Financial Information

PART II

Item 8. Financial Statements and Supplementary Data.

MARRIOTT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7. 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:

In 2017, our tax provision included an excess tax benefit of $72 million related to the vesting or exercise of share-based awards. Our tax provision did not reflect excess tax benefits of $32 million in 2016 and $34 million in 2015, as these periods were before our adoption of ASU 2016-09. In our Statements of Cash Flows, we presented excess tax benefits as financing cash flows before our adoption of ASU 2016-09.

Unrecognized Tax Benefits

The following table reconciles our unrecognized tax benefit balance for each year from the beginning of 2015 to the end of 2017:

These unrecognized tax benefits reflect the following year-over-year changes: (1) a $70 million increase in 2017, largely attributable to a federal tax issue related to the 2017 Tax Act; (2) a $397 million increase in 2016, largely attributable to Legacy-Starwood unrecognized tax benefits assumed in the Starwood Combination; and (3) a $14 million increase in 2015, largely attributable to a U.S. federal tax issue regarding transfer pricing.

Our unrecognized tax benefit balances included $385 million at year-end 2017, $288 million at year-end 2016, and $15 million at year-end 2015 of tax positions that, if recognized, would impact our effective tax rate. It is reasonably possible that we will settle $83 million of unrecognized tax benefits within the next twelve months. This includes $59 million of U.S. federal issues that are currently in appeals, $20 million of state and non-U.S. audits we expect to resolve in 2018, and $3 million related to issues for which statutes of limitations will expire in 2018. We recognize accrued interest and penalties for our unrecognized tax benefits as a component of tax expense. Related interest totaled $24 million in 2017, $8 million in 2016, and $3 million in 2015.

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 2017, we have settled all issues for tax years through 2013 for Marriott and through 2006 for Starwood. In the 2018 first quarter, we settled all issues for Starwood through 2009. Our Marriott 2014 and 2015 tax year audits are substantially complete, and our Marriott 2016 tax year audit is currently ongoing. Starwood is currently under audit by the IRS for years 2010 through 2012. 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 2017 and year-end 2016:

Our valuation allowance is attributable to non-U.S. and U.S. state net operating loss carry forwards. During 2017, our valuation allowance increased primarily due to current year net operating losses in Luxembourg.

At year-end 2017, we had approximately $12 million of tax credits that will expire through 2025 and $15 million of tax credits that do not expire. We recorded $6 million of net operating loss benefits in 2017 and $5 million in 2016. At year-end 2017, we had approximately $2,250 million of primarily state and foreign net operating losses, of which $1,346 million will expire through 2037.

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 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 (6.2)% in 2017, (7.4)% in 2016, and (4.8)% in 2015. 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, and Luxembourg totaled $576 million in 2017, $271 million in 2016, and $182 million in 2015.

Other Information

We paid cash for income taxes, net of refunds of $636 million in 2017, $293 million in 2016, and $218 million in 2015.

Tax Cuts and Jobs Act of 2017

The 2017 Tax Act was enacted on December 22, 2017, and 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 the 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.

Although we have not completed our accounting for the effects of the 2017 Tax Act, we have where possible made reasonable estimates of the 2017 Tax Act’s effects on our existing deferred tax balances and the one-time transition tax, as described below. In cases where we have not been able to make reasonable estimates of the impact of the 2017 Tax Act, as described below, we continue to account for those items based on our existing accounting under ASC 740, Income Taxes, and the provisions of the tax laws that were in effect immediately before enactment of the 2017 Tax Act. In all cases, we will continue to refine our calculations as we complete additional analyses. As we complete our analysis, 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.

Our provisional estimate of the impact of the 2017 Tax Act resulted in an increase of $586 million to our 2017 income tax provision due to the one-time transition tax, partially offset by a benefit from the reduction of the U.S. federal corporate tax rate, as described 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 for our year-end deferred tax assets and liabilities. While we have made a reasonable estimate of the impact of the federal 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 one-time 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, the deemed repatriation of such E&P may result in additional state income taxes in some of the U.S. states in which we operate. We recorded a provisional estimated federal and state Transition Tax expense of $745 million in 2017. This estimate could change as we finalize our calculations and inputs, including the determination of untaxed post-1986 E&P and amounts held in cash or other specified assets.

The 2017 Tax Act does not provide for additional income taxes for any remaining undistributed foreign earnings not subject to the Transition Tax, or for any additional outside basis differences inherent in foreign entities, as these amounts continue to be indefinitely reinvested in those foreign operations. Substantially all our unremitted foreign earnings that have not been previously taxed have now been subjected to U.S. taxation under the Transition Tax. We have made no additional provision for U.S. income taxes or additional non-U.S. taxes on the remaining unremitted accumulated earnings of non-U.S. subsidiaries. It is not practical at this time to determine the income tax liability related to any remaining undistributed earnings or additional basis difference not subject to the Transition Tax.

State net operating losses and valuation allowances. We must assess whether our state net operating loss valuation allowances are affected by various aspects of the 2017 Tax Act. As discussed above, we have recorded provisional amounts related to the 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 yet recorded any change to valuation allowances as a result of the 2017 Tax Act.

The 2017 Tax Act also included a new provision designed to tax global intangible low-taxed income (“GILTI”). Under U.S. GAAP, we may make an accounting policy election to either (1) treat any taxes on GILTI inclusions as a current-period expense when incurred (the “period cost method”) or (2) factor such amounts into our measurement of our deferred taxes (the “deferred method”). We have not yet adopted either accounting policy because we have not completed our analysis of this provision.