Note 15
Commitments and contingencies
Contingencies – Regulatory, Compliance and Legal Antitrust
In April 2014, the European Commission announced its decision regarding its investigation of anticompetitive practices in the cables industry and granted the Company full immunity from fines under the European Commission’s leniency program. In December 2013, the Company agreed with the Brazilian Antitrust Authority (CADE) to settle its ongoing investigation into the Company’s involvement in anticompetitive practices in the cables industry and the Company agreed to pay a fine of
approximately 1.5 million Brazilian reals (equivalent to approximately $1 million on date of payment).
In Brazil, the Company’s Gas Insulated Switchgear business is under investigation by the CADE for alleged anticompetitive practices. In addition, the CADE has opened an investigation into certain other power businesses of the Company, including flexible alternating current transmission systems (FACTS) and power transformers. With respect to these matters, management is cooperating fully with the authorities. An informed judgment about the outcome of these investigations or the amount of potential loss or range of loss for the Company, if any, relating to these investigations cannot be made at this stage.
Suspect payments
As a result of an internal investigation, the Company self-reported to the Securities and Exchange Commission (SEC) and the Department of Justice (DoJ) in the United States as well as to the Serious
has commenced an investigation into this matter. The Company is cooperating fully with the
authorities. At this time, it is not possible for the Company to make an informed judgment about the outcome of these matters.
General
In addition, the Company is aware of proceedings, or the threat of proceedings, against it and others in respect of private claims by customers and other third parties with regard to certain actual or alleged anticompetitive practices. Also, the Company is subject to other various legal proceedings,
investigations, and claims that have not yet been resolved. With respect to the above-mentioned regulatory matters and commercial litigation contingencies, the Company will bear the costs of the continuing investigations and any related legal proceedings.
Liabilities recognized
At December 31, 2017 and 2016, the Company had aggregate liabilities of $233 million and
$150 million, respectively, included in “Other provisions” and “Other non-current liabilities”, for the above regulatory, compliance and legal contingencies, and none of the individual liabilities
recognized was significant. As it is not possible to make an informed judgment on the outcome of certain matters and as it is not possible, based on information currently available to management, to estimate the maximum potential liability on other matters, there could be material adverse outcomes beyond the amounts accrued.
Guarantees General
The following table provides quantitative data regarding the Company’s third-party guarantees. The maximum potential payments represent a “worst-case scenario”, and do not reflect management’s expected outcomes.
December 31 ($ in millions)
Maximum potential payments
2017 2016
Performance guarantees 1,775 193
Financial guarantees 17 69
Indemnification guarantees 72 71
Total 1,864 333
The carrying amount of liabilities recorded in the Consolidated Balance Sheets reflects the Company’s best estimate of future payments, which it may incur as part of fulfilling its guarantee obligations. In respect of the above guarantees, the carrying amounts of liabilities at December 31, 2017 and 2016, were not significant.
The Company is party to various guarantees providing financial or performance assurances to certain third parties. These guarantees, which have various maturities up to 2027, mainly consist of
performance guarantees whereby (i) the Company guarantees the performance of a third party’s product or service according to the terms of a contract and (ii) as member of a consortium/joint venture that includes third parties, the Company guarantees not only its own performance but also the work of third parties. Such guarantees may include guarantees that a project will be completed within a specified time. If the third party does not fulfill the obligation, the Company will compensate the guaranteed party in cash or in kind. The original maturity dates for the majority of these performance guarantees range from one to eight years.
In conjunction with the divestment of the high-voltage cable and cables accessories businesses, the Company has entered into various performance guarantees with other parties with respect to certain liabilities of the divested business. At December 31, 2017, the maximum potential payable under these guarantees amounts to $929 million and these guarantees have various maturities ranging from one to ten years.
Commercial commitments
In addition, in the normal course of bidding for and executing certain projects, the Company has entered into standby letters of credit, bid/performance bonds and surety bonds (collectively
“performance bonds”) with various financial institutions. Customers can draw on such performance
bonds in the event that the Company does not fulfill its contractual obligations. The Company would then have an obligation to reimburse the financial institution for amounts paid under the performance bonds.
At December 31, 2017 and 2016, the total outstanding performance bonds aggregated to $7.7 billion and
$7.9 billion, respectively. There have been no significant amounts reimbursed to financial institutions under these types of arrangements in 2017, 2016 and 2015.
Product and order-related contingencies
The Company calculates its provision for product warranties based on historical claims experience and specific review of certain contracts.
