

(millions)	2019			2018			2017
Income before income taxes
United States	$	938		$	851		$	1,097
Foreign	367			478			560
	1,305			1,329			1,657
Income taxes
Currently payable
Federal	345			7			358
State	52			28			31
Foreign	77			99			79
	474			134			468
Deferred
Federal	(124		)	109			(41		)
State	(29		)	(59		)	8
Foreign	—			(3		)	(25		)
	(153		)	47			(58		)
Total income taxes	$	321		$	181		$	410



	2019		2018		2017
U.S. statutory income tax rate	21.0	%	21.0	%	35.0	%
Foreign rates varying from U.S. statutory rate	(2.5	)	(3.0	)	(6.7	)
Excess tax benefits on share-based compensation	—		(0.3	)	(0.3	)
State income taxes, net of federal benefit	1.3		1.5		1.4
Cost (benefit) of remitted and unremitted foreign earnings	0.8		0.7		0.1
Legal entity restructuring, deferred tax impact	—		(3.3	)	—
Discretionary pension contributions	—		(2.3	)	—
Revaluation of investment in foreign subsidiary	2.5		—		—
Net change in valuation allowance	(1.6	)	2.0		(0.4	)
U.S. deduction for qualified production activities	—		—		(1.4	)
Statutory rate changes, deferred tax impact	0.3		—		(9.0	)
U.S. deemed repatriation tax	—		(1.2	)	10.4
Intangible property transfer	—		—		(2.4	)
Divestiture	2.9		—		—
Out-of-period adjustment	3.0		—		—
Other	(3.1	)	(1.5	)	(1.9	)
Effective income tax rate	24.6	%	13.6	%	24.8	%

The 2019 effective income tax rate was unfavorably impacted by a permanent basis difference in the assets sold to Ferrero as well as an out-of-period correction. During the fourth quarter of 2019, the Company recorded an out-of-period adjustment to correct an error in the tax rate applied to a deferred tax asset arising from an intangible property transfer in a prior year. The adjustment increased income tax expense and decreased deferred tax assets by $39 million, respectively. We determined the adjustment to be immaterial to our Consolidated Financial Statements for the year ended December 28, 2019 and related prior annual and quarterly periods.

The 2018 effective income tax rate benefited from the reduction of the U.S. corporate tax rate as well as a $11 million reduction of income tax expense due to changes in estimates related to the Tax Cuts and Jobs Act, the impact of discretionary pension contributions totaling $250 million in 2018, which were designated as 2017 tax year contributions, and a $44 million discrete tax benefit as a result of the remeasurement of deferred taxes following a legal entity restructuring.

The 2017 effective income tax rate benefited from a deferred tax benefit of $39 million resulting from intercompany transfers of intellectual property under the application of the newly adopted standard. See discussion regarding the adoption of ASU 2016-16, Intra-Entity Transfers of Assets Other Than Inventory, in Note 1.

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (Tax Act). The Tax Act made broad and complex changes to the U.S. tax code which impacted our year ended December 30, 2017 including but not limited to, reducing the corporate tax rate from 35% to 21%, requiring a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries that may be electively paid over eight years, and accelerating first year expensing of certain capital expenditures.

Shortly after the Tax Act was enacted, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB 118), which provides guidance on accounting for the Tax Act’s impact. SAB 118 provided a measurement period, which in no case should extend beyond one year from the Tax Act enactment date, during which a company may complete the accounting for the impacts of the Tax Act under ASC Topic 740.

The Company's 2018 income tax provision includes an $11 million reduction to income tax expense due to changes in estimates related to the Tax Act. The reduction is primarily related to a $16 million reduction in the transition tax estimate and $5 million of additional tax associated primarily with the final assessment of changes in our indefinite reinvestment assertion and resulting tax.

Transition tax on foreign earnings: The transition tax is a tax on the previously untaxed accumulated and current earnings and profits of certain of our foreign subsidiaries. In order to determine the amount of the transition tax, the Company must determine, in addition to other factors, the amount of post-1986 earnings and profits (E&P) of the relevant subsidiaries, as well as the amount of non-U.S. income taxes paid on such earnings. E&P is similar to retained earnings of the subsidiary, but requires other adjustments to conform to U.S. tax rules. As of December 30, 2017, based on accumulated foreign earnings and profits of approximately $2.6 billion, which are primarily in Europe, the Company was able to make a reasonable estimate of the transition tax and recorded a transition tax obligation of $157 million. In the third quarter of 2018, the Company recorded a $16 million reduction to the transition tax liability and tax expense based on updated estimates of E&P. During the fourth quarter of 2018, the Company, as part of completing its accounting under SAB 118, revised its estimate of the transition tax liability to $94 million, and recorded $47 million of tax reserves related to uncertainty in our interpretation of the statute and associated regulations.

Indefinite reinvestment assertion: Prior to the Tax Act, the Company treated a significant portion of its undistributed foreign earnings as indefinitely reinvested. In light of the Tax Act, which included a new territorial tax regime, as of the year ended December 30, 2017, Management determined that the Company would analyze its global capital structure and working capital strategy and considered the indefinite reinvestment assertion to be provisional under SAB 118. In the fourth quarter of 2018, we finished analyzing our global capital structure and working capital strategy and determined that $2.4 billion of foreign earnings as of December 30, 2017 were no longer considered to be indefinitely invested. Accordingly, income tax expense of approximately $5 million was recorded in the fourth quarter of 2018. The Company completed its assessment and accounting under SAB 118 for its indefinite investment assertion.

