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INCOME TAXES
12 Months Ended
Dec. 31, 2019
INCOME TAXES  
INCOME TAXES

23. Income Taxes

U.S. Tax Reform Overview

On December 22, 2017, the U.S. enacted Public Law 115-97, known informally as the Tax Cuts and Jobs Act (the Tax Act). The Tax Act reduced the statutory rate of U.S. federal corporate income tax to 21 percent and enacted numerous other changes impacting AIG and the insurance industry.

The Tax Act includes provisions for Global Intangible Low-Taxed Income (GILTI) under which taxes are imposed on the excess of a deemed return on tangible assets of certain foreign subsidiaries and for Base Erosion and Anti-Abuse Tax (BEAT) under which taxes are imposed on certain base eroding payments to affiliated foreign companies. While the U.S. tax authorities issued formal guidance, including recently issued proposed and final regulations for BEAT and other provisions of the Tax Act, there are still certain aspects of the Tax Act that remain unclear and subject to substantial uncertainties. Additional guidance is expected in future periods. Such guidance may result in changes to the interpretations and assumptions we made and actions we may take, which may impact amounts recorded with respect to international provisions of the Tax Act, possibly materially. Consistent with accounting guidance, we treat BEAT as a period tax charge in the period the tax is incurred and have made an accounting policy election to treat GILTI taxes in a similar manner.

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income

In February 2018, the FASB issued an accounting standard that allows the optional reclassification of stranded tax effects within Accumulated Other Comprehensive Income (AOCI) that arise due to the enactment of the Tax Act to retained earnings. We elected to early adopt the standard for the three-month period ended March 31, 2018. As a result of adopting this standard, we reclassified $248 million from AOCI to retained earnings. The amount reclassified includes stranded effects related to the change in the U.S. federal corporate income tax rate on the gross temporary differences and related valuation allowances.

We use an item-by-item approach to release the stranded or disproportionate income tax effects in AOCI related to our available-for-sale securities. Under this approach, a portion of the disproportionate tax effects is assigned to each individual security lot at the date the amount becomes lodged. When the individual securities are sold, mature, or are otherwise impaired on an other-than-temporary basis, the assigned portion of the disproportionate tax effect is reclassified from AOCI to income from continuing operations.

EFFECTIVE TAX RATE

The following table presents income (loss) from continuing operations before income tax expense (benefit) by U.S. and foreign location in which such pre-tax income (loss) was earned or incurred:

Years Ended December 31,

 

 

 

 

 

 

(in millions)

 

2019

 

2018

 

2017

U.S.

$

3,825

$

(12)

$

1,940

Foreign

 

1,462

 

269

 

(474)

Total

$

5,287

$

257

$

1,466

The following table presents the income tax expense (benefit) attributable to pre-tax income (loss) from continuing operations:

Years Ended December 31,

 

 

 

 

 

 

(in millions)

 

2019

 

2018

 

2017

Foreign and U.S. components of actual income tax expense:

 

 

 

 

 

 

U.S.:

 

 

 

 

 

 

Current

$

278

$

134

$

427

Deferred

 

633

 

(175)

 

6,865

Foreign:

 

 

 

 

 

 

Current

 

267

 

202

 

209

Deferred

 

(12)

 

(7)

 

25

Total

$

1,166

$

154

$

7,526

Our actual income tax (benefit) expense differs from the statutory U.S. federal amount computed by applying the federal income tax rate due to the following:

Years Ended December 31,

2019

 

2018

 

2017

 

 

Pre-Tax

 

Tax

 

Percent of

 

 

 

Pre-Tax

 

Tax

 

Percent of

 

 

 

 

 

Tax

 

Percent of

 

 

 

Income

 

Expense/

 

Pre-Tax

 

 

 

Income

 

Expense/

 

Pre-Tax

 

 

 

Pre-Tax

 

Expense/

 

Pre-Tax

 

(dollars in millions)

 

(Loss)

 

(Benefit)

 

Income (Loss)

 

 

 

(Loss)

 

(Benefit)

Income (Loss)

 

 

 

Income

 

(Benefit)

 

Income

 

U.S. federal income tax at statutory

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

rate

$

5,336

$

1,120

 

21.0

%

 

$

255

$

54

 

21.0

%

 

$

1,476

$

517

 

35.0

%

Adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax exempt interest

 

 

 

(25)

 

(0.5)

 

 

 

 