The reconciliation of the “Provisions for warranties”, including guarantees of product performance, was as follows:
($ in millions) 2017 2016 2015
Balance at January 1, 1,142 1,089 1,148
Net change in warranties due to acquisitions and divestments 30 — —
Claims paid in cash or in kind (335) (329) (357)
Net increase in provision for changes in estimates, warranties issued
and warranties expired 297 424 377
Exchange rate differences 97 (42) (79)
Balance at December 31, 1,231 1,142 1,089
During 2016, the Company determined that the provision for product warranties in its solar business, acquired in 2013 as part of the purchase of Power-One, was no longer sufficient to cover expected warranty costs in the remaining warranty period. Due to higher than originally expected product failure rates for certain solar inverters designed and manufactured by Power-One, a substantial portion of which relates to products which were delivered to customers prior to the acquisition date, the previously estimated product warranty provision was increased by a total of $23 million and $151 million, during 2017 and 2016, respectively. The corresponding increases were included in “Cost of sales of products” and resulted in a decrease in diluted earnings per share of $0.01 for 2017, and a decrease in basic and diluted earnings per share of $0.06 and $0.05, respectively, for 2016. As $8 million and $131 million, in 2017 and 2016, respectively, relates to products which were sold prior to the acquisition date these costs have been excluded from the Company’s measure of segment profit, Operational EBITA (see Note 23). This warranty provision has been recorded based on the information presently available and is subject to change in the future.
Related party transactions
The Company conducts business with certain companies where members of the Company’s Board of Directors or Executive Committee act, or in recent years have acted, as directors or senior executives.
The Company’s Board of Directors has determined that the Company’s business relationships with those companies do not constitute material business relationships. This determination was made in accordance with the Company’s related party transaction policy which was prepared based on the Swiss Code of Best Practice and the independence criteria set forth in the corporate governance rules of the New York Stock Exchange.
— Note 16 Taxes
“Provision for taxes” consisted of the following:
($ in millions) 2017 2016 2015
Current taxes 1,061 925 1,005
Deferred taxes (201) (144) (217)
Tax expense from continuing operations 860 781 788
Tax expense (benefit) from discontinued operations (4) (4) (2)
ABB Group, ABB Ltd, is domiciled in Switzerland and income generated in jurisdictions outside of Switzerland (hereafter “foreign jurisdictions”) which has already been subject to corporate income tax in those foreign jurisdictions is, to a large extent, tax exempt in Switzerland. There is no requirement in Switzerland for any parent company of a group to file a tax return of the consolidated group
determining domestic and foreign pre-tax income. As the Company’s consolidated income from continuing operations is predominantly earned outside of Switzerland, corporate income tax in foreign jurisdictions largely determines the weighted-average global tax rate of the Company.
On December 22, 2017, the U.S. Government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the Tax Act). The Tax Act makes broad and complex changes to the U.S. tax code. The SEC staff issued Staff Accounting Bulletin No. 118, which has allowed the Company to record provisional amounts in income tax expense from continuing operations in the 2017 financial statements.
The estimated impact includes a benefit of $30 million due to changes in tax rates, valuation allowance on foreign tax credits and undistributed earnings of subsidiaries, offset by $26 million charge for one-time transition tax. Ongoing guidance and accounting interpretations are expected over the next 12 months and the completion of the accounting for the Tax Act will be finalized during that measurement period.
The reconciliation of “Tax expense from continuing operations” at the weighted-average tax rate to the effective tax rate is as follows:
($ in millions, except % data) 2017 2016 2015
Income from continuing operations before taxes 3,231 2,799 2,840
Weighted-average global tax rate 23.5% 21.2% 21.8%
Income taxes at weighted-average tax rate 760 594 619
Items taxed at rates other than the weighted-average tax rate (102) 27 (36)
Changes in valuation allowance, net 753 (17) 57
Effects of changes in tax laws and (enacted) tax rates (747) 42 —
Non-deductible expenses, excluding goodwill 58 86 52
Other, net 138 49 96
Tax expense from continuing operations 860 781 788
Effective tax rate for the year 26.6% 27.9% 27.7%
In 2017, the benefit reported in “Items taxed at rates other than the weighted-average tax rate”
predominantly included a positive impact of $72 million related to non-taxable amounts for net gains from sale of businesses. In 2015, the benefit reported in “Items taxed at rates other than the
weighted-average tax rate” predominantly included a benefit of $50 million related to tax credits arising from research and development activities.
