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. Federal income tax 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. 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)	2018		2017			2016
Pre-tax income:
Switzerland	$	950	$	527		$	766
Outside Switzerland	3,707		3,195			4,184
Total pre-tax income	$	4,657	$	3,722		$	4,950
Provision for income taxes
Current tax expense:
Switzerland	$	89	$	46		$	97
Outside Switzerland	563		313			727
Total current tax expense	652		359			824
Deferred tax expense (benefit):
Switzerland	3		2			(27		)
Outside Switzerland	40		(500		)	18
Total deferred tax expense (benefit)	43		(498		)	(9		)
Provision for income taxes	$	695	$	(139	)	$	815

The most significant jurisdictions contributing to the overall taxation of Chubb are calculated using the following rates in 2018: Switzerland 7.83 percent, Bermuda 0.0 percent, U.S. 21.0 percent, and U.K. 19.0 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)	2018			2017			2016
Expected tax provision at Swiss statutory tax rate	$	365		$	291		$	388
Permanent differences:
Taxes on earnings subject to rate other than Swiss statutory rate	372			263			582
Tax-exempt interest and dividends received deduction, net of proration	(75		)	(199		)	(200		)
Net withholding taxes	33			30			20
Excess tax benefit on share-based compensation	(19		)	(48		)	—
Impact of 2017 Tax Act	(25		)	(450		)	—
Corporate owned life insurance	2			(37		)	—
Other	42			11			25
Provision for income taxes	$	695		$	(139	)	$	815

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



	December 31			December 31
(in millions of U.S. dollars)	2018			2017
Deferred tax assets:
Loss reserve discount	$	584		$	715
Unearned premiums reserve	471			231
Foreign tax credits	262			340
Provision for uncollectible balances	37			45
Loss carry-forwards	137			90
Debt related amounts	71			77
Compensation related amounts	263			260
Cumulative translation adjustments	43			30
Unrealized depreciation on investments	102			—
Other, net	95			70
Total deferred tax assets	2,065			1,858
Deferred tax liabilities:
Deferred policy acquisition costs	621			635
Other intangible assets, including VOBA	1,440			1,437
Un-remitted foreign earnings	47			66
Investments	59			53
Unrealized appreciation on investments	—			184
Depreciation	123			83
Total deferred tax liabilities	2,290			2,458
Valuation allowance	79			99
Net deferred tax liabilities	$	(304	)	$	(699	)

The 2017 Tax Act, enacted in December 2017, among other things, reduced the U.S. Federal income tax rate from 35 percent to 21 percent effective in 2018. In the fourth quarter of 2017, we recorded a $450 million income tax benefit on a provisional basis, and an additional $25 million in 2018, principally reflecting this reduction in the U.S. corporate tax rate from 35 percent to 21 percent. Our final $475 million income tax benefit was comprised of a $743 million reduction in the deferred tax liabilities principally related to certain intangible assets, a $250 million reduction in net deferred tax assets related to other net assets, a net charge of $18 million related to the impact of excess foreign tax credits, withholding taxes associated with unremitted earnings and the impact of the reduced rate on our foreign branches. The 2018 change reflected the favorable impact of changes to certain tax only accounting methods offset by updates to provisional amounts recorded related to foreign tax credits and withholding taxes as a result of additional guidance issued during 2018.

The 2017 Tax Act also included provisions for Global Intangible Low-Taxed Income (GILTI) under which taxes may be imposed on income of foreign subsidiaries and for a Base Erosion and Anti-Abuse Tax (BEAT) under which taxes may be imposed on certain payments to affiliated foreign companies. We have evaluated the accounting policy election required with regard to the BEAT and GILTI provisions, and have concluded we will treat both as a period cost. As a result, we have recorded no related deferred taxes.

The valuation allowance of $79 million at December 31, 2018, and $99 million at December 31, 2017, 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, 2018, Chubb has net operating loss carry-forwards of $491 million which, if unused, will expire starting in 2019, and a foreign tax credit carry-forward in the amount of $262 million which, if unused, will expire starting in 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)	2018		2017
Balance, beginning of year	$	13	$	17
Additions based on tax positions related to the current year	1		3
Additions based on tax positions related to prior years	—		—
Reductions for tax positions of prior years	—		(4		)
Reductions for the lapse of the applicable statutes of limitations	—		(3		)
Balance, end of year	$	14	$	13

At December 31, 2018 and 2017, the total amount of unrecognized tax benefits that would affect the effective tax rate, if recognized, were $14 million and $13 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. Tax-related interest expense (income) and penalties reported in the Consolidated statements of operations were immaterial for December 31, 2018, 2017, and 2016. Liabilities for tax-related interest and penalties in our Consolidated balance sheets were $3 million at both December 31, 2018 and 2017.

In September 2016, the IRS completed its examination of Chubb Group Holdings’ (formerly ACE Group Holdings) U.S. Federal income 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 U.S. Federal income tax returns for 2014 and 2015 and Chubb Corp’s U.S. Federal income tax return for 2014 all of which were still ongoing at December 31, 2018. As a multinational company, we also have examinations under way in several foreign jurisdictions. It is reasonably possible that over the next twelve months, that the amount of unrecognized tax benefits may change resulting from the re-evaluation of unrecognized tax benefits arising from examinations by taxing authorities and the lapsing of statutes of limitations. With few exceptions, Chubb is no longer subject to income tax examinations for years before 2010.