 

(37)

 

(14.5)

 

 

 

 

 

(111)

 

(7.5)

 

Uncertain tax positions*

 

 

 

258

 

4.8

 

 

 

 

 

176

 

69.0

 

 

 

 

 

660

 

44.7

 

Reclassifications from accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

other comprehensive income

 

 

 

(113)

 

(2.1)

 

 

 

 

 

(72)

 

(28.2)

 

 

 

 

 

(184)

 

(12.5)

 

Dispositions of Subsidiaries

 

 

 

21

 

0.4

 

 

 

 

 

-

 

-

 

 

 

 

 

17

 

1.2

 

Tax Attribute Restoration

 

 

 

-

 

-

 

 

 

 

 

-

 

-

 

 

 

 

 

-

 

-

 

Non-controlling Interest

 

 

 

(5)

 

(0.1)

 

 

 

 

 

(1)

 

(0.4)

 

 

 

 

 

(7)

 

(0.5)

 

Non-deductible transfer pricing

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

charges

 

 

 

15

 

0.3

 

 

 

 

 

29

 

11.4

 

 

 

 

 

35

 

2.4

 

Dividends received deduction

 

 

 

(40)

 

(0.7)

 

 

 

 

 

(38)

 

(14.8)

 

 

 

 

 

(90)

 

(6.1)

 

Effect of foreign operations

 

 

 

69

 

1.3

 

 

 

 

 

44

 

17.3

 

 

 

 

 

69

 

4.7

 

Share-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

payments excess tax effect

 

 

 

27

 

0.5

 

 

 

 

 

(13)

 

(5.1)

 

 

 

 

 

(40)

 

(2.7)

 

State income taxes

 

 

 

13

 

0.2

 

 

 

 

 

10

 

3.9

 

 

 

 

 

(9)

 

(0.6)

 

Impact of Tax Act

 

 

 

-

 

-

 

 

 

 

 

62

 

24.3

 

 

 

 

 

6,687

 

453.0

 

Global intangible low-taxed income

 

 

 

13

 

0.2

 

 

 

 

 

21

 

8.2

 

 

 

 

 

-

 

-

 

Other*

 

 

 

(134)

 

(2.5)

 

 

 

 

 

(102)

 

(40.0)

 

 

 

 

 

(58)

 

(3.9)

 

Effect of discontinued operations

 

 

 

(8)

 

(0.1)

 

 

 

 

 

40

 

15.7

 

 

 

 

 

3

 

0.2

 

Valuation allowance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

 

 

(44)

 

(0.8)

 

 

 

 

 

21

 

8.2

 

 

 

 

 

43

 

2.9

 

Consolidated total amounts

 

5,336

 

1,167

 

21.9

 

 

 

255

 

194

 

76.0

 

 

 

1,476

 

7,532

 

510.3

 

Amounts attributable to discontinued

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

operations

 

49

 

1

 

2.0

 

 

 

(2)

 

40

 

NM

 

 

 

10

 

6

 

60.0

 

Amounts attributable to continuing

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

operations

$

5,287

$

1,166

 

22.1

%

 

$

257

$

154

 

59.9

%

 

$

1,466

$

7,526

 

513.4

%

*2019 includes a net charge of $96 million related to the accrual of IRS interest, of which $207 million tax expense is reported in Uncertain Tax Positions and $(111) million tax benefit is reported in Other. 2018 includes a net charge of $83 million related to the accrual of IRS interest, of which $189 million tax expense is reported in Uncertain Tax Positions and $(106) million tax benefit is reported in Other. 2017 includes a net charge of $301 million related to the accrual of IRS interest, of which $245 million tax expense is reported in Uncertain Tax Positions and $56 million tax expense is reported in Other.

 

For the year ended December 31, 2019, the effective tax rate on income from continuing operations was 22.1 percent. The effective tax rate on income from continuing operations differs from the statutory tax rate of 21 percent primarily due to a $96 million net charge principally related to the accrual of IRS interest (including interest related to uncertain tax positions), $82 million associated with the effect of foreign operations, $37 million of tax charges and related interest associated with increases in uncertain tax positions primarily related to open tax issues and audits in state and local jurisdictions, $27 million of excess tax charges related to share-based compensation payments recorded through the income statement, and $15 million of non-deductible transfer pricing charges, partially offset by tax benefits of $113 million of reclassifications from accumulated other comprehensive income to income from continuing operations related to the disposal of available for sale securities, $65 million associated with tax exempt income, and $44 million of valuation allowance activity related to certain foreign subsidiaries and state jurisdictions. Effect of foreign operations is primarily related to income and losses in our foreign operations taxed at statutory tax rates different than 21 percent, and foreign income subject to U.S. taxation.

