Income Taxes

On December 22, 2017, the TCJ Act was enacted into law. The TCJ Act significantly reforms the Internal Revenue Code of 1986, as amended, by among other things, establishing a flat corporate income tax rate of 21 percent and creating a territorial tax system (with a one-time transition tax imposed on previously undistributed foreign earnings and profits).

The Securities and Exchange Commission staff issued SAB 118, which provides guidance on accounting for the tax effects of the TCJ Act. SAB 118 provides a measurement period that should not extend beyond one year from the TCJ Act's enactment date for companies to complete the applicable accounting under Topic 740. In accordance with SAB 118, and based on the information available as of June 30, 2018, the Company recorded a net provisional discrete income tax cost of $233 million as a result of the TCJ Act being enacted.

The reduction in the U.S. corporate tax rate under the TCJ Act required a one-time revaluation of certain tax-related assets and liabilities to reflect their value at the reduced corporate tax rate of 21 percent, which resulted in a decrease in income tax expense of approximately $80 million. The one-time transition tax on undistributed foreign earnings and profits resulted in an increase in income tax expense of $297 million. Incremental adjustments have been made to these estimates during the three months ended June 30, 2018, based on the availability of additional information. The Company has not yet completed the accounting for the one-time transition tax and continues to analyze undistributed foreign earnings and profits for purposes of filing the tax return for 2018. In addition, the Company continues to interpret the law and guidance issued as of the date of these financial statements. On August 1, 2018, the U.S. Treasury and Internal Revenue Service released proposed regulations relating to the one-time transition tax. The proposed regulations are subject to a 60-day comment period. Final regulations are expected to be issued after consideration of the comments. The Company is currently evaluating the impact of the proposed regulations. The Company intends to make the election to pay the one-time transition tax over eight years. The amount of cash payments will be less than the amount of the income tax expense due to the utilization of available credits.

Certain provisions of the TCJ Act will impact the Company starting in 2019. These provisions include, but are not limited to, the creation of the base erosion anti-abuse tax, a general limitation of U.S. federal income taxes on dividends from foreign subsidiaries, a new provision designed to tax global intangible low-taxed income and the repeal of the domestic production activities deduction. The Company continues to evaluate the future impacts of these provisions and, as of June 30, 2018, has not recorded any impact of any of these future provisions.

Income before income taxes was derived from the following sources:



	2018		2017		2016
United States	$	963,843	$	722,925	$	672,907
Foreign	738,434		605,716		441,821
	$	1,702,277	$	1,328,641	$	1,114,728

Income taxes include the following:



	2018			2017			2016
Federal
Current	$	453,821		$	132,420		$	235,557
Deferred	(23,876		)	37,316			(45,797		)
Foreign
Current	210,385			157,518			113,146
Deferred	(17,454		)	(5,319		)	(7,006		)
State and local
Current	18,168			17,835			24,495
Deferred	(82		)	5,027			(12,883		)
	$	640,962		$	344,797		$	307,512

A reconciliation of the Company's effective income tax rate to the statutory federal rate follows:



	2018		2017		2016
Statutory federal income tax rate	28.1	%	35.0	%	35.0	%
State and local income taxes	1.2		1.7		0.6
Tax related to international activities	(1.0	)	(5.5	)	(5.2	)
Transition tax related to the TCJ Act	17.5		—		—
Remeasurement of deferred tax assets and liabilities related to the TCJ Act	(4.8	)	—		—
Cash surrender value of life insurance	(0.4	)	(0.9	)	0.2
Federal manufacturing deduction	(1.0	)	(0.9	)	(1.0	)
Research tax credit	(0.7	)	(0.8	)	(1.9	)
Share-based compensation	(2.2	)	(2.7	)	—
Other	1.0		0.1		(0.1	)
Effective income tax rate	37.7	%	26.0	%	27.6	%

Deferred income taxes are provided for the temporary differences between the financial reporting basis and the tax basis of assets and liabilities. The differences comprising the net deferred taxes shown on the Consolidated Balance Sheet at June 30 were as follows:



