15. Taxes on Income

On December 22, 2017, the U.S. Tax Cuts and Jobs Act (the Act) was signed into law. In the fourth quarter of 2017, the company recorded tax expense of $83 million for the estimated impact of the mandatory deemed repatriation of its foreign earnings and revaluation of its U.S. deferred tax assets and liabilities. The company’s review of the implications of the Act will be ongoing throughout 2018, and as such, adjustments to any of the previously recorded provisional estimates of the Act’s impact may be required. These provisional estimates recorded are as follows:

Reduction of U.S. federal corporate tax rate: The company recorded a provisional increase to tax expense of $52 million in 2017 for the estimated impact of revaluing its net deferred tax asset position in the U.S. at the new 21 percent corporate tax rate. While this remains a reasonable estimate, it may be impacted by other analyses related to the Act, including the calculation of the transition tax;

Transition tax: The company recorded a provisional increase to tax expense of $31 million in 2017 to reflect the impact of the tax on accumulated untaxed earnings and profits (E&P) of certain foreign affiliates. To determine the amount of the transition tax, the amount of the post-1986 E&P and the amount of non-U.S. income taxes paid on such earnings must be calculated for all relevant foreign affiliates. While this estimated impact is reasonable, additional information is being gathered and analyzed in order to more precisely calculate the final impact of the transition tax;

Valuation allowances: The company must assess the impact of the various aspects of the Act on its valuation allowance analyses, including the transition tax. As the company has recorded provisional estimates in 2017 with respect to certain aspects of the Act, any corresponding impacts from changes in valuation allowances are also provisional estimates; and

Cost recovery: The company made a provisional estimate in 2017 of the impact on its current tax expense and deferred tax liabilities associated with the new immediate expensing provisions for certain qualifying expenditures made after September 27, 2017. This estimate will be refined as the necessary computations are completed with respect to the full inventory of all qualifying 2017 expenditures.

Global intangible low-tax income (GILTI): The company has included a provisional estimate in the second quarter of 2018 to increase its annual effective tax rate for the current year impact of the new tax on GILTI. Any subsequent adjustments to this provisional estimate will be reflected on a current basis when determined.

Based on a detailed analysis of its global income and other tax attributes that has concluded in the current reporting period, the company is now making the accounting policy election to treat taxes due for GILTI and the base erosion anti-abuse tax (BEAT) as a current-period expense as incurred.

With the introduction of a modified territorial tax system in the Act, the company is continuing the review of its previously stated intent to indefinitely reinvest the undistributed earnings of certain of its foreign subsidiaries. As the company does not believe a reasonable estimate of the impact of the Act on its indefinite reinvestment assertion can currently be determined, no provisional estimate has been recorded as allowed by applicable accounting standards. When either a reasonable estimate or the final determination becomes available, the impact will be recorded in the corresponding reporting period, no later than December 2018.

Due to the timing of the enactment and the complexity involved in applying the provisions of the Act, the company made reasonable estimates of the various effects and recorded provisional amounts in the financial statements for the three and six months ended June 30, 2018, and the year ended December 31, 2017. As the company collects and prepares necessary data, and continues to interpret the Act based on any additional guidance issued by the U.S. Treasury Department, the Internal Revenue Service, and other standard-setting bodies, adjustments may be required to the provisional amounts that could materially affect the company’s financial position and results of operations as well as its effective tax rate in the period in which the required adjustments are made. In all cases, the analysis will be completed and any required adjustments will be recorded no later than December 2018.