For the year ended December 31, 2018, the effective tax rate on income from continuing operations was 59.9 percent. The effective tax rate on income from continuing operations differs from the statutory tax rate of 21 percent primarily due to a $83 million net charge primarily related to the accrual of IRS interest (including interest related to uncertain tax positions), $62 million measurement period adjustment related to the deemed repatriation tax, $44 million associated with the effect of foreign operations, $29 million of non-deductible transfer pricing charges, $21 million of additional U.S. taxes imposed on income of our foreign subsidiaries under international provisions of the Tax Act, and $21 million of valuation allowance activity related to certain foreign subsidiaries and state jurisdictions, partially offset by tax benefits of $75 million associated with tax exempt income, and $72 million of reclassifications from accumulated other comprehensive income to income from continuing operations related to the disposal of available for sale securities. Effect of foreign operations is primarily related to income and losses in our foreign operations taxed at statutory tax rates different than 21 percent and foreign income subject to U.S. taxation.

 

For the year ended December 31, 2017, the effective tax rate on income from continuing operations was not meaningful. The effective tax rate differs from the 2017 statutory tax rate of 35 percent primarily due to tax charges of $6.7 billion associated with the enactment of the Tax Act discussed above, $660 million of tax charges and related interest associated with increases in uncertain tax positions primarily related to cross border financing transactions and other open tax issues, $69 million associated with the effect of foreign operations, and $35 million of non-deductible transfer pricing charges, partially offset by tax benefits of $201 million of tax exempt income, $184 million of reclassifications from accumulated other comprehensive income to income from continuing operations related to the disposal of available for sale securities, and $40 million of excess tax deductions related to share based compensation payments recorded through the income statement in accordance with relevant accounting literature. Effect of foreign operations is primarily related to losses incurred in our European operations taxed at a statutory tax rate lower than 35 percent and other foreign taxes.

As a result of the Tax Act, the majority of accumulated foreign earnings that were previously untaxed were subject to a one-time deemed repatriation tax. Going forward, certain foreign earnings of our foreign affiliates will be exempt from U.S. tax upon repatriation. Notwithstanding the changes, U.S. tax on foreign exchange gain or loss and certain non-U.S. withholding taxes will continue to be applicable upon future repatriations of foreign earnings.

For the year ended December 31, 2019, we consider our foreign earnings with respect to certain operations in Canada, South Africa, the Far East, Latin America, Bermuda as well as the European, Asia Pacific and Middle East regions to be indefinitely reinvested. These earnings relate to ongoing operations and have been reinvested in active business operations. While, following the enactment of the Tax Act, distributions from foreign affiliates are, generally, not subject to U.S. income tax, such distributions may be subject to non-U.S. withholding taxes. A deferred tax liability of approximately $110 million related to such withholding taxes has not been recorded for those foreign subsidiaries whose earnings are considered to be indefinitely reinvested. Additionally, as of December 31, 2019, we do not project any significant potential U.S. tax with respect to foreign currency gains or losses accumulated on previously taxed unremitted foreign earnings and therefore no deferred tax has been recorded. Deferred taxes, if necessary, have been provided on earnings of non-U.S. affiliates whose earnings are not indefinitely reinvested.

The following table presents the components of the net deferred tax assets (liabilities):

December 31,

 

 

 

 

(in millions)

 

2019

 

2018

Deferred tax assets:

 

 

 

 

Losses and tax credit carryforwards

$

10,541

$

11,792

Basis differences on investments

 

2,673

 

2,038

Life policy reserves

 

1,766

 

2,200

Accruals not currently deductible, and other

 

743

 

608

Investments in foreign subsidiaries

 

148

 

173

Loss reserve discount

 

471

 

272

Loan loss and other reserves

 

58

 

-

Unearned premium reserve reduction

 

382

 

504

Fixed assets and intangible assets

 

963

 

531

Other

 

319

 

962

Employee benefits

 

617

 

604

Total deferred tax assets

 

18,681

 

19,684

Deferred tax liabilities:

 

 

 

 

Deferred policy acquisition costs

 

