Income Taxes

The following table reconciles the total provision for income taxes recorded in the consolidated statements of income with the amounts computed at the statutory federal tax rate of 35%.

TABLE 86: INCOME TAXES



	FOR THE YEAR ENDED DECEMBER 31,
(In Millions)	2017			2016			2015
Tax at Statutory Rate	$	571.9		$	531.0		$	512.7
Tax Exempt Income	(9.6		)	(7.2		)	(4.8		)
Foreign Tax Rate Differential	(50.0		)	(50.9		)	(44.2		)
Excess Tax Benefit Related to Share-Based Compensation	(31.6		)	(12.3		)	—
State Taxes, net	41.0			31.1			33.1
Impact of Tax Cuts and Jobs Act	(53.1		)	—			—
Other	(33.7		)	(7.1		)	(5.6		)

Provision for Income Taxes	$	434.9		$	484.6		$	491.2

The tax provision for 2017 includes a net benefit attributable to the Tax Cuts and Jobs Act of $53.1 million as outlined below, an increased income tax benefit derived from the vesting of restricted stock units and stock option exercises, and Federal and State research tax credits of $20.9 million, $17.6 million of which were recognized related to the Corporation’s technology spend between 2013 and 2016, each resulting in a reduction of the effective tax rate.

The Tax Cuts and Jobs Act was enacted on December 22, 2017, and reduces the U.S. federal corporate tax rate from 35% to 21%. It also requires companies to pay a mandatory deemed repatriation tax on earnings of foreign subsidiaries that were previously tax deferred. At December 31, 2017, Northern Trust has made a reasonable estimate as to the impact of the Tax Cuts and Jobs Act as follows:

TABLE 87: IMPACT OF TAX CUTS AND JOBS ACT




(In Millions)	2017
Federal Taxes on Mandatory Deemed Repatriation	$	150.0
Impact Related to Federal Deferred Taxes	(210.0		)
Other Adjustments	6.9

Provision (Benefit) for Income Taxes	$	(53.1	)

The amounts related to federal taxes on mandatory deemed repatriation and certain other adjustments are considered provisional as of December 31, 2017, as Northern Trust did not have the necessary information available to complete its accounting for the change in tax law and as such has provided a reasonable estimate. Northern Trust will continue to refine the related calculations as additional analyses are completed. In addition, these provisional amounts may require adjustment based on an evolving understanding of the new tax law and the issuance of guidance by the IRS.

The Corporation files income tax returns in the U.S. federal, various state, and foreign jurisdictions. The Corporation is no longer subject to income tax examinations by U.S. federal authorities before 2013, U.S. state or local tax authorities for years before 2011, or non-U.S. tax authorities for years before 2010.

Included in other liabilities within the consolidated balance sheets at December 31, 2017 and 2016 were $27.7 million and $17.2 million of unrecognized tax benefits, respectively. If recognized, 2017 and 2016 net income would have increased by $21.7 million and $11.9 million, respectively, resulting in a decrease of those years’ effective income tax rates. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

TABLE 88: UNRECOGNIZED TAX BENEFITS



(In Millions)	2017			2016
Balance at January 1	$	17.2		$	12.3
Additions for Tax Positions Taken in the Current Year	9.9			—
Additions for Tax Positions Taken in Prior Years	6.2			6.6
Reductions for Tax Positions Taken in Prior Years	(5.4		)	(1.2		)
Reductions Resulting from Expiration of Statutes	(0.2		)	(0.5		)

Balance at December 31	$	27.7		$	17.2

Unrecognized tax benefits had net increases of $10.5 million, resulting in a remaining balance of $27.7 million at December 31, 2017, compared to net increases of $4.9 million resulting in a remaining balance of $17.2 million at December 31, 2016. It is possible that changes in the amount of unrecognized tax benefits could occur in the next 12 months due to changes in judgment related to recognition or measurement, settlements with taxing authorities, or expiration of statute of limitations. Management does not believe that future changes, if any, would have a material effect on the consolidated financial position or liquidity of Northern Trust, although they could have a material effect on operating results for a particular period.

A provision for interest and penalties of $0.1 million, net of tax, was included in the provision for income taxes for the year ended December 31, 2017. This compares to a benefit of interest and penalties of $1.6 million, net of tax, for the year ended December 31, 2016. As of December 31, 2017 and 2016, the liability for the potential payment of interest and penalties totaled $10.3 million and $9.9 million, net of tax, respectively.

