Financial Information

PART II

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Income Taxes

On December 22, 2017, the U.S. government enacted the 2017 Tax Act, which significantly changes how the U.S. taxes corporations. The 2017 Tax Act requires complex computations that were not previously required by U.S. tax law, significant judgments in interpretation of the provisions of the 2017 Tax Act and significant estimates in calculations, and preparation and analysis of information not previously relevant or regularly produced. The U.S. Treasury Department, the IRS, and other standard-setting bodies could interpret or issue guidance on how provisions of the 2017 Tax Act will be applied or otherwise administered that differs from our interpretation. See Footnote 7 “Income Taxes” for further information on the impact of the 2017 Tax Act on our 2017 results.

As discussed below and in Footnote 7 “Income Taxes,” our accounting for the 2017 Tax Act is not yet complete as we continue to refine our calculations, collect necessary information, and monitor developing interpretations. As we complete our analysis of the 2017 Tax Act, collect and prepare necessary data, and interpret any additional regulatory or accounting guidance, we may make adjustments to the provisional amounts we have recorded during a measurement period of up to one year from the enactment of the 2017 Tax Act that could materially impact our provision for income taxes in the periods in which we make such adjustments. Although we are not yet able to quantify all impacts of the 2017 Tax Act on our 2018 and future results, we believe that the overall impact of the 2017 Tax Act on our future financial results will be positive. We discuss the provisional impact on our 2017 results and the potential impact on our future results further in the paragraphs below.

Reduction of U.S. federal corporate tax rate. The 2017 Tax Act reduced the U.S. federal corporate tax rate from 35 percent to 21 percent, effective January 1, 2018. In 2017, we recorded a provisional estimated net tax benefit of $159 million from remeasurement of our year-end deferred tax assets and liabilities to reflect the lower rate at which we expect they will be realized in the future. While we have made a reasonable estimate of the impact of the corporate tax rate reduction, that estimate could change as we complete our analyses of all impacts of the 2017 Tax Act, including, but not limited to, our calculation of deemed repatriation of deferred foreign income and the state tax effect of adjustments made to federal temporary differences.

Deemed Repatriation Transition Tax. The Deemed Repatriation Transition Tax (“Transition Tax”) is a new tax on previously untaxed earnings and profits (“E&P”) of certain of our foreign subsidiaries accumulated post-1986 through year-end 2017. In addition to U.S. federal income taxes, deemed repatriation of such E&P under the 2017 Tax Act may result in additional state income taxes in some of the U.S. states in which we operate. We recorded a provisional estimated Transition Tax expense of $745 million in 2017. We are continuing to gather additional information to more precisely compute the amount of the Transition Tax, and our estimate could change when we finalize all necessary calculations.

We estimate that cash payments for the Transition Tax will total $600 million, which is lower than our provisional estimated Transition Tax expense due to our ability to utilize tax credits that we have carried over from prior years and other adjustments. The federal portion of the Transition Tax is payable over eight years, and we estimate that we will pay $578 million as follows: 8 percent in each of the years from 2018 to 2022, 15 percent in 2023, 20 percent in 2024, and 25 percent in 2025. Our estimate includes payment of an additional $22 million in state income taxes in 2018 as a result of the 2017 Tax Act. These amounts could change when we finalize our analysis of the taxability of the E&P in the states in which we operate.

State net operating losses and valuation allowances. We must assess whether various aspects of the 2017 Tax Act affect our state net operating loss valuation allowances. As discussed above, we have recorded provisional estimates of state income taxes for certain portions of the 2017 Tax Act, but we have not completed our analysis for the states where we have net operating loss carryovers and valuation allowances. Because we have not yet completed our determination of the need for, or any change in, any valuation allowance, we have not recorded any change to our valuation allowances as a result of the 2017 Tax Act.

Other provisions. We continue to evaluate other provisions in the 2017 Tax Act, including: (1) the creation of the base erosion anti-abuse tax (“BEAT”), a new minimum tax; (2) elimination of U.S. federal income taxes on dividends from foreign subsidiaries; (3) a new provision designed to tax global intangible low-taxed income (“GILTI”); (4) limitations on the deductibility of certain executive compensation; and (5) limitations on the use of foreign tax credits to reduce the U.S. income tax liability. Because we have not yet completed our analysis of these provisions, we do not have a reasonable estimate of their potential impact, if any, on our future results.

The impact of the 2017 Tax Act, and other changes affecting our provision for income taxes, are discussed below.

2017 Compared to 2016

Provision for income taxes increased by $1,060 million, primarily due to the 2017 Tax Act ($586 million), the gain on the sale of our interest in Avendra ($259 million), higher earnings due to the inclusion of Legacy-Starwood operations for the full year 2017 ($244 million), lower merger-related costs ($86 million), an unfavorable comparison to the 2016 release of a valuation allowance ($15 million), the gain on the disposition of a North American Full-Service property ($9 million), and a change in judgment regarding the realizability of certain deferred tax assets in certain states and foreign jurisdictions ($7 million). The increase was partially offset by tax benefits from the adoption of ASU 2016-09 ($72 million), tax law changes in non-U.S. jurisdictions ($22 million), change in the jurisdictional mix of earnings ($26 million), the reversal of tax reserves related to interest accrued for previous periods ($15 million), and adjustments resulting from finalizing prior years’ returns ($10 million).

2016 Compared to 2015

Provision for income taxes increased by $8 million, driven by $4 million from the Starwood Combination and the following Legacy-Marriott drivers: tax rate changes in several jurisdictions ($12 million), higher earnings from foreign operations ($6 million), and an unfavorable comparison to 2015 U.S. and foreign true-ups ($5 million), partially offset by lower U.S. earnings due to merger-related expenses ($11 million) and the release of a valuation allowance ($8 million).