Taxation

Under current 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, Chubb Insurance (Switzerland) Limited and a reinsurance company, Chubb 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 Chubb's 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.

Chubb Group Holdings and its respective subsidiaries are subject to income taxes imposed by U.S. authorities and file a consolidated U.S. tax return. As part of the Chubb Corp acquisition, immediately following the merger, Chubb Corp merged with and into Chubb INA Holdings Inc., and therefore, joined the Chubb Group Holdings consolidated return. Should Chubb Group Holdings pay a dividend to Chubb Limited, 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 (Hong Kong and Korea life companies) 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's domestic operations are in Switzerland, the jurisdiction where we are legally organized, incorporated, and registered.

The following table presents pre-tax income and the related provision for income taxes:



	Year Ended December 31
(in millions of U.S. dollars)	2017			2016			2015
Pre-tax income:
Switzerland	$	527		$	766		$	469
Outside Switzerland	3,195			4,184			2,827
Total pre-tax income	$	3,722		$	4,950		$	3,296
Provision for income taxes
Current tax expense:
Switzerland	$	46		$	97		$	38
Outside Switzerland	313			727			266
Total current tax expense	359			824			304
Deferred tax expense (benefit):
Switzerland	2			(27		)	4
Outside Switzerland	(500		)	18			154
Total deferred tax expense (benefit)	(498		)	(9		)	158
Provision for income taxes	$	(139	)	$	815		$	462

The most significant jurisdictions contributing to the overall taxation of Chubb are calculated using the following rates in 2017: Switzerland 7.83 percent, Bermuda 0.0 percent, U.S. 35.0 percent, and U.K. 19.0 percent. Effective January 1, 2018, the U.S. corporate rate was reduced to 21 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:



	Year Ended December 31
(in millions of U.S. dollars)	2017			2016			2015
Expected tax provision at Swiss statutory tax rate	$	291		$	388		$	258
Permanent differences:
Taxes on earnings subject to rate other than Swiss statutory rate	263			582			193
Tax-exempt interest and dividends received deduction, net of proration	(199		)	(200		)	(32		)
Net withholding taxes	30			20			35
Excess tax benefit on share-based compensation	(48		)	—			—
Impact of 2017 Tax Act	(450		)	—			—
Corporate owned life insurance	(37		)	—			—
Other	11			25			8
Total provision for income taxes	$	(139	)	$	815		$	462

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



	December 31			December 31
(in millions of U.S. dollars)	2017			2016
Deferred tax assets:
Loss reserve discount	$	715		$	1,269
Unearned premiums reserve	231			498
Foreign tax credits	340			2,115
Provision for uncollectible balances	45			72
Loss carry-forwards	90			92
Debt related amounts	77			219
Compensation related amounts	260			449
Cumulative translation adjustments	30			59
Other, net	70			69
Total deferred tax assets	1,858			4,842
Deferred tax liabilities:
Deferred policy acquisition costs	635			842
Other intangible assets, including VOBA	1,437			2,352
Un-remitted foreign earnings	66			2,001
Investments	53			406
Unrealized appreciation on investments	184			60
Depreciation	83			91
Total deferred tax liabilities	2,458			5,752
Valuation allowance	99			78
Net deferred tax assets (liabilities)	$	(699	)	$	(988	)

The 2017 Tax Act, enacted on December 22, 2017, among other things, reduces the U.S. federal income tax rate to 21 percent from 35 percent effective in 2018. We have not completed our assessment of the effects of the 2017 Tax Act; however, we have made our best estimate of those effects based on our current understanding of the provisions in the Act. Accordingly, we recorded a $450 million income tax transition benefit in the fourth quarter of 2017 on a provisional basis, principally reflecting the reduction in the U.S. corporate tax rate from 35 percent to 21 percent. This is comprised of a $743 million reduction in the deferred tax liabilities principally related to certain intangible assets, a $371 million reduction in net deferred tax assets related to other net assets, and a net benefit of $78 million related to the impact of excess foreign tax credits generated by the deemed repatriation rules and the impact of the reduced rate on our foreign branches. We have computed these amounts based on the best available information and our understanding of the 2017 Tax Act.

As we complete our analysis of the 2017 Tax Act, collect and prepare necessary data and interpret any additional guidance issued by the IRS, the Treasury Department and other standard setting agencies, we may make adjustments to the provisional amounts. Those adjustments may materially impact our provision for income taxes in the period in which the adjustments are made.

The valuation allowance of $99 million at December 31, 2017, and $78 million at December 31, 2016, 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 potential inability to utilize foreign tax credits in the U.S. and 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, 2017, Chubb has net operating loss carry-forwards of $329 million which, if unused, will expire starting in 2018, and a foreign tax credit carry-forward in the amount of $340 million which, if unused, will expire in the years 2022 through 2027.

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)	2017			2016
Balance, beginning of year	$	17		$	16
Additions based on tax positions related to the current year	3			3
Additions based on tax positions related to prior years ⁽¹⁾	—			2
Reductions for tax positions of prior years	(4		)	(4		)
Reductions for the lapse of the applicable statutes of limitations	(3		)	—
Balance, end of year	$	13		$	17

⁽¹⁾Assumed in connection with the Chubb Corp acquisition in 2016.

At December 31, 2017 and 2016, the total amount of unrecognized tax benefits that would affect the effective tax rate, if recognized, were $13 million and $17 million, respectively.

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 years ended December 31, 2017, 2016, and 2015, tax-related interest expense (income) and penalties reported in the Consolidated statements of operations was $1 million for each of the three years. At December 31, 2017 and 2016, liabilities for tax-related interest and penalties in our Consolidated balance sheets were $3 million and $4 million, respectively.

In September 2016, the IRS completed its examination of Chubb Group Holdings’ (formerly ACE Group Holdings) federal tax returns for the 2010-2012 tax years. No material adjustments resulted from this examination. During 2017, the IRS commenced its field examination of Chubb Group Holdings federal income tax returns for 2014 and 2015 and Chubb Corp’s federal tax return for 2014 which were still ongoing at December 31, 2017. 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 and non-U.S. income tax examinations for years before 2010.