|9 Months Ended|
Sep. 30, 2018
|Income Tax Disclosure [Abstract]|
NOTE 6. INCOME TAXES
Our effective tax rate for the year is expected to approximate 21.0 percent, excluding any discrete tax items that may arise.
Our effective tax rates for the three and nine months ended September 30, 2018, were 13.3 percent and 22.8 percent, respectively.
The three months ended September 30, 2018, contained $37 million, or $0.23 per share, of favorable net discrete tax items, primarily due to $34 million of favorable discrete items related to the 2017 Tax Cuts and Jobs Act (Tax Legislation) and $3 million of other favorable discrete items.
The nine months ended September 30, 2018, contained $37 million, or $0.23 per share, of unfavorable net discrete tax items, primarily due to $48 million of unfavorable discrete items related to the Tax Legislation, partially offset by $11 million of other favorable discrete items. See table below for additional information on Tax Legislation adjustments.
Our effective tax rates for the three and nine months ended October 1, 2017, were 26.5 percent and 26.3 percent, respectively and contained only immaterial discrete tax items.
The SEC issued guidance which addressed the uncertainty in the application of GAAP to the Tax Legislation where certain income tax effects could not be finalized at December 31, 2017. This guidance allows entities to record provisional amounts based on current estimates that are updated on a quarterly basis. As a result, our accounting for the effects of the Tax Legislation is not considered complete at this time. The final transition impacts of the Tax Legislation may differ from our estimates, possibly materially, due to, among other things, changes in interpretations of the Tax Legislation, any legislative action to address questions that arise because of the Tax Legislation, any changes in accounting standards for income taxes or related interpretations in response to the Tax Legislation, or any updates or changes to estimates we have utilized to calculate the transition impacts. The SEC requires final calculations to be completed within the one-year measurement period ending December 22, 2018, and reflect any additional guidance issued throughout the year. Any adjustments of provisional amounts will be reported in the period in which the estimates change. We made provisional estimates of the effects of the Tax Legislation in three primary areas: (1) the withholding tax accrued on those earnings no longer considered permanently reinvested at December 31, 2017; (2) our existing deferred tax balances and (3) the one-time transition tax. The Internal Revenue Service (IRS) continues to issue guidance, which required adjustment of the one-time transition tax as shown in the table below.
The adjustments during the one-year Tax Legislation measurement period for each group and other Tax Legislation adjustments for the three and nine months ended September 30, 2018, consisted of the following:
(1) Charges relate to one-time recognition of deferred tax charges at historical tax rates on intercompany profit in inventory.
Withholding tax is an additional cost associated with the distribution of earnings from some jurisdictions. As a result of the Tax Legislation, we reconsidered previous assertions regarding earnings that were considered permanently reinvested, which requires us to record withholding taxes on earnings likely to be distributed in the foreseeable future. The assertion as to which earnings are permanently reinvested for purposes of calculating withholding tax is provisional as we refine the underlying calculations of the amount of earnings subject to the tax and the rate at which it will be taxed. The recorded provisional amount for the withholding tax resulted in an incremental tax expense of $331 million at December 31, 2017.
In the third quarter of 2018, we recorded a $118 million adjustment to lower withholding taxes as we revised our assertion to permanently reinvested earnings. The $118 million tax benefit resulted from reevaluating the dividend withholding tax accrual for India and China. The total withholding tax accrual on non-permanently reinvested earnings at September 30, 2018, after this reduction was $219 million.
One-time Transition Tax
The one-time transition tax is based on our total post-1986 unrepatriated earnings and profits not previously subject to U.S. income tax. We recorded a provisional amount for our one-time transition tax of $298 million with a cash impact of $338 million at December 31, 2017.
In the third quarter of 2018, we recorded $70 million of additional one-time transition tax due to proposed regulations issued by the IRS on August 9, 2018.
The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.
Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef