Income Taxes

On December 22, 2017, the Tax Cuts and Jobs Act (the "Tax Act") was signed into law. The Tax Act reduces the U.S. corporate income tax rate from a maximum of 35% to 21% for all corporations, effective January 1, 2018, and makes certain changes to U.S. taxation of income earned by foreign subsidiaries, capital expenditures, interest expense and various other items.

As a result of the reduction in the U.S. corporate income tax rate from 35% to 21%, we revalued our net deferred tax assets at December 31, 2017 and recognized a provisional $195 million tax expense in our consolidated statement of operations for the year ended December 31, 2017. As a result of finalizing our provisional amount recorded in 2017, we recorded an increase to this amount of $92 million in 2018.

The Tax Act imposed a one-time repatriation tax on certain earnings of foreign subsidiaries. The Tax Act also includes certain anti-abuse and base erosion provisions that may impact the amount of U.S. tax that we pay with respect to income earned by our foreign subsidiaries. We have completed our analysis of the impact of the one-time repatriation tax and concluded that we do not have a tax liability under this provision. We have also completed our analysis of the anti-abuse and base erosion provisions and have recorded a tax expense of $10 million related to the global intangible low-taxed income provisions and do not have liability related to the base erosion and anti-abuse tax provisions of the Act.



	Successor					Predecessor
	Year Ended December 31, 2018			Period Ended December 31, 2017		Period Ended October 31, 2017	Year Ended December 31, 2016
	(Dollars in millions)
Income tax expense was as follows:
Federal
Current	$	—		—		—	—
Deferred	199			231		193	177
State
Current	(9		)	2		7	4
Deferred	28			6		16	27
Foreign
Current	30			4		39	41
Deferred	(52		)	(9	)	13	(84	)
Total income tax expense	$	196		234		268	165



	Successor				Predecessor
	Year Ended December 31, 2018			Period Ended December 31, 2017	Period Ended October 31, 2017	Year Ended December 31, 2016
	(Dollars in millions)
Income tax expense was allocated as follows:
Income tax expense in the consolidated statements of operations:
Attributable to income	$	196		234	268	165
Member's/Stockholders' equity:
Tax effect of the change in accumulated other comprehensive loss	$	(49	)	17	49	(43	)

The following is a reconciliation from the statutory federal income tax rate to our effective income tax rate:



	Successor				Predecessor
	Year Ended December 31, 2018		Period Ended December 31, 2017		Period Ended October 31, 2017		Year Ended December 31, 2016
	(Percentage of pre-tax income)
Statutory federal income tax rate	21.0	%	35.0	%	35.0	%	35.0	%
State income taxes, net of federal income tax benefit	2.8	%	3.6	%	2.9	%	3.7	%
Tax Reform	17.2	%	210.6	%	—	%	(13.2	)%
Global intangible low-taxed income	1.8	%	—	%	—	%	—	%
CenturyLink acquisition transaction costs	—	%	11.3	%	—	%	—	%
Uncertain tax positions	0.5	%	1.2	%	0.1	%	0.1	%
Net foreign income tax	(4.8	)%	(19.3	)%	0.9	%	(6.7	)%
Executive compensation limitation	1.2	%	5.4	%	0.9	%	1.1	%
Research and development credits	(1.3	)%	(0.9	)%	(1.2	)%	—	%
Other, net	(1.9	)%	4.7	%	0.1	%	(0.4	)%
Effective income tax rate	36.5	%	251.6	%	38.7	%	19.6	%

The successor year ended December 31, 2018 and the period ended December 31, 2017, the effective tax rate is 36.5% and 251.6% compared to 38.7% for the predecessor period ended October 31, 2017 and 19.6% for the predecessor year ended December 31, 2016, respectively. The effective tax rate for the successor period ended December 31, 2018 reflects $92 million of an estimated one-time income tax expense related to income tax law changes under the Tax Act enacted in 2017. The effective tax rate for the successor period ended December 31, 2017 reflects $195 million of an estimated one-time income tax expense related to income tax law changes under the Tax Act enacted in 2017. The predecessor year ended December 31, 2016 reflects a $110 million estimated one-time income tax benefit related to newly issued regulations under Internal Revenue Code Section 987 addressing the taxation of foreign currency translations gains and losses arising from foreign branches, as well as $82 million of income tax benefit related to the release of foreign valuation allowances, primarily in Germany, Brazil and Mexico.

The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and deferred tax liabilities were as follows:



	Successor
	December 31, 2018			December 31, 2017
	(Dollars in millions)
Deferred tax assets
Deferred revenue	$	298		256
Net operating loss carry forwards	3,494			3,633
Property, plant and equipment	57			63
Other	309			282
Gross deferred tax assets	4,158			4,234
Less valuation allowance	(931		)	(942	)
Net deferred tax assets	3,227			3,292
Deferred tax liabilities
Deferred revenue	(45		)	(44	)
Property, plant and equipment	(853		)	(689	)
Intangible assets	(1,998		)	(2,329	)
Other	(25		)	(16	)
Gross deferred tax liabilities	(2,921		)	(3,078	)
Net deferred tax assets	$	306		214

Of the $306 million and $214 million net deferred tax assets at December 31, 2018 and 2017, respectively, $202 million and $212 million is reflected as a long-term liability and $508 million and $426 million is reflected as a net noncurrent deferred tax asset at December 31, 2018 and 2017, respectively.

