Income Taxes

On December 22, 2017, the "Tax Cuts and Jobs Act" (the “Act”) was enacted in the United States. The provisions of the Act significantly revised the U.S. corporate income tax rules. In the fourth quarter of 2017, the Company recorded a one-time additional income tax expense of $658 million related to the enactment of the Act. The more significant tax law changes resulting from the Act and related impacts to the Company are as follows:

•

A one-time repatriation tax on the deemed repatriation of post-1986 undistributed earnings of foreign subsidiaries. As a result of this one-time deemed repatriation, the Company recorded a one-time additional income tax expense of $676 million during the fourth quarter of 2017. A portion of the resulting income taxes payable can be paid in installments over eight years. The noncurrent income taxes payable related to the one-time repatriation tax was $495 million and $614 million at December 31, 2018 and 2017, respectively. Additionally, as a result of the one-time repatriation provisions of the Act, the Company recorded additional foreign withholding taxes of $53 million in the fourth quarter of 2017 related to the expected repatriation of foreign held cash and equivalents.

•

A reduction in the U.S. corporate federal tax rate from a maximum of 35% to a flat rate of 21% beginning in 2018. Although the lower tax rate took effect in 2018, deferred tax assets and liabilities should be measured using the enacted tax rate expected to apply in the years in which they are expected to be settled. In the fourth quarter of 2017, the Company recorded a one-time net income tax benefit of $82 million as a result of the revaluation of the Company’s deferred tax assets and liabilities to reflect the impact of lower future U.S. corporate tax rates.


•	Deductibility of certain executive compensation. In the fourth quarter of 2017, the Company recorded a one-time write-off of deferred tax assets of $11 million related to the non-deductibility of certain performance-based compensation.

At December 31, 2017, the Company had not completed the accounting for the tax effects of enactment of the Act; however, the Company made a reasonable estimate which was recorded in the fourth quarter of 2017. During 2018, the Company revised its initial estimates which did not result in material changes to the provisional amounts recorded at December 31, 2017, or the effective tax rate for 2018. As of December 31, 2018, the Company has completed its accounting related to the tax effects of enactment of the Act. The Company’s accounting for the tax effects of the Act are subject to future changes due to subsequent clarification of the tax law. On January 15, 2019, the U.S. Department of Treasury released final regulations related to the one-time transition tax. Although the Company's assessment of these final rules is not complete, they are not expected to materially impact the Company’s financial statements.

Provision for income taxes— The components of the provision for income taxes were as follows:



In millions	2018			2017			2016
U.S. federal income taxes:
Current	$	373		$	1,117		$	756
Deferred	(15		)	(10		)	(224		)
Total U.S. federal income taxes	358			1,107			532
Foreign income taxes:
Current	358			296			290
Deferred	49			102			(5		)
Total foreign income taxes	407			398			285
State income taxes:
Current	66			106			90
Deferred	—			(28		)	(34		)
Total state income taxes	66			78			56
Total provision for income taxes	$	831		$	1,583		$	873

Income before taxes for domestic and foreign operations was as follows:



In millions	2018		2017		2016
Domestic	$	1,774	$	1,806	$	1,653
Foreign	1,620		1,464		1,255
Total income before taxes	$	3,394	$	3,270	$	2,908

The reconciliation between the U.S. federal statutory tax rate and the effective tax rate was as follows:



	2018		2017		2016
U.S. federal statutory tax rate	21.0	%	35.0	%	35.0	%
U.S. tax effect of foreign earnings	1.5		0.5		0.7
Tax effect of U.S. federal tax law change	(0.1	)	20.1		—
State income taxes, net of U.S. federal tax benefit	1.6		1.2		1.3
Differences between U.S. federal statutory and foreign tax rates	2.1		(3.5	)	(3.6	)
Nontaxable foreign interest income	(1.7	)	(1.7	)	(2.1	)
Tax effect of foreign dividends	1.0		0.4		0.8
Tax relief for U.S. manufacturers	—		(1.4	)	(1.4	)
Excess tax benefits from stock-based compensation	(0.3	)	(1.5	)	—
Other, net	(0.6	)	(0.7	)	(0.7	)
Effective tax rate	24.5	%	48.4	%	30.0	%

The Company's effective tax rate for the twelve months ended December 31, 2018, 2017 and 2016 was 24.5%, 48.4% and 30.0%, respectively. The 2018 effective tax rate benefited from the lower U.S. corporate federal tax rate and discrete items, primarily related to a discrete tax benefit of $37 million in the third quarter of 2018 related to the release of a valuation allowance against the deferred tax assets of a non-U.S. subsidiary, which was partially offset by a discrete tax charge in the third quarter of 2018 of $22 million related to foreign tax credits. Included in the effective tax rate for 2017 was a one-time additional income tax expense of $658 million related to the enactment of the Act.

Additionally, the effective tax rate for 2018 and 2017 included $10 million and $50 million, respectively, related to excess tax benefits from stock-based compensation guidance effective January 1, 2017. Refer to Note 1. Description of Business and Summary of Significant Accounting Policies for additional information.

