
Note 7.	Income Taxes

The components of income from continuing operations before provision for income taxes are as follows:



(In millions)	2017		2016		2015

U.S.	$	655	$	493	$	851
Non-U.S.	1,774		1,531		1,085

Income from Continuing Operations	$	2,429	$	2,024	$	1,936

The components of the provision for income taxes of continuing operations are as follows:



(In millions)	2017			2016			2015

Current Income Tax Provision
Federal	$	1,259		$	280		$	184
Non-U.S.	576			349			363
State	62			9			9

	1,897			638			556

Deferred Income Tax Provision (Benefit)
Federal	$	(1,437	)	$	(510	)	$	(297	)
Non-U.S.	(271		)	(104		)	(288		)
State	12			(25		)	(15		)

	(1,696		)	(639		)	(600		)

Provision for (benefit from) income taxes	$	201		$	(1	)	$	(44	)

The company generally receives a tax deduction upon the exercise of non-qualified stock options by employees, or the vesting of restricted stock units held by employees, for the difference between the exercise price and the market price of the underlying common stock on the date of exercise. Prior to 2017, the amount of the tax deduction in excess of compensation cost recognized was allocated to capital in excess of par value. Beginning in 2017, these excess tax benefits reduce the tax provision as described in Note 1. In 2017, the company's tax provision was reduced by $65 million of such benefits. In 2016 and 2015, $53 million and $63 million, respectively, of such benefits were allocated to capital in excess of par value.

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 was enacted. The Tax Act includes significant changes to existing U.S. tax laws that affect the company, including a reduction of the U.S. corporate income tax rate from 35% to 21% beginning in 2018 and creation of a territorial tax system with a one-time transition tax on deemed repatriated earnings and profits of foreign subsidiaries (transition tax). The company recognized a net charge for certain aspects of the Tax Act in its 2017 financial statements for which the accounting is provisional, but reasonable estimates could be determined.

The company recognized a $1.25 billion income tax charge for the year ended December 31, 2017, related to the transition tax. The company also remeasured its net U.S. deferred tax balances affected by the Tax Act’s reduction in the U.S. corporate income tax rate, which resulted in a $1.06 billion income tax benefit for the year ended December 31, 2017. Although the net $204 million charge represents what the company believes is a reasonable estimate of the impact of the Tax Act, the components of the net charge are provisional and may change. For example, these estimates may be impacted by the need for further analysis and future clarification and guidance regarding available tax accounting methods and elections, earnings and profits computations and state tax conformity to federal tax changes.

The provision for income taxes in the accompanying statement of income differs from the provision calculated by applying the statutory federal income tax rate of 35% to income from continuing operations before provision for income taxes due to the following:



(In millions)	2017			2016			2015

Provision for Income Taxes at Statutory Rate	$	850		$	708		$	678

Increases (Decreases) Resulting From:
Foreign rate differential	(380		)	(322		)	(275		)
Foreign exchange loss on inter-company debt refinancing	(237		)	—			—
Income tax credits	(273		)	(318		)	(316		)
Manufacturing deduction	(42		)	(38		)	(38		)
Withholding taxes	55			—			—
Singapore tax holiday	(25		)	(23		)	(21		)
Impact of change in tax laws and apportionment on deferred taxes	(1,121		)	2			(38		)
Transition tax	1,250			—			—
Provision of tax reserves, net	99			12			18
Excess tax benefits from stock options and restricted stock units	(65		)	—			—
Tax return reassessments and settlements	8			(41		)	(54		)
Other, net	82			19			2

Provision for (benefit from) income taxes	$	201		$	(1	)	$	(44	)

The company has operations and a taxable presence in approximately 50 countries outside the U.S. The company's effective income tax rate differs from the U.S. federal statutory rate each year due to certain operations that are subject to tax incentives, state and local taxes, and foreign taxes that are different than the U.S. federal statutory rate.

