Financial Information

PART II

Item 8. Financial Statements and Supplementary Data.

MARRIOTT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6. INCOME TAXES

The components of our earnings before income taxes for the last three fiscal years consisted of:

Our provision for income taxes for the last three fiscal years consists of:

Unrecognized Tax Benefits

The following table reconciles our unrecognized tax benefit balance for each year from the beginning of 2017 to the end of 2019:

Our unrecognized tax benefit balances included $498 million at year-end 2019, $497 million at year-end 2018, and $385 million at year-end 2017 of tax positions that, if recognized, would impact our effective tax rate. It is reasonably possible that we will settle $207 million of unrecognized tax benefits within the next twelve months. This includes $179 million related to U.S. federal issues that are currently in appeals and $28 million related to state and non-U.S. audits we expect to resolve in 2020. We recognize accrued interest and penalties for our unrecognized tax benefits as a component of tax expense. Related interest totaled $28 million in 2019, $3 million in 2018, and $24 million in 2017.

We file income tax returns, including returns for our subsidiaries, in various jurisdictions around the world. The U.S. Internal Revenue Service (“IRS”) has examined our federal income tax returns, and as of year-end 2019, we have settled all issues for tax years through 2013 for Marriott and through 2009 for Starwood. Our Marriott 2014 and 2015 tax year audits are substantially complete, and our Marriott 2016 through 2018 tax year audits are currently ongoing. Starwood is currently under audit by the IRS for years 2010 through 2016. Various foreign, state, and local income tax returns are also under examination by the applicable taxing authorities.

Deferred Income Taxes

Deferred income tax balances reflect the effects of temporary differences between the carrying amounts of assets and liabilities and their tax bases, as well as from net operating loss and tax credit carry-forwards. We state those balances at the enacted tax rates we expect will be in effect when we pay or recover the taxes. Deferred income tax assets represent amounts available to reduce income taxes we will pay on taxable income in future years. We evaluate our ability to realize these future tax deductions and credits by assessing whether we expect to have sufficient future taxable income from all sources, including reversal of taxable temporary differences, forecasted operating earnings, and available tax planning strategies to utilize these future deductions and credits. We establish a valuation allowance when we no longer consider it more likely than not that a deferred tax asset will be realized.

The following table presents the tax effect of each type of temporary difference and carry-forward that gave rise to significant portions of our deferred tax assets and liabilities as of year-end 2019 and year-end 2018:

Our valuation allowance is attributable to non-U.S. and U.S. state net operating loss carry forwards. During 2019, our valuation allowance increased primarily due to net operating losses in Luxembourg.

At year-end 2019, we had approximately $24 million of tax credits that will expire through 2029 and $16 million of tax credits that do not expire. We recorded $10 million of net operating loss benefits in 2019 and $10 million in 2018. At year-end 2019, we had approximately $3,319 million of primarily state and foreign net operating losses, of which $1,951 million will expire through 2039.

Reconciliation of U.S. Federal Statutory Income Tax Rate to Actual Income Tax Rate

The following table reconciles the U.S. statutory tax rate to our effective income tax rate for the last three fiscal years:

The non-U.S. income tax benefit presented in the table above includes tax-exempt income in Hong Kong, a tax rate incentive in Singapore, a deemed interest deduction in Switzerland, and tax-exempt income earned from certain operations in Luxembourg, which collectively represented 8.0% in 2019, 3.4% in 2018, and 6.2% in 2017. We included the impact of these items in the foreign tax rate differential line above because we consider them to be equivalent to a reduction of the statutory tax rates in these jurisdictions. Pre-tax income in Switzerland, Singapore, Hong Kong, and Luxembourg totaled $642 million in 2019, $432 million in 2018, and $576 million in 2017.

The non-U.S. income tax benefit also includes U.S. income tax expense on non-U.S. operations, which represents 2.0% in 2019 and 1.4% in 2018. We included the impact of this tax in the non-U.S. income line above because we consider this tax to be an integral part of the foreign taxes.

Other Information

We paid cash for income taxes, net of refunds of $526 million in 2019, $678 million in 2018, and $636 million in 2017.

Tax Cuts and Jobs Act of 2017

The U.S. Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”) was enacted on December 22, 2017. In 2017, we recorded a provisional estimated tax benefit of $153 million related to the change in the U.S. tax rate, and a provisional estimated Deemed Repatriation Transition Tax (“Transition Tax”) expense of $745 million. In 2018, we completed our analyses of all impacts of the 2017 Tax Act and recognized an additional tax benefit of $41 million. Substantially all of our unremitted foreign earnings that had not been previously taxed have now been subjected to U.S. taxation under the Transition Tax. In 2018, we recorded a charge of $29 million for state tax liability on unremitted accumulated earnings and continue to update the state tax liability on unremitted accumulated earnings. It is not practical at this time to determine the income tax liability related to any remaining undistributed earnings or additional basis differences not subject to the Transition Tax. We account for U.S. tax on Global Intangible Low-Taxed Income in the period incurred.