	2018			2017
Retirement benefits	$	340,480		$	571,022
Other liabilities and reserves	112,935			144,885
Long-term contracts	17,496			61,375
Stock-based compensation	38,535			59,725
Loss carryforwards	679,880			678,486
Unrealized currency exchange gains and losses	27,228			22,212
Inventory	(9,612		)	17,809
Foreign tax credit carryforward	—			23,050
Depreciation and amortization	(689,320		)	(1,080,218		)
Valuation allowance	(694,857		)	(684,079		)
Net deferred tax (liability)	$	(177,235	)	$	(185,733	)

Change in net deferred tax asset (liability):
Provision for deferred tax	$	41,412		$	(37,024	)
Items of other comprehensive (loss)	(65,542		)	(177,655		)
Acquisitions and other	32,628			(521,814		)
Total change in net deferred tax	$	8,498		$	(736,493	)

As of June 30, 2018, the Company recorded deferred tax assets of $679,880 resulting from $2,633,218 in loss carryforwards. A valuation allowance of $675,045 related to the loss carryforwards has been established due to the uncertainty of their realization. Of this valuation allowance, $640,239 relates to non-operating entities whose loss carryforward utilization is considered to be remote. Some of the loss carryforwards can be carried forward indefinitely; others can be carried forward from three to 20 years. In addition, a valuation allowance of $19,812 related to future deductible items has been established due to the uncertainty of their realization. These future deductible items are recorded in the other liabilities and reserves line in the table above.

Historically, all foreign undistributed earnings were permanently reinvested in international operations. No tax was provided on such earnings as it was not practicable to estimate the additional tax that might be payable on the eventual distribution. The enactment of the TCJ Act created a territorial tax system significantly reducing the U.S. federal tax cost of future distributions. Although future distributions of foreign earnings to the U.S. should not be subject to U.S. federal income taxes, other U.S. or foreign taxes may be imposed on such earnings. The Company has analyzed existing factors and determined it will no longer permanently reinvest certain foreign earnings. On these undistributed foreign earnings of approximately $274 million that are no longer permanently reinvested outside of the U.S., the Company has recorded a deferred tax liability of $12 million. The remaining undistributed foreign earnings of approximately $2,700 million remain permanently reinvested outside the U.S. at June 30, 2018. Of these undistributed earnings, we have recorded a deferred tax liability of $4 million where certain foreign holding companies are not permanently reinvested in their subsidiaries. It is not practicable to estimate the additional taxes, including applicable foreign withholding taxes, that might be payable on the potential distribution of such permanently reinvested foreign earnings.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:



	2018			2017			2016
Balance July 1	$	147,506		$	139,907		$	145,688
Additions for tax positions related to current year	4,195			4,735			7,025
Additions for tax positions of prior years	8,333			2,618			2,582
Additions for acquisitions	—			3,939			—
Reductions for tax positions of prior years	(3,790		)	(1,175		)	(627		)
Reductions for settlements	(315		)	(3,020		)	(10,284		)
Reductions for expiration of statute of limitations	(4,480		)	(2,792		)	(4,142		)
Effect of foreign currency translation	1,642			3,294			(335		)
Balance June 30	$	153,091		$	147,506		$	139,907

The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was $153,091, $95,460 and $80,722 as of June 30, 2018, 2017 and 2016, respectively. If recognized, a significant portion of the gross unrecognized tax benefits as of June 30, 2017, and 2016, would have been offset against an asset that had been recorded in the Consolidated Balance Sheet. The accrued interest related to the gross unrecognized tax benefits, excluded from the amounts above, was $21,737, $15,432 and $12,357 as of June 30, 2018, 2017 and 2016, respectively.

It is reasonably possible that, within the next 12 months, the amount of gross unrecognized tax benefits could be reduced by up to approximately $120,000 as a result of the revaluation of existing uncertain tax positions arising from developments in the examination process or the closure of tax statutes. Any increase in the amount of unrecognized tax benefits within the next 12 months is expected to be insignificant.

The Company and its subsidiaries file income tax returns in the United States and in various foreign jurisdictions. In the normal course of business, the Company is subject to examination by taxing authorities throughout the world. The Company is open to assessment of its U.S. federal income tax returns by the Internal Revenue Service for years after 2011, and its state and local tax returns for years after 2011. The Company is open to assessment for significant foreign jurisdictions for years after 2009.