Income Taxes

12 Months Ended

Dec. 31, 2017

Note 11 – Income Taxes

The Tax Act, enacted by the U.S. government on December 22, 2017, makes broad and complex changes to the U.S. tax code which will require time to interpret. The SEC issued Staff Accounting Bulletin No. 118 (SAB 118) in December, 2017, to provide guidance on accounting for the effects of the Tax Act. SAB 118 provides for a measurement period of up to one year from the Tax Act enactment date for companies to complete their assessment of and accounting for those effects of the Tax Act required under ASC 740 “Implementation Guidance on Accounting for Uncertainty in Income Taxes’’ to be reported in the period of enactment. Under SAB 118, a company must first reflect the income tax effects of the Tax Act for which the accounting is complete in the period of the date of enactment. To the extent the accounting for other income tax effects is incomplete, but for which a reasonable estimate can be determined, companies must record a provisional estimate to be included in their financial statements. For any income tax effect for which a reasonable estimate cannot be determined, an entity must continue to apply ASC 740 based on the provisions of the tax laws in effect immediately prior to the Tax Act being enacted until such time as a reasonable estimate can be determined.

Credco has recorded a discrete net charge of $858 million in the period ended December 31, 2017 related to the Tax Act. For the reasons stated below, Credco requires additional time to complete its analysis of the impacts of the Tax Act and therefore its accounting for the Tax Act is provisional.

Impacts of the Deemed Repatriation: The Tax Act imposed a one-time transition tax on unrepatriated post-1986 accumulated earnings and profits (E&P) of certain of our foreign subsidiaries. To calculate this tax, Credco must determine the cumulative amount of E&P, as well as the amount of foreign taxes paid on such earnings. In addition, Credco made a decision to no longer assert that the accumulated post-1986 E&P of its non-U.S. subsidiaries that are subject to this one-time transition tax are intended to be permanently reinvested outside the United States. As a result Credco recorded a deferred tax liability for the state income and foreign withholding tax consequences of any future cash dividends paid from such E&P. Credco has recorded reasonable estimates based on data available for both the deemed repatriation tax for 2017 of $737 million, and the deferred state income and foreign withholding taxes on potential future distributions of these earnings of $105 million. Until Credco fully completes its analysis of both items, Credco’s accounting for these items is provisional.
Remeasurement of Deferred Tax Assets and Liabilities: Credco has recorded a deferred tax charge of $16 million related to the remeasurement of its U.S. federal net deferred tax assets for 2017. This charge reflects the change in the corporate tax rate from 35 percent to 21 percent, effective January 1, 2018, as well as other provisions of the Tax Act. Certain components of the remeasurement are reasonable estimates based on available information. Until Credco fully completes its analysis of all components, Credco’s accounting for the remeasurement of its net deferred tax assets is provisional.

Credco will complete its analysis of and finalize its accounting for these provisional estimates during the one-year measurement period as prescribed by SAB 118.

The results of operations of Credco are included in the consolidated U.S. federal income tax return of American Express. Under an agreement with American Express, provision for income taxes is recognized on a separate company basis. If benefits for net operating losses, future tax deductions and foreign tax credits cannot be recognized on a separate company basis, such benefits are then recognized based upon a share, derived by formula, of those deductions and credits that are recognizable on an American Express consolidated reporting basis.

The components of income tax expense (benefit) for the years ended December 31 included in Credco’s Consolidated Statements of Income were as follows:

(Millions)				2017		2016		2015
Current income tax expense (benefit):
	U.S. federal ^(a)		$	785	$	(4)	$	15
	U.S. state and local			15		(6)		(4)
	Non-U.S.			24		11		20
		Total current income tax expense		824		1		31
Deferred income tax expense (benefit) :
	U.S. federal ^(b)			58		10		(5)
	U.S. state and local			1		1		―
	Non-U.S.			(5)		3		12
		Total deferred income tax expense		54		14		7
Total income tax expense			$	878	$	15	$	38

2017 includes a charge of $737 million related to the Tax Act deemed repatriation tax on certain non-U.S. earnings.
2017 includes charges related to the Tax Act of $16 million due to the remeasurement of certain federal net deferred tax assets to the lower federal tax rate of 21 percent and $105 million due to deferred state income and foreign withholding tax consequences of future cash distributions from non-U.S. subsidiaries.