During the twelve months ended December 31, 2017, we completed an extensive analysis of our Internal Revenue Code ("IRC") Section 382 limitation that resulted in an increase of the amount of net operating loss carry forwards as of December 31, 2017 by approximately $1.0 billion on a pre-tax basis that was recorded in purchase accounting. At the successor date of December 31, 2018, we had federal NOLs of $13.8 billion before uncertain tax positions of $4.3 billion and state NOLs of $10 billion. If unused, the NOLs will expire between 2022 and 2037. At the successor date of December 31, 2018, we had $31 million of federal tax credits. At the successor date of December 31, 2018, we had foreign NOLs of $6.0 billion.

We establish valuation allowances when necessary to reduce the deferred tax assets to amounts we expect to realize. As of December 31, 2018, a valuation allowance of $0.9 billion was established as it is more likely than not that this amount of net operating loss and tax credit carryforwards will not be utilized prior to expiration. Our valuation allowance at December 31, 2018 and 2017 is primarily related to foreign and state NOL carryforwards. This valuation allowance decreased by $11 million during 2018 primarily due to the impact of foreign exchange rate adjustments and state law changes.

During 2016, we recognized a $22 million income tax benefit from the vesting of share-based compensation due to the adoption of ASU 2016-09, Improvements to Employee Share-Based Payment Accounting. We also recognized $82 million of income tax benefit related to the release of deferred tax asset valuation allowances primarily in Germany, Brazil, and Mexico. The determinations to release the foreign valuation allowances were driven by our projection of future profitability for each legal entity due to the recapitalization of our German subsidiary, the planned action to restructure our Brazilian business, and the merger of our Mexican subsidiaries.

With respect to our foreign corporate subsidiaries, we provide for U.S. income taxes on the undistributed earnings and the other outside basis temporary differences (differences between a parent's book and tax basis in a subsidiary, including currency translation adjustments) unless they are considered indefinitely reinvested outside the United States. The amount of temporary differences related to undistributed earnings and other outside basis temporary differences of investments in foreign subsidiaries upon which U.S. income taxes have not been provided was immaterial.

With respect to our foreign branches, we had historically established deferred tax liabilities for foreign branches with an overall cumulative translation gain, but had not established deferred tax assets for those with an overall translation loss as we had no plans to trigger realization of the losses in the foreseeable future. On December 7, 2016, the Internal Revenue Service issued regulations under Internal Revenue Code Section 987 addressing the taxation of foreign currency translations gains and losses arising from foreign branches. The new regulations require a “fresh start” recalculation of the unrealized gains and losses as of the adoption date. The regulations provide that the tax bases of specified assets, such as fixed assets, will be translated at historic foreign exchange rates. As a result, the deferred taxes related to such foreign currency translation are expected to reverse through the operations of the branch thereby allowing the recognition of deferred tax assets arising from translation losses as well. The issuance of the regulations resulted in us recognizing an estimated one-time tax benefit of $110 million during the fourth quarter 2016.

A reconciliation of the change in our gross unrecognized tax benefits (excluding both interest and any related federal benefit) from the successor period November 1 to December 31, 2017, the predecessor period January 1 to October 31, 2017 and the predecessor year ended December 31, 2016 is as follows:



	Successor				Predecessor
	Year Ended December 31, 2018			Period Ended December 31, 2017	Period Ended October 31, 2017
	(Dollars in millions)
Unrecognized tax benefits at beginning of period	$	21		20	18
Tax positions of prior periods netted against deferred tax assets	950			—	—
(Decrease) increase in tax positions taken in the prior period	(1		)	1	—
Increase in tax positions taken in the current period	3			—	2
Decrease due to settlement/payments	(1		)	—	—
Decrease from the lapse of statute of limitations	(2		)	—	—
Unrecognized tax benefits at end of period	$	970		21	20

The total amount (including interest and any related federal benefit) of unrecognized tax benefits that, if recognized, would impact the effective income tax rate was $23 million, $28 million, and $27 million for the successor year ended December 31, 2018, period ended December 31, 2017 and the predecessor period ended October 31, 2017, respectively.

Our policy is to reflect interest expense associated with unrecognized tax benefits in income tax expense. We had accrued interest (presented before related tax benefits) of approximately $6 million and $20 million at December 31, 2018 and 2017, respectively.

We, or at least one of our affiliates, file income tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions. With few exceptions, we are no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2003. The Internal Revenue Service and state and local taxing authorities reserve the right to audit any period where net operating loss carry forwards are available.

Based on our current assessment of various factors, including (i) the potential outcomes of these ongoing examinations, (ii) the expiration of statute of limitations for specific jurisdictions, (iii) the negotiated settlement of certain disputed issues, and (iv) the administrative practices of applicable taxing jurisdictions, it is reasonably possible that the related unrecognized tax benefits for uncertain tax positions previously taken may decrease by up to $2 million within the next 12 months. The actual amount of such decrease, if any, will depend on several future developments and events, many of which are outside our control.

We incur tax expense attributable to income in various subsidiaries that are required to file state or foreign income tax returns on a separate legal entity basis. We also recognize accrued interest and penalties in income tax expense related to uncertain tax benefits. Our tax rate is volatile and may move up or down with changes in, among other things, the amount and source of income or loss, our ability to utilize foreign tax credits, changes in tax laws, and the movement of liabilities established for uncertain tax positions as statutes of limitations expire or positions are otherwise effectively settled.