Pre-tax earnings of non-U.S. subsidiaries are subject to U.S. taxation when effectively repatriated. Northern Trust provides for income taxes on the undistributed earnings of non-U.S. subsidiaries, except to the extent that those earnings are indefinitely reinvested outside the U.S. Northern Trust elected to indefinitely reinvest $246.1 million, $237.1 million, and $257.4 million of 2017, 2016, and 2015 earnings, respectively, of certain non-U.S. subsidiaries and, therefore, no U.S. deferred income taxes were recorded on those earnings.

As of December 31, 2017, the cumulative amount of the undistributed earnings in the Corporation’s foreign subsidiaries was approximately $1.9 billion. As a result of the Tax Cuts and Jobs Act being enacted on December 22, 2017, these earnings and the earnings from prior years which have been reinvested indefinitely outside of the United States are deemed to have been repatriated to the U.S. and subject to a repatriation tax. The repatriation tax has been estimated to be $150.0 million and recorded as an income tax provision. The repatriation tax will be paid in installments over eight years as permitted under U.S. income tax laws.

The components of the consolidated provision for income taxes for each of the three years ended December 31 are as follows:

TABLE 89: PROVISION FOR INCOME TAXES



	FOR THE YEAR ENDED DECEMBER 31,
(In Millions)	2017			2016			2015
Current Tax Provision:
Federal	$	347.3		$	495.8		$	489.8
State	38.3			65.3			64.5
Non-U.S.	125.4			99.3			83.1

Total	511.0			660.4			637.4
Deferred Tax Provision:
Federal	$	(96.4	)	$	(159.0	)	$	(131.1	)
State	24.6			(18.9		)	(13.6		)
Non-U.S.	(4.3		)	2.1			(1.5		)

Total	(76.1		)	(175.8		)	(146.2		)

Provision for Income Taxes	$	434.9		$	484.6		$	491.2

In addition to the amounts shown above, tax charges and benefits have been recorded directly to stockholders’ equity for the following:

TABLE 90: TAX CHARGES AND BENEFITS RECORDED DIRECTLY TO STOCKHOLDERS’ EQUITY



	FOR THE YEAR ENDED DECEMBER 31,
(In Millions)	2017			2016			2015
Current Tax Benefit (Charge) for Employee Stock Options and Other Stock-Based Plans	$	—		$	(7.6	)	$	17.7
Tax Effect of Other Comprehensive Income	(112.4		)	72.4			17.0

Deferred taxes result from temporary differences between the amounts reported in the consolidated financial statements and the tax bases of assets and liabilities. As a result of the Tax Cuts and Jobs Act being enacted on December 22, 2017, deferred tax assets and liabilities have been remeasured based on the federal tax rate at which they are expected to reverse in the future, which is 21%. Deferred tax assets and liabilities have been computed as follows:

TABLE 91: NET DEFERRED TAX LIABILITIES



	DECEMBER 31,
(In Millions)	2017			2016			2015
Deferred Tax Liabilities:
Lease Financing	$	85.8		$	148.7		$	272.6
Software Development	187.8			352.0			339.9
Accumulated Depreciation	41.0			26.0			20.6
Compensation and Benefits	—			50.2			70.7
State Taxes, net	59.4			33.3			48.8
Other Liabilities	145.7			243.1			169.1

Gross Deferred Tax Liabilities	519.7			853.3			921.7

Deferred Tax Assets:
Allowance for Credit Losses	32.3			67.2			81.7
Compensation and Benefits	35.5			—			—
Other Assets	88.3			233.8			185.0

Gross Deferred Tax Assets	156.1			301.0			266.7

Valuation Reserve	(1.1		)	(0.9		)	(1.6		)
Deferred Tax Assets, net of Valuation Reserve	155.0			300.1			265.1

Net Deferred Tax Liabilities	$	364.7		$	553.2		$	656.6

Northern Trust had various state net operating loss carryforwards as of December 31, 2017, 2016, and 2015. The income tax benefits associated with these loss carryforwards were approximately $1.1 million as of December 31, 2017, $0.9 million as of December 31, 2016, and $1.6 million as of December 31, 2015. A valuation allowance of $1.1 million was recorded at December 31, 2017, $0.9 million as of December 31, 2016, and $1.6 million as of December 31, 2015, as management believes the net operating losses will not be fully realized. No valuation allowance related to the remaining deferred tax assets was recorded at December 31, 2017, 2016, and 2015, as management believes it is more likely than not that the deferred tax assets will be fully realized.