(2,200)

 

(2,342)

Unrealized gains related to available for sale debt securities

 

(2,123)

 

(490)

Loan loss and other reserves

 

-

 

(20)

Total deferred tax liabilities

 

(4,323)

 

(2,852)

Net deferred tax assets before valuation allowance

 

14,358

 

16,832

Valuation allowance

 

(1,427)

 

(1,780)

Net deferred tax assets (liabilities)

$

12,931

$

15,052

The following table presents our U.S. consolidated income tax group tax losses and credits carryforwards as of December 31, 2019.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unlimited

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Carryforward

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Period and

December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Carryforward

 

 

 

 

Tax

 

Carryforward Period Ending Tax Year(b)

 

Periods(b)

(in millions)

 

Gross

 

Effected

 

2020

 

2021

 

2022

 

2023

 

2024

 

2025

 

2026 - After

Net operating loss carryforwards

$

32,143

$

6,750

$

-

$

-

$

-

$

-

$

-

$

-

$

6,750

Capital loss carryforwards

$

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

Foreign tax credit carryforwards

 

 

 

2,249

 

738

 

116

 

683

 

711

 

-

 

-

 

-

Other carryforwards

 

 

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

Total AIG U.S. consolidated income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

tax group tax losses and credits

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

carryforwards on a U.S. GAAP basis(a)

 

 

$

8,999

$

738

$

116

$

683

$

711

$

-

$

-

$

6,750

(a)Financial reporting basis is net of unrecognized tax benefits of $2.1 billion for those tax years in which tax attributes are available for use when settlement occurs. (b)Carryforward periods are based on U.S. tax laws governing utilization of tax attributes. Expiration periods are based on the year the carryforward was generated.

Assessment of Deferred Tax Asset Valuation Allowance

The evaluation of the recoverability of our deferred tax asset and the need for a valuation allowance requires us to weigh all positive and negative evidence to reach a conclusion that it is more likely than not that all or some portion of the deferred tax asset will not be realized. The weight given to the evidence is commensurate with the extent to which it can be objectively verified. The more negative evidence that exists, the more positive evidence is necessary and the more difficult it is to support a conclusion that a valuation allowance is not needed.

Our framework for assessing the recoverability of the deferred tax asset requires us to consider all available evidence, including:

the nature, frequency, and amount of cumulative financial reporting income and losses in recent years;

the sustainability of recent operating profitability of our subsidiaries;

the predictability of future operating profitability of the character necessary to realize the net deferred tax asset, including forecasts of future income for each of our businesses and actual and planned business and operational changes;

the carryforward period for the net operating loss, capital loss and foreign tax credit carryforwards, including the effect of reversing taxable temporary differences; and

prudent and feasible actions and tax planning strategies that would be implemented, if necessary, to protect against the loss of the deferred tax asset.

In performing our assessment of the recoverability of the deferred tax asset under this framework, we consider tax laws governing the utilization of the net operating loss, capital loss and foreign tax credit carryforwards in each applicable jurisdiction. Under U.S. tax law, a company generally must use its net operating loss carryforwards before it can use its foreign tax credit carryforwards, even though the carryforward period for the foreign tax credit is shorter than for the net operating loss. Our U.S. federal consolidated income tax group includes both life companies and non-life companies. While the U.S. taxable income of our non-life companies can be offset by our net operating loss carryforwards, only a portion (no more than 35 percent) of the U.S. taxable income of our life companies can be offset by those net operating loss carryforwards. The remaining tax liability of our life companies can be offset by the foreign tax credit carryforwards. Accordingly, we utilize both the net operating loss and foreign tax credit carryforwards concurrently which enables us to realize our tax attributes prior to expiration. As of December 31, 2019, based on all available evidence, it is more likely than not that the U.S. net operating loss and foreign tax credit carryforwards will be utilized prior to expiration and, thus, no valuation allowance has been established.

Estimates of future taxable income, including income generated from prudent and feasible actions and tax planning strategies and any changes to interpretations and assumptions related to the impact of the Tax Act could change in the near term, perhaps materially, which may require us to consider any potential impact to our assessment of the recoverability of the deferred tax asset. Such potential impact could be material to our consolidated financial condition or results of operations for an individual reporting period.

