016 and 2015, the Company recognized approximately $9 million and $38 million, respectively, in expenses for interest and penalties. For the year ended December 31, 2014, the Company recognized benefits of approximately $19 million of interest and penalties. The Company had approximately $173 million and $164 million accrued for the payment of interest and penalties as of December 31, 2016 and 2015, respectively.