Income Taxes

12 Months Ended

Dec. 31, 2019

We use an asset-and-liability approach to account for income taxes. Our objective is to recognize the amount of taxes payable or refundable for the current year through charges or credits to the current tax provision, and to recognize deferred tax assets and liabilities for future tax consequences of temporary differences between amounts reported in our consolidated financial statements and their respective tax bases. The measurement of tax assets and liabilities is based on enacted tax laws and applicable tax rates. The effects of a tax position on our consolidated financial statements are recognized when we believe it is more likely than not that the position will be sustained. A valuation allowance is established if it is considered more likely than not that all or a portion of the deferred tax assets will not be realized. Deferred tax assets and liabilities recorded in our consolidated statement of condition are netted within the same tax jurisdiction.

The following table presents the components of income tax expense (benefit) for the periods indicated:



	Years Ended December 31,
(In millions)	2019			2018			2017
Current:
Federal	$	157		$	122		$	343
State	86			148			24
Non-U.S.	357			374			380
Total current expense	600			644			747
Deferred:
Federal	(6		)	(128		)	45
State	33			(22		)	66
Non-U.S.	(157		)	14			(19		)
Total deferred expense (benefit)	(130		)	(136		)	92
Total income tax expense (benefit)	$	470		$	508		$	839

The following table presents a reconciliation of the U.S. statutory income tax rate to our effective tax rate based on income before income tax expense for the periods indicated:



	Years Ended December 31,
	2019		2018		2017
U.S. federal income tax rate	21.0	%	21.0	%	35.0	%
Changes from statutory rate:
State taxes, net of federal benefit	3.4		3.1		2.0
Tax-exempt income	(1.5	)	(2.0	)	(4.3	)
Business tax credits⁽¹⁾	(5.4	)	(4.1	)	(3.7	)
Foreign tax differential	(0.1	)	(0.6	)	(7.2	)
Foreign legal entity restructuring	(4.3	)	—		—
Foreign tax credit limitations	2.2		0.2		—
Transition tax	—		—		15.2
Deferred tax revaluation	—		(1.0	)	(6.8	)
Foreign designated earnings	—		—		(0.7	)
Litigation expense	1.6		0.3		—
Other, net	0.4		(0.6	)	(1.6	)
Effective tax rate	17.3	%	16.3	%	27.9	%

⁽¹⁾ Business tax credits include low-income housing, production and investment tax credits.

The 2017 income tax expense included a net provisional estimate of $257 million attributable to the enactment of TCJA (H.R.1).

As of December 31, 2018, the accounting for income tax effects of the TCJA was completed and the 2018 income tax expense included an additional deferred tax benefit of approximately $32 million.

Beginning in 2018, the TCJA subjects a U.S. shareholder to current tax on GILTI earned by certain foreign subsidiaries. We have elected to recognize the resulting tax on GILTI as a period expense in the period the tax is incurred. As such, we have included an estimate of this liability in our estimated annual effective tax rate. This adjustment increased our effective tax rate by 0.3% and 0.2% in 2019 and 2018, respectively, which is reflected in the prior reconciliation table under "Foreign Tax Credit Limitations".

Undistributed indefinitely reinvested earnings of certain foreign subsidiaries amounted to approximately $4.1 billion at December 31, 2019. As a result, no provision has been recorded for state and local or foreign withholding income taxes. If a distribution were to occur, we would be subject to state, local and to foreign withholding tax. It is expected that any distribution will be exempt from federal income tax. Although the foreign withholding tax is generally creditable against U.S. federal income tax, certain credit utilization limitations may result in a net cost.

The following table presents significant components of our gross deferred tax assets and gross deferred tax liabilities as of the dates indicated:



	December 31,
(In millions)	2019			2018
Deferred tax assets:
Other amortizable assets	$	394		$	49
Tax credit carryforwards	387			274
Lease obligations	254			—
Deferred compensation	120			134
Restructuring charges and other reserves	104			156
NOL and other carryforwards	73			104
Pension plan	66			55
Foreign currency translation	57			50
Unrealized losses on investment securities, net	—			146
Total deferred tax assets	1,455			968
Valuation allowance for deferred tax assets	(330		)	(138		)
Deferred tax assets, net of valuation allowance	$	1,125		$	830
Deferred tax liabilities:
Fixed and intangible assets	$	763		$	744
Investment basis differences	258			229
Right-of-use Assets	223			—
Unrealized gains on investment securities, net	86			—
Other	32			11
Total deferred tax liabilities	$	1,362		$	984

The table below summarizes the deferred tax assets and related valuation allowances recognized as of December 31, 2019:



(In millions)	Deferred Tax Asset		Valuation Allowance			Expiration
Other amortizable assets	$	394	$	(243	)	__
Tax credits	387		(29		)	2029-2039
NOLs - Non-U.S.	33		(18		)	2020-2028, None
Other carryforwards	27		(27		)	None
NOLs - State	13		(13		)	2020-2039

Management considers the valuation allowance adequate to reduce the total deferred tax assets to an aggregate amount that will more likely than not be realized. Management has determined that a valuation allowance is not required for the remaining deferred tax assets because it is more likely than not that there is

sufficient taxable income of the appropriate nature within the carryforward periods to realize these assets.

At December 31, 2019, 2018 and 2017, the gross unrecognized tax benefits, excluding interest, were $149 million, $108 million and $94 million, respectively. Of this, the amounts that would reduce the effective tax rate, if recognized, are $140 million, $100 million and $87 million, respectively. The reduction in the effective tax rate includes the federal benefit for unrecognized state tax benefits.

The following table presents activity related to unrecognized tax benefits as of the dates indicated:



	December 31,
(In millions)	2019			2018			2017
Beginning balance	$	108		$	94		$	71
Decrease related to agreements with tax authorities	(17		)	(40		)	(14		)
Increase related to tax positions taken during current year	13			12			26
Increase related to tax positions taken during prior years	49			44			11
Decreases related to a lapse of the applicable statute of limitations	(4		)	(2		)	—
Ending balance	$	149		$	108		$	94

It is reasonably possible that of the $149 million of unrecognized tax benefits as of December 31, 2019, up to $4 million could decrease within the next 12 months due to the resolution of various audits. Management believes that we have sufficient accrued liabilities as of December 31, 2019 for tax exposures and related interest expense.

Income tax expense included related interest and penalties of approximately $5 million and $1 million in 2019 and 2018, respectively. Total accrued interest and penalties were approximately $10 million, $8 million and$8 million as of December 31, 2019, 2018 and 2017, respectively.