The foreign tax credits discussed below are the result of foreign earnings and profits remitted or deemed remitted to the U.S. during the reporting year and the U.S. treatment of taxes paid in the foreign jurisdictions in the years those profits were originally earned.

In 2017, the company continued to implement tax planning initiatives related to non U.S. subsidiaries. These non-U.S. subsidiaries incurred foreign tax obligations, and made cash and deemed distributions to the company’s U.S. operations which resulted in no net tax cost. As a result of these distributions, the company benefitted from U.S. foreign tax credits of $86 million, offset in part by additional U.S. income taxes of $53 million on the related foreign income (which reduced the benefit from the foreign rate differential in 2017). The company also implemented foreign tax credit planning in Sweden which resulted in $20 million of foreign tax credits, with no related incremental U.S. income tax expense.

In 2016, the company continued to implement tax planning initiatives related to non-U.S. subsidiaries. These non-U.S. subsidiaries incurred foreign tax obligations, and made cash and deemed distributions to the company’s U.S. operations which resulted in no net tax cost. As a result of these distributions, the company benefitted from U.S. foreign tax credits of $91 million, offset in part by additional U.S. income taxes of $37 million on the related foreign income (which reduced the benefit from the foreign rate differential in 2016). The company also implemented foreign tax credit planning in Sweden which resulted in $100 million of foreign tax credits, with no related incremental U.S. income tax expense.

In 2015, the company implemented tax planning initiatives related to non-U.S. subsidiaries. These non-U.S. subsidiaries incurred foreign tax obligations, and made cash and deemed distributions to the company’s U.S. operations which resulted in no net tax cost. As a result of these distributions, the company benefitted from U.S. foreign tax credits of $111 million, offset in part by additional U.S. income taxes of $46 million on the related foreign income (which reduced the benefit from the foreign tax rate differential in 2015). The company also implemented foreign tax credit planning in Sweden which resulted in $80 million of foreign tax credits, with no related incremental U.S. income tax expense. Also in 2015, the company recorded benefits totaling $54 million related to additional prior year foreign tax and other credits as well as restructuring and other costs associated with the 2014 acquisition of Life Technologies.

In 2017 the company refinanced certain long term inter-company debt which resulted in an income tax benefit of $237 million related to a foreign exchange loss recognized for income tax purposes.

The company has significant activities in Singapore and has received considerable tax incentives. The local taxing authority granted the company pioneer company status which provides an incentive encouraging companies to undertake activities that have the effect of promoting economic or technological development in Singapore. This incentive equates to a tax exemption on earnings associated with most of the company’s manufacturing activities in Singapore and continues through December 31, 2026. In 2017, 2016 and 2015, the impact of this tax holiday decreased the annual effective tax rates by 1.0 percentage points, 1.1 percentage points and 1.1 percentage points, respectively, and increased diluted earnings per share by approximately $0.06, $0.06 and $0.05, respectively. In connection with the March 2017 extension of this agreement until 2026, the company recorded a benefit in Q1 2017 of approximately $65 million ($0.16 per diluted share) for the effect on deferred tax balances of the extended tax holiday.

Net deferred tax asset (liability) in the accompanying balance sheet consists of the following:



(In millions)	2017			2016

Deferred Tax Asset (Liability)
Depreciation and amortization	$	(3,957	)	$	(4,219	)
Net operating loss and credit carryforwards	1,150			1,453
Reserves and accruals	139			192
Accrued compensation	265			372
Foreign undistributed earnings	—			(156		)
Inventory basis difference	81			110
Other capitalized costs	61			84
Unrealized losses on hedging instruments	125			36
Other, net	126			66

Deferred tax assets (liabilities), net before valuation allowance	(2,010		)	(2,062		)
Less: Valuation allowance	256			113

Deferred tax assets (liabilities), net	$	(2,266	)	$	(2,175	)

The company estimates the degree to which tax assets and loss and credit carryforwards will result in a benefit based on expected profitability by tax jurisdiction and provides a valuation allowance for tax assets and loss and credit carryforwards that it believes will more likely than not expire unutilized. At December 31, 2017, all of the company’s valuation allowance relates to deferred tax assets, primarily net operating losses, for which any subsequently recognized tax benefits will reduce income tax expense.