 

For the year ended December 31, 2019, recent changes in market conditions, including interest rate fluctuations, impacted the unrealized tax gains and losses in the U.S. Life Insurance Companies’ available for sale securities portfolio, resulting in a deferred tax liability related to net unrealized tax capital gains. As of December 31, 2019, based on all available evidence, we concluded that no valuation allowance is required. For the year ended December 31, 2019, we released $290 million of valuation allowance associated with the unrealized tax losses in the U.S. Life Insurance Companies’ available for sale securities portfolio, all of which was allocated to other comprehensive income. We released the full amount of valuation allowance previously recorded during the three-month period ended March 31, 2019 and no additional activity was recorded for the remainder of 2019.

For the year ended December 31, 2019, recent changes in market conditions, including interest rate fluctuations, impacted the unrealized tax gains and losses in the U.S. Non-Life Companies’ available for sale securities portfolio, resulting in an increase to the deferred tax liability related to net unrealized tax capital gains. As of December 31, 2019, we continue to be in an overall unrealized tax gain position with respect to the U.S. Non-Life Companies’ available for sale securities portfolio and thus concluded no valuation allowance is necessary in the U.S. Non-Life Companies’ available for sale securities portfolio.

For the year ended December 31, 2019, we recognized a net decrease of $44 million in our deferred tax asset valuation allowance associated with certain foreign subsidiaries and state jurisdictions, primarily attributable to current year activity.

The following table presents the net deferred tax assets (liabilities) at December 31, 2019 and 2018 on a U.S. GAAP basis:

December 31,

 

 

 

 

 

(in millions)

 

 

 

2019

 

2018

Net U.S. consolidated return group deferred tax assets

 

 

$

14,622

$

15,479

Net deferred tax assets (liabilities) in accumulated other comprehensive income

 

 

 

(2,055)

 

(510)

Valuation allowance

 

 

 

(90)

 

(405)

Subtotal

 

 

 

12,477

 

14,564

Net foreign, state and local deferred tax assets

 

 

 

2,006

 

2,031

Valuation allowance

 

 

 

(1,337)

 

(1,374)

Subtotal

 

 

 

669

 

657

Subtotal - Net U.S., foreign, state and local deferred tax assets

 

 

 

13,146

 

15,221

Net foreign, state and local deferred tax liabilities

 

 

 

(215)

 

(169)

Total AIG net deferred tax assets (liabilities)

 

 

$

12,931

$

15,052

Deferred Tax Asset Valuation Allowance of U.S. Consolidated FEDERAL Income Tax Group

At December 31, 2019 and 2018, our U.S. consolidated income tax group had net deferred tax assets after valuation allowance of $12.5 billion and $14.6 billion, respectively. At December 31, 2019 and 2018, our U.S. consolidated income tax group had valuation allowances of $90 million and $405 million, respectively.

Deferred Tax ASSET — Foreign, State and Local

At December 31, 2019 and 2018, we had net deferred tax assets (liabilities) of $454 million and $488 million, respectively, related to foreign subsidiaries, state and local tax jurisdictions, and certain domestic subsidiaries that file separate tax returns.

At December 31, 2019 and 2018, we had deferred tax asset valuation allowances of $1.3 billion and $1.4 billion, respectively, related to foreign subsidiaries, state and local tax jurisdictions, and certain domestic subsidiaries that file separate tax returns. We maintained these valuation allowances following our conclusion that we could not demonstrate that it was more likely than not that the related deferred tax assets will be realized. This was primarily due to factors such as cumulative losses in recent years and the inability to demonstrate profits within the specific jurisdictions over the relevant carryforward periods.

Tax Examinations and Litigation

We file a consolidated U.S. federal income tax return with our eligible U.S. subsidiaries. Income earned by subsidiaries operating outside the U.S. is taxed, and income tax expense is recorded, based on applicable U.S. and foreign law.

The statute of limitations for all tax years prior to 2000 has expired for our consolidated federal income tax return. We are currently under examination for the tax years 2000 through 2013.

On March 20, 2008, we received a Statutory Notice of Deficiency (Notice) from the IRS for years 1997 to 1999. The Notice asserted that we owe additional taxes and penalties for these years primarily due to the disallowance of foreign tax credits associated with cross-border financing transactions. The transactions that are the subject of the Notice extend beyond the period covered by the

Notice, and the IRS has administratively challenged the later periods. The IRS has also administratively challenged other cross-border transactions in later years. We have paid the assessed tax plus interest and penalties for 1997 to 1999. On February 26, 2009, we filed a complaint in the United States District Court for the Southern District of New York (Southern District) seeking a refund of approximately $306 million in taxes, interest and penalties paid with respect to the 1997 taxable year. We allege that the IRS improperly disallowed foreign tax credits and that our taxable income should be reduced as a result of the 2005 restatement of our consolidated financial statements.