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

		2017		2016		2015
U.S. statutory federal income tax rate		35.0	%	35.0	%	35.0	%
(Decrease) increase in taxes resulting from:
	State and local income taxes, net of federal benefit	(0.3)		(0.5)		―
	Non-U.S. subsidiaries earnings^(a)	(25.7)		(25.1)		(25.5)
	Tax Settlements^(b)	(1.1)		(1.4)		(0.4)
	U.S. Tax Act^(c)	311.6		―		―
	Other^(d)	(0.2)		(0.9)		6.0
Actual tax rate		319.3	%	7.1	%	15.1	%

Results for all years include recurring permanent tax benefits, in relation to the level of pretax income. Expenses in the United States are attracting a 35 percent statutory benefit whereas foreign earnings are taxed at lower rates and were indefinitely reinvested prior to the impacts of the Tax Act in 2017 (refer footnote (c)). Credco’s effective tax rate reflects the favorable impact of the tax benefit related to its ongoing funding activities outside of the United States.
Relates to the resolution of tax matters in various jurisdictions.
Relates to the $858 million charge for the impacts of the Tax Act.
Results for 2016 and 2015 include the impact of prior year tax returns filed in the current year.

The results for the year ended December 31, 2015 reflect out-of-period corrections that increased tax expense by $11 million and the effective tax rate by approximately 4.4 percent. The corrections relate to tax calculations of foreign exchange gains/losses in one jurisdiction reflected in the 2014 results. None of the current or prior period financial statements were materially misstated from these corrections.

Credco 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. In particular, the 2017 balances were reduced to reflect the remeasurement of certain federal net deferred tax assets due to the enacted lower federal tax rate of 21 percent.

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

(Millions)				2017		2016
Deferred tax assets:
	Reserves not yet deducted for tax purposes		$	26	$	23
	State income taxes			5		9
	Foreign exchange loss			7		―
	Other			―		1
		Gross deferred tax assets		38		33
Deferred tax liabilities:
	Investment in foreign subsidiaries^(a)			105		―
	Foreign exchange gain			―		8
		Gross deferred tax liabilities		105		8
Net deferred tax assets			$	(67)	$	25

Deferred state income and foreign withholding tax consequences of future cash distributions from non-U.S. subsidiaries.

Credco is subject to the income tax laws of the United States, its states and municipalities and those of the foreign jurisdictions in which American Express 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, Credco 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. Credco adjusts the level of unrecognized tax benefits when there is new information available to assess the likelihood of the outcome.

American Express is under continuous examination by the Internal Revenue Service (IRS) and tax authorities in other countries and states in which American Express has significant business operations. The tax years under examination and open for examination vary by jurisdiction. In February 2017, American Express received notification that all matters outstanding with the IRS for the tax years 1997-2007 were resolved. The resolution of such matters did not impact Credco’s effective tax rate. American Express is currently under examination with the IRS for the tax years 2008 through 2014.

The following table presents changes in unrecognized tax benefits:

(Millions)				2017		2016		2015
Balance, January 1			$	308	$	211	$	364
	Increases:
		Current year tax positions		8		79		2
		Tax positions related to prior years		―		24		1
	Decreases:
		Tax positions related to prior years ^(a)		(289)		(1)		(152)
		Settlements with tax authorities		―		(1)		―
		Lapse of statute of limitations		(3)		(4)		(4)
Balance, December 31			$	24	$	308	$	211

Decrease due to the resolution with the IRS of an uncertain tax position in January 2017, which resulted in the recognition of $289 million in shareholders’ equity, specifically within AOCI.

Included in the unrecognized tax benefits of $24 million, $308 million and $211 million for December 31, 2017, 2016 and 2015, respectively, are approximately $19 million, $12 million and $14 million, respectively that if recognized, would favorably affect the effective tax rate in a future period.

Credco believes it is reasonably possible that its unrecognized tax benefits could decrease within the next 12 months by as much as $3 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 $3 million of unrecognized tax benefits, approximately $2 million relates to amounts that, if recognized, would impact the effective tax rate in a future period.

Interest and penalties relating to unrecognized tax benefits are reported in the income tax provision. For the years ended December 31, 2017, 2016 and 2015, Credco recognized tax benefits of approximately $1 million, $2 million and $1 million, respectively, for interest and penalties. Credco had approximately $5 million and $48 million accrued for the payment of interest and penalties as of December 31, 2017 and 2016, respectively. The reduction in accrued interest in 2017 includes approximately $42 million related to the resolution of an uncertain tax position with the IRS in January 2017, which had no net impact on the income tax provision.

Current taxes due to American Express or affiliates as of December 31, 2017 and 2016 were $786 million and $17 million, respectively. The amount due to American Express for 2017 includes a $729 million payable related to the deemed repatriation tax.

		Payments due by year
(Millions)		2018		2019 - 2020		2021 - 2022		2023 and thereafter		Total
Deemed repatriation tax^(a)	$	-	$	122	$	116	$	491	$	729

(a) Represents Credco’s estimated obligation under the Tax Act to pay the deemed repatriation tax to American Express on certain non-U.S. earnings over eight years, which has been calculated on a provisional basis. This amount does not reflect other related non-cash accruals.

Net income taxes refunded to Credco during 2017 were approximately $308 million and net income taxes paid by Credco during 2016 were approximately $45 million.