The changes in the valuation allowance are as follows:



	Year Ended December 31,
(In millions)	2017		2016			2015

Beginning Balance	$	113	$	109		$	116
Additions charged to income tax provision	28		—			—
Additions due to acquisitions	108		25			—
Currency translation and other	7		(21		)	(7		)

Ending Balance	$	256	$	113		$	109

At December 31, 2017, the company had federal, state and non-U.S. net operating loss carryforwards of $195 million, $1.86 billion and $4.09 billion, respectively. Use of the carryforwards is limited based on the future income of certain subsidiaries. The federal and state net operating loss carryforwards expire in the years 2018 through 2037. Of the non-U.S. net operating loss carryforwards, $1.43 billion expire in the years 2018 through 2037, and the remainder do not expire.

The company operates in various jurisdictions around the world. A provision has not been made for certain U.S. state income taxes or additional non-U.S. taxes on $13.21 billion of undistributed earnings of international subsidiaries that could be subject to taxation if remitted to the U.S. because such amounts are intended to be reinvested outside the United States indefinitely. It is not practicable to estimate the unrecognized tax liability due to i) the extent of uncertainty as to which remittance structure would be used (among several possibilities) should a decision be made to repatriate; and ii) the implications of indirect taxes, including withholding taxes that could potentially be required depending on the repatriation structure.

Unrecognized Tax Benefits

As of December 31, 2017, the company had $1.41 billion of unrecognized tax benefits which, if recognized, would reduce the effective tax rate.

A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows:



(In millions)	2017			2016			2015

Balance at beginning of year	$	802		$	350		$	214
Additions due to acquisitions	31			54			—
Additions for tax positions of current year	565			342			14
Additions for tax positions of prior years	51			94			121
Closure of tax years	—			(28		)	(5		)
Settlements	(40		)	(10		)	6

Balance at end of year	$	1,409		$	802		$	350

During 2017, the company’s unrecognized tax benefits provisionally increased $511 million as a result of uncertain tax positions relating to the scope of the Tax Act’s one-time transition tax, $54 million relating to foreign tax positions, $43 million as a result of a foreign exchange loss recognized on the refinancing of certain long term inter-company debt and $31 million due to an acquisition. All of the total $1.41 billion liability is classified as a long-term liability. The company does not expect its unrecognized tax benefits to change significantly over the next twelve months.

During 2016, the company’s unrecognized tax benefits increased $342 million due to the uncertainty around the deductibility of a foreign exchange loss on intercompany investments, $54 million due to acquisitions, $43 million due to tax planning related to prior years that resulted in amended tax filings, $35 million relating to foreign tax positions and $14 million due to the utilization of deferred tax assets. In 2016, the company also settled the Life Technologies tax audit for the 2012 to 2014 tax years which reduced the reserve on unrecognized tax benefits by $10 million.

During 2015, the company’s unrecognized tax benefits increased $70 million due to the utilization of deferred tax assets and $28 million relating to foreign net operating losses on which the company has a deferred tax asset established. This increase was offset in part by a reduction of $10 million from a resolution of an IRS audit of Life Technologies for which a reserve had previously been established.

The company classified interest and penalties related to unrecognized tax benefits as income tax expense. The total amount of interest and penalties related to uncertain tax positions and recognized in the balance sheet as of December 31, 2017 and 2016 was $31 million and $24 million, respectively.

The company conducts business globally and, as a result, Thermo Fisher or one or more of its subsidiaries files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business, the company is subject to examination by taxing authorities throughout the world, including such major jurisdictions as Australia, Canada, China, Denmark, Finland, France, Germany, Japan, Singapore, Sweden, the United Kingdom and the United States. With few exceptions, the company is no longer subject to U.S. federal, state and local, or non-U.S., income tax examinations for years before 2011.