Prior to the Act, deferred U.S. federal and state income taxes and foreign withholding taxes had not been provided on substantially all undistributed earnings of international subsidiaries as these earnings were considered permanently invested. As part of the one-time deemed repatriation provisions of the Act, the Company provided for U.S. tax on substantially all undistributed earnings of its foreign subsidiaries as of December 31, 2017. Upon repatriation of these earnings to the U.S., the Company may be subject to foreign withholding taxes. The accrual for foreign withholding taxes related to the expected repatriation of foreign held cash and equivalents as of December 31, 2018 and December 31, 2017 was $71 million and $75 million, respectively.

Deferred foreign withholding taxes have not been provided on undistributed earnings considered permanently invested. As of December 31, 2018, undistributed earnings of certain international subsidiaries that are considered permanently invested were approximately $6 billion. Determination of the related deferred tax liability is not practicable because of the complexities associated with the hypothetical calculation.

Deferred tax assets and liabilities— The components of deferred income tax assets and liabilities at December 31, 2018 and 2017 were as follows:



	2018						2017
In millions	Asset			Liability			Asset			Liability
Goodwill and intangible assets	$	194		$	(484	)	$	195		$	(506	)
Inventory reserves, capitalized tax cost and LIFO inventory	30			(3		)	31			(3		)
Investments	19			(171		)	15			(180		)
Plant and equipment	17			(72		)	18			(64		)
Accrued expenses and reserves	36			—			45			—
Employee benefit accruals	186			—			177			—
Foreign tax credit carryforwards	8			—			13			—
Net operating loss carryforwards	451			—			507			—
Capital loss carryforwards	89			—			98			—
Allowances for uncollectible accounts	10			—			9			—
Pension liabilities	—			(19		)	—			(25		)
Deferred intercompany deductions	—			—			405			—
Unrealized loss (gain) on foreign debt instruments	—			(45		)	—			(19		)
Other	32			(13		)	99			(15		)
Gross deferred income tax assets (liabilities)	1,072			(807		)	1,612			(812		)
Valuation allowances	(418		)	—			(459		)	—
Total deferred income tax assets (liabilities)	$	654		$	(807	)	$	1,153		$	(812	)

The valuation allowances recorded at December 31, 2018 and 2017 related primarily to certain net operating loss carryforwards, capital loss carryforwards and foreign tax credit carryforwards. As of December 31, 2018, the Company has utilized all realizable foreign tax credit carryforwards.

At December 31, 2018, the Company had net operating loss carryforwards available to offset future taxable income in the U.S. and certain foreign jurisdictions, which expire as follows:



	Gross Carryforwards Related
In millions	to Net Operating Losses
2019	$	25
2020	87
2021	81
2022	34
2023	7
2024	7
2025-2045	55
Do not expire	1,532
Total gross carryforwards related to net operating losses	$	1,828

Unrecognized tax benefits— The changes in the amount of unrecognized tax benefits for the years ended 2018, 2017 and 2016 were as follows:



In millions	2018			2017			2016
Beginning balance	$	285		$	210		$	259
Additions based on tax positions related to the current year	3			42			19
Additions for tax positions of prior years	49			100			126
Reductions for tax positions of prior years	(31		)	(24		)	(97		)
Settlements	(5		)	(53		)	(96		)
Foreign currency translation	(4		)	10			(1		)
Ending balance	$	297		$	285		$	210

Included in the balance at December 31, 2018 were approximately $268 million of unrecognized tax benefits that, if recognized, would impact the Company’s effective tax rate.

Settlements during 2017 primarily related to the Company effectively settling with the German Fiscal Authority on issues identified during its 2009-2011 audit, which primarily related to intercompany transactions. During the fourth quarter of 2016, the Company effectively settled with the Internal Revenue Service on issues identified during its 2012-2013 audit, which primarily related to deferred gain recognition and foreign tax credits. Based on this agreement, the Company decreased its unrecognized tax benefits by approximately $96 million.

The Company and its subsidiaries file tax returns in the U.S. and various state, local and foreign jurisdictions. These tax returns are routinely audited by the tax authorities in these jurisdictions including the Internal Revenue Service, Her Majesty's Revenue and Customs, German Fiscal Authority, French Fiscal Authority, and Australian Tax Office, and a number of these audits are currently ongoing, which may increase the amount of the unrecognized tax benefits in future periods. Due to the ongoing audits, the Company believes it is reasonably possible that within the next twelve months the amount of the Company's unrecognized tax benefits may be decreased by approximately $42 million related predominantly to various intercompany transactions. The Company has recorded its best estimate of the potential exposure for these issues. The following table summarizes the open tax years for the Company’s major jurisdictions:



Jurisdiction		Open Tax Years
United States – Federal		2016-2018
United Kingdom		2017-2018
Germany		2012-2018
France		2014-2018
Australia		2013-2018

The Company recognizes interest and penalties related to income tax matters in income tax expense. The accrual for interest and penalties as of December 31, 2018 and 2017 was $25 million for both periods.

On February 18, 2014, the Company received a Notice of Deficiency ("NOD") from the IRS asserting that a non-taxable return of capital received from a subsidiary was a taxable dividend distribution. The NOD assessed additional taxes of $70 million for the 2006 tax year, plus interest and penalties. In May 2014, the Company petitioned the United States Tax Court to challenge the NOD. The Company's petition was subsequently denied and the case proceeded to court with the trial taking place in the third quarter of 2016. In August 2018, the court decided in favor of the Company. The Company did not have a reserve for this matter, which was fully resolved in 2018.