Taxation

Under Swiss law, a resident company is subject to income tax at the federal, cantonal, and communal levels that is levied on net worldwide income. Income attributable to permanent establishments or real estate located abroad is excluded from the Swiss tax base. Chubb Limited is a holding company and, therefore, is exempt from cantonal and communal income tax. As a result, Chubb Limited is subject to Swiss income tax only at the federal level. Furthermore, participation relief (i.e., tax relief) is granted to Chubb Limited at the federal level for qualifying dividend income and capital gains related to the sale of qualifying participations (i.e., subsidiaries). It is expected that the participation relief will result in a full exemption of participation income from federal income tax. Chubb Limited is subject to an annual cantonal and communal capital tax on the taxable equity of Chubb Limited in Switzerland.

Chubb has two Swiss operating subsidiaries, an insurance company, ACE Insurance (Switzerland) Limited and a reinsurance company, ACE Reinsurance (Switzerland) Limited. Both are subject to federal, cantonal, and communal income tax and to annual cantonal and communal capital tax.

Under current Bermuda law, Chubb Limited and its Bermuda subsidiaries are not required to pay any taxes on income or capital gains. If a Bermuda law were enacted that would impose taxes on income or capital gains, Chubb Limited and the Bermuda subsidiaries have received an undertaking from the Minister of Finance in Bermuda that would exempt such companies from Bermudian taxation until March 2035.

Income from Chubb's operations at Lloyd's is subject to United Kingdom (U.K.) corporation taxes. Lloyd's is required to pay U.S. income tax on U.S. connected income (U.S. income) written by Lloyd's syndicates. Lloyd's has a closing agreement with the Internal Revenue Service (IRS) whereby the amount of tax due on this business is calculated by Lloyd's and remitted directly to the IRS. These amounts are then charged to the accounts of the Names/Corporate Members in proportion to their participation in the relevant syndicates. Chubb's Corporate Members are subject to this arrangement but, as U.K. domiciled companies, will receive U.K. corporation tax credits for any U.S. income tax incurred up to the value of the equivalent U.K. corporation income tax charge on the U.S. income.

ACE Group Holdings and its respective subsidiaries are subject to income taxes imposed by U.S. authorities and file a consolidated U.S. tax return. Starting in tax year 2014, Combined Insurance and its life subsidiary joined the ACE Group Holdings consolidated return. For tax years prior to 2014, Combined Insurance and its life subsidiary filed a separate consolidated U.S. tax return. Should ACE Group Holdings pay a dividend to Chubb, withholding taxes would apply. Currently, however, no withholding taxes are accrued with respect to such un-remitted earnings as management has no intention of remitting these earnings. Similarly, no taxes have been provided on the un-remitted earnings of certain foreign subsidiaries as management has no intention of remitting these earnings. The cumulative amount that would be subject to withholding tax, if distributed, as well as the determination of the associated tax liability are not practicable to compute; however, such amount would be material to Chubb. Certain international operations of Chubb are also subject to income taxes imposed by the jurisdictions in which they operate.

Chubb is not subject to income taxation other than as stated above. There can be no assurance that there will not be changes in applicable laws, regulations, or treaties which might require Chubb to change the way it operates or becomes subject to taxation.

Chubb's domestic operations are in Switzerland, the jurisdiction where we are legally organized, incorporated, and registered. Domestic operations for the years ended December 31, 2015, 2014, and 2013 are not considered significant to the consolidated income before income taxes for the respective periods.

The following table presents the provision for income taxes:



	Years Ended December 31
(in millions of U.S. dollars)	2015		2014		2013
Current tax expense	$	304	$	481	$	231
Deferred tax expense	158		153		249
Provision for income taxes	$	462	$	634	$	480

The most significant jurisdictions contributing to the overall taxation of Chubb are calculated using the following rates: Switzerland 7.83 percent, Bermuda 0.0 percent, U.S. 35.0 percent, and U.K. 20.25 percent. The following table presents a reconciliation of the difference between the provision for income taxes and the expected tax provision at the Swiss statutory income tax rate:



