Note 13 – Income Taxes

On December 22, 2017, the TCJA was signed into law. It changed many aspects of U.S. corporate income taxation and included a reduction of the corporate income tax rate from 35% to 21% and imposed a tax on deemed repatriated earnings of foreign subsidiaries. Our assessment of the impact of the TCJA is substantially complete and is reflected in our consolidated financial statements as of March 31, 2018 and for the year then ended. As a result of the TCJA in fiscal 2018, we recorded a $2.9 billion tax benefit from the revaluation of our net deferred tax liabilities, offset by a provisional deemed repatriation tax of $10 million. Upon completion of our fiscal 2018 income tax return, we may identify additional revaluation adjustments to our recorded deferred tax liabilities, including the deemed repatriation tax. The issuance of future administrative guidance may further clarify the interpretation of the new law and require adjustments to the provisional amount we recorded. Any adjustment required to the provisional amount for repatriation tax recorded in fiscal 2018 is not expected to be material.

The (benefit) provision for income taxes consisted of the following:

	Years ended March 31,
	2018			2017			2016
Current
Federal	$	(45	)	$	136		$	73
State		(10	)		2			(33	)
Foreign		3			7			9
Total		(52	)		145			49

Deferred
Federal		(2,625	)		(9	)		420
State		48			5			111
Foreign		-			1			-
Total		(2,577	)		(3	)		531
(Benefit) provision for income taxes	$	(2,629	)	$	142		$	580

A reconciliation between the U.S. federal statutory tax rate and the effective tax rate is as follows:

	Years ended March 31,
	2018			2017			2016
Provision for income taxes at U.S. federal statutory tax rate¹		31.6	%		35.0	%		35.0	%
State and local taxes (net of federal tax benefit)		4.8	%		3.6	%		3.2	%
Revaluation of federal deferred tax liability from TCJA		(371.6	)%		-			-
Other, net		(1.4	)%		(3.9	)%		0.2	%
Effective tax rate		(336.6	)%		34.7	%		38.4	%

¹ Our federal statutory rate for fiscal 2018 was a blended rate of 31.6% compared to 35% for fiscal 2017 and 2016 due to the reduction of the corporate income tax rate from 35% to 21% by the TCJA.

Note 13 – Income Taxes (Continued)

Our net deferred income tax liability consisted of the following deferred tax liabilities and assets:

	March 31,
	2018			2017
Liabilities:
Lease transactions	$	5,642		$	7,647
State taxes, net of federal tax benefit		856			640
Mark-to-market of investments in marketable securities and derivatives		185			267
Other		244			383
Deferred tax liabilities	$	6,927		$	8,937

Assets:
Provision for credit and residual value losses		420			593
Deferred costs and fees		186			306
Net operating loss and tax credit carryforwards		993			67
Other		31			66
Deferred tax assets		1,630			1,032
Valuation allowance		(29	)		(21	)
Net deferred tax assets	$	1,601		$	1,011
Net deferred income tax liability¹	$	5,326		$	7,926

¹ Balance includes deferred tax assets attributable to unrealized gains or losses included in accumulated other comprehensive income or loss, net of $7 million at March 31, 2018 and deferred tax liabilities of $15 million at March 31, 2017, respectively. The change in this deferred liability is not included in total deferred tax expense.

We have deferred tax assets related to cumulative federal and state net operating loss carryforwards of $857 million and $109 million at March 31, 2018, respectively, compared to no federal net operating loss deferred tax assets and $59 million in state net operating loss deferred tax assets at March 31, 2017, respectively. We also have deferred tax assets for federal alternative fuel credits of $8 million and a deferred tax asset for foreign tax credit carryforwards of $10 million at March 31, 2018 compared to no deferred tax assets for federal alternative fuel vehicle credits or foreign tax credit carryforwards at March 31, 2017. The federal net operating loss carryforwards have no expiration and other tax credit carryforwards will expire beginning in fiscal 2028. Some state net operating loss carryforwards have no expiration while others expire beginning in fiscal 2020.

The deferred tax assets related to foreign tax credit and state tax net operating loss carryforwards are reduced by a valuation allowance of $29 million at March 31, 2018. The deferred tax assets related to state tax net operating loss carryforwards were reduced by a valuation allowance of $21 million at March 31, 2017. The determination of the valuation allowance is based on management’s estimate of future taxable income during the respective carryforward periods. Apart from the valuation allowance, we believe that the remaining deferred tax assets will be realized in full.

Realization with respect to the federal tax loss and alternative fuel vehicle credit carryforwards is dependent on generating sufficient income. Although realization is not assured, management believes it is more likely than not that the deferred assets will be realized. The amount of the deferred tax assets considered realizable could be reduced if management’s estimates change.

Note 13 – Income Taxes (Continued)

We have made an assertion of permanent reinvestment of earnings from our foreign subsidiary; as a result, other than the deemed repatriation tax that is provided pursuant to the TCJA, state and local taxes have not been provided for unremitted earnings of our foreign subsidiary. At March 31, 2018 and 2017, these unremitted earnings totaled $223 million and $220 million, respectively. Determination of the amount of the deferred state and local tax liability is not practicable, and accordingly no estimate of the unrecorded deferred state and local tax liability is provided.

Although we do not foresee any events causing repatriation of earnings, possible examples may include but are not limited to parent company capital needs or exiting the business in the foreign country.

Our share of the income tax payable or receivable in those states where we filed consolidated or combined returns with TMNA and its subsidiaries was not significant for both March 31, 2018 and 2017. Additionally, our federal and state income tax payable or receivable from TMCC affiliated companies, including TFSIC, Toyota Financial Savings Bank (“TFSB”), and Toyota Financial Services Securities USA Corporation, was not significant for both March 31, 2018 and 2017.

The guidance for the accounting and reporting for income taxes requires us to assess tax positions in cases where the interpretation of the tax law may be uncertain. Unrecognized tax benefits were not significant as of March 31, 2018, 2017 and 2016. We do not have any positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase or decrease within 12 months.

We accrue interest, if applicable, related to uncertain income tax positions in interest expense. Statutory penalties, if applicable, accrued with respect to uncertain income tax positions are recognized as an addition to the income tax liability. For each of fiscal 2018, 2017, and 2016, accrued interest was not significant and no penalties were accrued.

Tax-related Contingencies

As of March 31, 2018, we remained under IRS examination for fiscal 2018 and fiscal 2017. The IRS examination for fiscal 2016 was concluded in the second quarter of fiscal 2018 and the IRS examination for fiscal 2017 was concluded in the first quarter of fiscal 2019.