Reduction in U.S. Corporate Tax Rate: The tax provision as of December 30, 2017, included a tax benefit of $149 million for the remeasurement of certain deferred tax assets and liabilities to reflect the corporate income tax rate reduction impact to the Company's net deferred tax balances. The accounting for the reduction in the U.S. Corporate Tax rate was considered complete in the fourth quarter of 2017.

The Tax Act also created a new requirement that certain income earned by foreign subsidiaries, known as global intangible low-tax income (GILTI), must be included in the gross income of their U.S. shareholder. During the fourth quarter of 2018, the Company elected to treat the tax effect of GILTI as a current-period expense when incurred.

As of December 28, 2019, approximately $800 million of unremitted earnings were considered indefinitely reinvested. The unrecognized deferred tax liability for these earnings is estimated at approximately $20 million. However, this estimate could change based on the manner in which the outside basis difference associated with these earnings reverses.

Management monitors the Company’s ability to utilize certain future tax deductions, operating losses and tax credit carryforwards, prior to expiration. Changes resulting from management’s assessment will result in impacts to deferred tax assets and the corresponding impacts on the effective income tax rate. Valuation allowances were recorded to reduce deferred tax assets to an amount that will, more likely than not, be realized in the future. The total tax benefit of carryforwards at year-end 2019 and 2018 were $279 million and $270 million, respectively, with related valuation allowances at year-end 2019 and 2018 of $146 million and $166 million, respectively. Of the total carryforwards at year-end 2019, substantially all will expire after 2024.

The following table provides an analysis of the Company’s deferred tax assets and liabilities as of year-end 2019 and 2018. Deferred tax liabilities decreased in 2019 due primarily to the divestiture of selected cookies, fruit and fruit-flavored snacks, pie crusts, and ice cream cones businesses.



	Deferred tax assets						Deferred tax liabilities
(millions)	2019			2018			2019		2018
U.S. state income taxes	$	—		$	—		$	6	$	19
Advertising and promotion-related	11			11			—		—
Wages and payroll taxes	15			20			—		—
Inventory valuation	17			14			—		—
Employee benefits	143			132			—		—
Operating loss, credit and other carryforwards	279			270			—		—
Hedging transactions	9			10			—		—
Depreciation and asset disposals	—			—			217		220
Trademarks and other intangibles	—			—			526		613
Deferred compensation	19			20			—		—
Stock options	29			31			—		—
Other	9			26			—		—
	531			534			749		852
Less valuation allowance	(146		)	(166		)	—		—
Total deferred taxes	$	385		$	368		$	749	$	852
Net deferred tax asset (liability)	$	(364	)	$	(484	)
Classified in balance sheet as:
Other assets	$	231		$	246
Other liabilities	(595		)	(730		)
Net deferred tax asset (liability)	$	(364	)	$	(484	)

The change in valuation allowance reducing deferred tax assets was:



(millions)	2019			2018			2017
Balance at beginning of year	$	166		$	153		$	131
Additions charged to income tax expense	25			29			35
Reductions credited to income tax expense (a)	(47		)	(1		)	(28		)
Currency translation adjustments	2			(15		)	15
Balance at end of year	$	146		$	166		$	153

The Company is subject to federal income taxes in the U.S. as well as various state, local, and foreign jurisdictions. The Company’s 2019 provision for U.S. federal income taxes represents approximately 70% of the Company’s consolidated income tax provision. The Company was chosen to participate in the Internal Revenue Service (IRS) Compliance Assurance Program (CAP) beginning with the 2008 tax year. As a result, with limited exceptions, the Company is no longer subject to U.S. federal examinations by the IRS for years prior to 2018. The Company is under examination for income and non-income tax filings in various state and foreign jurisdictions.

As of December 28, 2019, the Company has classified $19 million of unrecognized tax benefits as a current tax liability. The Company believes a decrease of $44 million in unrecognized tax benefits during the next twelve months is reasonably possible primarily due to finalization of tax examinations. In addition, this decrease is expected to be offset by approximately $5 million of projected additions during the next twelve months related primarily to ongoing intercompany transfer pricing activity. Management is currently unaware of any issues under review that could result in significant additional payments, accruals, or other material deviation in this estimate.

Following is a reconciliation of the Company’s total gross unrecognized tax benefits as of the years ended December 28, 2019, December 29, 2018 and December 30, 2017. For the 2019 year, approximately $81 million represents the amount that, if recognized, would affect the Company’s effective income tax rate in future periods.



(millions)	2019			2018			2017
Balance at beginning of year	$	97		$	60		$	63
Tax positions related to current year:
Additions (a)	5			51			6
Tax positions related to prior years:
Additions	4			4			5
Reductions	(14		)	(13		)	(8		)
Settlements	(1		)	(4		)	(4		)
Lapses in statutes of limitation	(1		)	(1		)	(2		)
Balance at end of year	$	90		$	97		$	60