	Years Ended December 31
(in millions of U.S. dollars)	2015			2014			2013
Expected tax provision at Swiss statutory tax rate	$	258		$	273		$	331
Permanent differences:
Taxes on earnings subject to rate other than Swiss statutory rate	193			224			124
Change to deferred taxes related to unrealized foreign exchange losses ⁽¹⁾	—			139			—
Tax-exempt interest and dividends received deduction, net of proration	(32		)	(33		)	(27		)
Net withholding taxes	35			33			27
Change in valuation allowance⁽¹⁾	2			(20		)	4
Other	6			18			21
Total provision for income taxes	$	462		$	634		$	480

⁽¹⁾2014 includes a charge to deferred taxes related to non-recognition of foreign tax credits related to unrealized foreign exchange losses.

The following table presents the components of the net deferred tax assets:



	December 31		December 31
(in millions of U.S. dollars)	2015		2014
Deferred tax assets:
Loss reserve discount	$	663	$	794
Unearned premiums reserve	190		99
Foreign tax credits	969		1,103
Investments	29		9
Provision for uncollectible balances	65		81
Loss carry-forwards	72		40
Compensation related amounts	189		185
Other	65		—
Total deferred tax assets	2,242		2,311
Deferred tax liabilities:
Deferred policy acquisition costs	412		213
VOBA and other intangible assets	384		321
Un-remitted foreign earnings	827		939
Unrealized appreciation on investments	195		406
Depreciation	68		77
Other	—		43
Total deferred tax liabilities	1,886		1,999
Valuation allowance	38		17
Net deferred tax assets	$	318	$	295

The valuation allowance of $38 million at December 31, 2015, and $17 million at December 31, 2014, reflects management's assessment, based on available information, that it is more likely than not that a portion of the deferred tax assets will not be realized due to the inability of certain foreign subsidiaries to generate sufficient taxable income. Adjustments to the valuation allowance are made when there is a change in management's assessment of the amount of deferred tax assets that are realizable.

At December 31, 2015, Chubb has net operating loss carry-forwards of $325 million which, if unused, will expire starting in the year 2016, and a foreign tax credit carry-forward in the amount of $142 million which, if unused, will expire in the years 2016 through 2025.

The following table presents a reconciliation of the beginning and ending amount of gross unrecognized tax benefits:



	December 31			December 31
(in millions of U.S. dollars)	2015			2014
Balance, beginning of year	$	23		$	27
Additions based on tax provisions related to the current year	1			2
Reductions for tax positions of prior years	(7		)	—
Reductions for the lapse of the applicable statutes of limitations	(1		)	(6		)
Balance, end of year	$	16		$	23

At December 31, 2015 and 2014, the total amount of unrecognized tax benefits that would affect the effective tax rate, if recognized, were $16 million and $6 million, respectively. At December 31, 2014, $17 million of unrecognized tax benefits would not affect the effective tax rate, if recognized, as the ultimate deductibility is highly certain but there is uncertainty about the timing of such deductibility. Because of the impact of deferred tax accounting, other than interest and penalties, an unfavorable resolution of these temporary items would not affect the effective tax rate but would accelerate the payment of cash to the taxing authority to an earlier period.

Chubb recognizes accruals for interest and penalties, if any, related to unrecognized tax benefits in income tax expense in the consolidated statements of operations. For the year ended December 31, 2015, tax-related interest expense (income) and penalties reported in the consolidated statements of operations were $1 million and $(1) million for both the years ended December 31, 2014 and 2013. At December 31, 2015 and 2014, Chubb recorded $4 million and $9 million, respectively, in liabilities for tax-related interest and penalties in our consolidated balance sheets.

The IRS commenced its field examination of Chubb’s federal tax returns for 2010, 2011 and 2012 during October 2014, which were still ongoing at December 31, 2015. It is reasonably possible that over the next twelve months, the amount of unrecognized tax benefits may change resulting from the re-evaluation of unrecognized tax benefits arising from examinations of taxing authorities and the closing of tax statutes of limitations. With few exceptions, Chubb is no longer subject to state and local or non-U.S. income tax examinations for years before 2005.