We also filed an administrative refund claim on September 9, 2010 for our 1998 and 1999 tax years.

On August 1, 2012, we filed a motion for partial summary judgment related to the disallowance of foreign tax credits associated with cross border financing transactions in the Southern District of New York. The Southern District of New York denied our summary judgment motion and upon AIG’s appeal, the U.S. Court of Appeals for the Second Circuit (the Second Circuit) affirmed the denial. AIG’s petition for certiorari to the U.S. Supreme Court from the decision of the Second Circuit was denied on March 7, 2016. As a result, the case has been remanded back to the Southern District of New York for a jury trial.

In January 2018, the parties reached non-binding agreements in principle on issues presented in the dispute and are currently reviewing the computations reflecting the settlement terms. The resolution is not final and is subject to various reviews. In 2019, we agreed with the IRS to execute an agreement for the tax years at issue in which AIG waives restrictions on the assessment of additional tax related to the settlement of the underlying issues in those tax years. The litigation has been stayed pending the outcome of the review process. We can provide no assurance regarding the outcome of any such litigation or whether binding compromised settlements with the parties will ultimately be reached. We currently believe that we have adequate reserves for the potential liabilities that may result from these matters.

 

Accounting For Uncertainty in Income Taxes

The following table presents a reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits:

Years Ended December 31,

 

 

 

 

 

 

(in millions)

 

2019

 

2018

 

2017

Gross unrecognized tax benefits, beginning of year

$

4,709

$

4,707

$

4,530

Increases in tax positions for prior years

 

51

 

14

 

210

Decreases in tax positions for prior years

 

(1)

 

(6)

 

(33)

Increases in tax positions for current year

 

4

 

-

 

-

Settlements

 

(1)

 

(6)

 

-

Gross unrecognized tax benefits, end of year

$

4,762

$

4,709

$

4,707

At December 31, 2019, 2018 and 2017, our unrecognized tax benefits, excluding interest and penalties, were $4.8 billion, $4.7 billion and $4.7 billion, respectively. The activity for the year ended December 31, 2019 includes increases primarily related to open tax issues and audits in state and local jurisdictions. The activity for the year ended 2018 is not material. The activity for the year ended December 31, 2017 includes increases for amounts associated with cross border financing transactions and the impact of settlement discussions with the IRS related to certain other open tax issues unrelated to the cross border financing transactions.

At December 31, 2019, 2018 and 2017, our unrecognized tax benefits related to tax positions that, if recognized, would not affect the effective tax rate because they relate to such factors as the timing, rather than the permissibility, of the deduction were $43 million, $38 million and $28 million, respectively. Accordingly, at December 31, 2019, 2018 and 2017, the amounts of unrecognized tax benefits that, if recognized, would favorably affect the effective tax rate were $4.7 billion, $4.7 billion and $4.7 billion, respectively.

Interest and penalties related to unrecognized tax benefits are recognized in income tax expense. At December 31, 2019, 2018, and 2017, we had accrued liabilities of $2.4 billion, $2.2 billion, and $2.0 billion, respectively, for the payment of interest (net of the federal benefit) and penalties. For the years ended December 31, 2019, 2018, and 2017, we accrued expense of $236 million, $190 million and $776 million, respectively, for the payment of interest and penalties. The activity for the period ended December 31, 2018, is primarily related to a decrease in the expected federal benefit of interest due to the U.S. corporate tax rate reduction and to an increase in interest and penalties associated with cross border financing transactions.

We believe it is reasonably possible that our unrecognized tax benefits could decrease within the next 12 months by as much as $3.6 billion, principally as a result of potential resolutions or settlements of prior years’ tax items. The prior years’ tax items include unrecognized tax benefits related to the deductibility of certain expenses and matters related to cross border financing transactions.

Listed below are the tax years that remain subject to examination by major tax jurisdictions:

At December 31, 2019

Open Tax Years

Major Tax Jurisdiction

 

United States

2000-2018

Australia

2015-2018

France

2017-2019

Japan

2013-2018

Korea

2014-2018

Singapore

2015-2018

United Kingdom

2018-2019