Income Taxes

12 Months Ended

Dec. 31, 2018

Note 11 – Income Taxes

The Tax Act, enacted by the U.S. government on December 22, 2017, made broad and complex changes to the U.S. tax code which required 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 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.

In 2017, Credco recorded a net discrete tax charge of $858 million related to the Tax Act that was accounted for as a provisional estimate under SAB 118. Credco has completed its assessment of and accounting for the Tax Act, and recorded a net discrete tax benefit of $23 million for the year ended December 31, 2018, which represents the final adjustment to Credco’s 2017 original provisional estimate, which is further explained below

Impacts of the Deemed Repatriation: In 2017, Credco recorded a provisional tax charge of $737 million related to the one-time transition tax on unrepatriated post-1986 accumulated earnings and profits (E&P) of certain foreign subsidiaries. Credco has completed its assessment of the transition tax, which resulted in an additional tax charge of $2 million to its original estimate of $737 million. Credco also recorded a provisional deferred tax liability of $105 million to account for the state income and foreign withholding tax on potential future cash dividends paid from such E&P. Credco has completed its assessment and reduced the deferred tax liability for state income and foreign withholding taxes related to certain foreign subsidiaries, which resulted in a discrete tax benefit adjustment of $25 million to its original provisional estimate.

Remeasurement of Deferred Tax Assets and Liabilities: In 2017, Credco recorded a provisional deferred tax charge of $16 million related to the remeasurement of its U.S. federal net deferred tax assets to reflect the change in the corporate tax rate from 35 percent to 21 percent, as well as other provisions of the Tax Act. Credco has completed its assessment of the remeasurement of deferred tax assets and liabilities which resulted in no change to its original estimate.

The global intangible low tax income (GILTI) provisions of the Tax Act impose a minimum tax on foreign income in excess of a deemed return on tangible assets. Credco has elected to account for GILTI as a current period expense when incurred.

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 for the years ended December 31 included in Credco’s Consolidated Statements of Income were as follows:

(Millions)				2018		2017		2016
Current income tax expense (benefit):
	U.S. federal		$	(14)	$	785	$	(4)
	U.S. state and local			(6)		15		(6)
	Non-U.S.			84		24		11
		Total current income tax expense		64		824		1
Deferred income tax (benefit) expense:
	U.S. federal			(28)		58		10
	U.S. state and local			1		1		1
	Non-U.S.			(8)		(5)		3
		Total deferred income tax (benefit) expense		(35)		54		14
Total income tax expense			$	29	$	878	$	15

A reconciliation of the U.S. federal statutory rate of 21 percent as of December 31, 2018, and 35 percent as of both December 31, 2017 and 2016, to Credco’s actual income tax rate on continuing operations was as follows:

		2018		2017		2016
U.S. statutory federal income tax rate		21.0	%	35.0	%	35.0	%
(Decrease) increase in taxes resulting from:
	State and local income taxes, net of federal benefit	(0.4)		(0.3)		(0.5)
	Non-U.S. subsidiaries earnings^(a)	(8.7)		(25.7)		(25.1)
	Tax settlements^(b)	―		(1.1)		(1.4)
	U.S. Tax Act^(c)	(5.6)		311.6		―
	Other^(d)	0.7		(0.2)		(0.9)
Actual tax rate		7.0	%	319.3	%	7.1	%

Results for 2018 reflect the reduction in the U.S. federal statutory tax rate and the impact of certain prior years’ tax item. Results for 2017 and 2016 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 $858 million charge in 2017 for the impacts of the Tax Act and the adjustments thereto in 2018

Results for all years include the impact of prior year tax returns filed in the current year

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)				2018		2017
Deferred tax assets:
	Reserves not yet deducted for tax purposes		$	36	$	26
	State income taxes			7		5
	Foreign exchange loss			42		7
	Other			29		―
		Gross deferred tax assets		114		38
Deferred tax liabilities:
	Investment in foreign subsidiaries^(a)			77		105
		Gross deferred tax liabilities		77		105
Net deferred tax assets (liabilities)			$	37	$	(67)

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.

Credco is under continuous examination by the Internal Revenue Service (IRS) and tax authorities in other countries and states in which it has significant business operations. The tax years under examination and open for examination vary by jurisdiction. In 2018, Credco settled its US federal income tax audits for tax years 2008-2014, and the statute of limitations for these years remain open through 2019. Tax years from 2015 onwards are open for examination by the IRS.

The following table presents changes in unrecognized tax benefits:

(Millions)				2018		2017		2016
Balance, January 1			$	24	$	308	$	211
	Increases:
		Current year tax positions		4		8		79
		Tax positions related to prior years		46		―		24
	Decreases:
		Tax positions related to prior years ^(a)		―		(289)		(1)
		Settlements with tax authorities		―		―		(1)
		Lapse of statute of limitations		(1)		(3)		(4)
Balance, December 31			$	73	$	24	$	308

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 shareholder’s equity, specifically within AOCI

Included in the unrecognized tax benefits of $73 million, $24 million and $308 million for December 31, 2018, 2017 and 2016, respectively, are approximately $52 million, $19 million and $12 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 year ended December 31, 2018, Credco recognized an immaterial amount for interest and penalties. For the years ended December 31, 2017 and 2016, Credco recognized tax benefits of approximately $1 million and $2 million, respectively, for interest and penalties. Credco had approximately $5 million accrued for the payment of interest and penalties as of both December 31, 2018 and 2017.

Current taxes due to American Express or affiliates as of December 31, 2018 and 2017 were $727 million and $786 million, respectively. The amount due to American Express for 2018 includes a $731 million payable related to the deemed repatriation tax.

		Payments due by year
(Millions)		2019		2020 - 2021		2022 - 2023		2024 and thereafter		Total
Deemed repatriation tax^(a)	$	63	$	116	$	116	$	436	$	731

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 starting in 2018. This amount does not reflect other related non-cash accruals

Net income taxes paid by Credco during 2018 were approximately $144 million and net income taxes refunded to Credco during 2017 were approximately $308 million.