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Income Taxes

12 Months Ended

Dec. 31, 2019

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 $462 million and $495 million as of December 31, 2019 and 2018, 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 had completed its accounting related to the tax effects of enactment of the Act. The Company’s ongoing accounting for the tax effects of the Act are based on the Company's current understanding of the changes in the tax law under the Act, but may be impacted due to issuance of final regulations or further clarification of the tax law.

Provision for income taxes— The components of the provision for income taxes for the twelve months ended December 31, 2019, 2018 and 2017 were as follows:



In millions	2019			2018			2017
U.S. federal income taxes:
Current	$	356		$	373		$	1,117
Deferred	(26		)	(15		)	(10		)
Total U.S. federal income taxes	330			358			1,107
Foreign income taxes:
Current	302			358			296
Deferred	53			49			102
Total foreign income taxes	355			407			398
State income taxes:
Current	77			66			106
Deferred	5			—			(28		)
Total state income taxes	82			66			78
Total provision for income taxes	$	767		$	831		$	1,583

Income before taxes for domestic and foreign operations for the twelve months ended December 31, 2019, 2018 and 2017 was as follows:



In millions	2019		2018		2017
Domestic	$	1,774	$	1,774	$	1,806
Foreign	1,514		1,620		1,464
Total income before taxes	$	3,288	$	3,394	$	3,270

The reconciliation between the U.S. federal statutory tax rate and the effective tax rate for the twelve months ended December 31, 2019, 2018 and 2017 was as follows:



	2019		2018		2017
U.S. federal statutory tax rate	21.0	%	21.0	%	35.0	%
U.S. tax effect of foreign earnings	1.1		1.5		0.5
Tax effect of U.S. federal tax law change	—		(0.1	)	20.1
State income taxes, net of U.S. federal tax benefit	1.7		1.6		1.2
Differences between U.S. federal statutory and foreign tax rates	2.0		2.1		(3.5	)
Nontaxable foreign interest income	(1.4	)	(1.7	)	(1.7	)
Tax effect of foreign dividends	0.2		1.0		0.4
Tax relief for U.S. manufacturers	—		—		(1.4	)
Excess tax benefits from stock-based compensation	(0.9	)	(0.3	)	(1.5	)
Other, net	(0.4	)	(0.6	)	(0.7	)
Effective tax rate	23.3	%	24.5	%	48.4	%

The Company's effective tax rate for the twelve months ended December 31, 2019, 2018 and 2017 was 23.3%, 24.5% and 48.4%, respectively. The 2019 and 2018 effective tax rates benefited from the lower U.S. corporate federal tax rate and discrete items. The 2019 effective tax rate benefited from a discrete tax benefit of $21 million in the third quarter for the U.S. federal provision to return adjustment resulting primarily from changes in estimates related to the Act. The 2018 effective tax rate benefited from a discrete tax benefit of $37 million in the third quarter 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 of $22 million in the third quarter 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 rates for 2019, 2018

and 2017 included $28 million, $10 million and $50 million, respectively, related to excess tax benefits from stock-based compensation.

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 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, 2019 and 2018 was $62 million and $71 million, respectively.

Deferred foreign withholding taxes have not been provided on undistributed earnings considered permanently invested. As of December 31, 2019, undistributed earnings of certain international subsidiaries that are considered permanently invested were approximately $5.7 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 as of December 31, 2019 and 2018 were as follows:



	2019						2018
In millions	Asset			Liability			Asset			Liability
Goodwill and intangible assets	$	202		$	(453	)	$	194		$	(484	)
Inventory reserves, capitalized tax cost and LIFO inventory	29			(3		)	30			(3		)
Investments	16			(158		)	19			(171		)
Plant and equipment	17			(74		)	17			(72		)
Accrued expenses and reserves	42			—			36			—
Employee benefit accruals	176			—			186			—
Foreign tax credit carryforwards	7			—			8			—
Net operating loss carryforwards	419			—			451			—
Capital loss carryforwards	80			—			89			—
Allowances for uncollectible accounts	9			—			10			—
Pension liabilities	—			(15		)	—			(19		)
Unrealized loss (gain) on foreign debt instruments	—			(57		)	—			(45		)
Operating leases	45			(45		)	—			—
Other	32			(13		)	32			(13		)
Gross deferred income tax assets (liabilities)	1,074			(818		)	1,072			(807		)
Valuation allowances	(408		)	—			(418		)	—
Total deferred income tax assets (liabilities)	$	666		$	(818	)	$	654		$	(807	)

The valuation allowances recorded as of December 31, 2019 and 2018 related primarily to certain net operating loss carryforwards, capital loss carryforwards and foreign tax credit carryforwards. As of December 31, 2019, the Company had utilized all realizable foreign tax credit carryforwards.

As of December 31, 2019, 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
2020	$	86
2021	80
2022	25
2023	7
2024	49
2025-2045	117
Do not expire	1,378
Total gross carryforwards related to net operating losses	$	1,742

Unrecognized tax benefits— The changes in the amount of unrecognized tax benefits for the twelve months ended December 31, 2019, 2018 and 2017 were as follows:



In millions	2019			2018			2017
Beginning balance	$	297		$	285		$	210
Additions based on tax positions related to the current year	6			3			42
Additions for tax positions of prior years	13			49			100
Reductions for tax positions of prior years	(14		)	(31		)	(24		)
Settlements	(5		)	(5		)	(53		)
Foreign currency translation	(1		)	(4		)	10
Ending balance	$	296		$	297		$	285

Included in the balance as of December 31, 2019 were approximately $267 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.

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 $56 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		2016-2019
United Kingdom		2017-2019
Germany		2012-2019
France		2016-2019
Australia		2013-2019

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, 2019 and 2018 was $19 million and $25 million, respectively.