In 2017, the relevant tax rate applicable to one of the Company’s subsidiaries increased and in connection with this change, the company benefited from an increase of $721 million in deferred tax assets relating to certain long-term assets. The respective effect is reported in “Effects of changes in tax laws and (enacted) tax rates”. After evaluating the recoverability of this deferred tax asset, the Company recorded a valuation allowance of $668 million as the Company determined that it was more likely than not that such deferred tax assets would not be realized. This is reported in the table above in
“Changes in valuation allowance, net”.
In 2016 and 2015, “Changes in valuation allowance, net” included reductions in valuation allowances recorded in certain jurisdictions where the Company determined that it was more likely than not that such deferred tax assets (recognized for net operating losses and temporary differences in those jurisdictions) would be realized, as well as increases in the valuation allowance in certain other jurisdictions. In 2015, the “Changes in valuation allowance, net” included an expense of $21 million related to certain of the Company’s operations in Asia.
In 2017, 2016 and 2015, “Non-deductible expenses” of $58 million, $86 million and $52 million, respectively, included expenses in relation to items that were deducted for financial accounting purposes, but were not tax deductible, such as interest expense, local taxes on productive activities, disallowed meals and entertainment expenses and other similar items.
In 2017, 2016 and 2015, “Other, net” in the table above included net charges of $148 million, $50 million and $74 million, respectively, related to the interpretation of tax law and double tax treaty agreements by competent tax authorities.
Deferred income tax assets and liabilities consisted of the following:
December 31 ($ in millions) 2017 2016
Deferred tax assets:
Unused tax losses and credits 524 514
Provisions and other accrued liabilities 779 865
Pension 473 507
Inventories 275 273
Property, plant and equipment and other non-current assets 1,152 266
Other 98 93
Total gross deferred tax asset 3,301 2,518
Valuation allowance (1,323) (561)
Total gross deferred tax asset, net of valuation allowance 1,978 1,957
Deferred tax liabilities:
Property, plant and equipment (237) (234)
Intangibles and other assets (739) (724)
Pension and other liabilities (220) (171)
Inventories (74) (91)
Unremitted earnings (557) (537)
Total gross deferred tax liability (1,827) (1,757)
Net deferred tax asset (liability) 151 200
Included in:(1)
“Deferred taxes” – non-current assets 1,250 1,118
“Deferred taxes” – non-current liabilities (1,099) (918)
Net deferred tax asset (liability) 151 200
(1) As a result of the adoption of an accounting standard update on the classification of deferred taxes (see Note 2), the information presented for 2016 has been reclassified.
Certain entities have deferred tax assets related to net operating loss carry-forwards and other items.
As recognition of these assets in certain entities did not meet the more likely than not criterion,
valuation allowances have been recorded and amount to $1,323 million and $561 million, at December 31, 2017 and 2016, respectively. “Unused tax losses and credits” at December 31, 2017 and 2016, in the table above, included $155 million and $108 million, respectively, for which the Company has established a full valuation allowance as, due to limitations imposed by the relevant tax law, the Company determined that, more likely than not, such deferred tax assets would not be realized.
At December 31, 2017 and 2016, deferred tax liabilities totaling $557 million and $537 million, respectively, have been provided for primarily in respect of withholding taxes, dividend distribution taxes or additional corporate income taxes (hereafter “withholding taxes”) on unremitted earnings which will be payable in foreign jurisdictions on the repatriation of earnings to Switzerland. Income which has been generated outside of Switzerland and has already been subject to corporate income tax in such foreign jurisdictions is, to a large extent, tax exempt in Switzerland. Therefore, generally no or only limited Swiss income tax has to be provided for on the repatriated earnings of foreign subsidiaries.
Certain countries levy withholding taxes on dividend distributions. Such taxes cannot always be fully reclaimed by the shareholder, although they have to be declared and withheld by the subsidiary. In 2017 and 2016, certain taxes arose in certain foreign jurisdictions for which the technical merits do not allow utilization of benefits. At both December 31, 2017 and 2016, foreign subsidiary retained earnings subject to withholding taxes upon distribution of approximately $100 million were considered as permanently reinvested, as these funds are used for financing current operations as well as business growth through working capital and capital expenditure in those countries and, consequently, no deferred tax liability was recorded.
At December 31, 2017, net operating loss carry-forwards of $1,708 million and tax credits of $133 million were available to reduce future taxes of certain subsidiaries. Of these amounts, $974 million of loss carry-forwards and $107 million of tax credits will expire in varying amounts through 2037. The largest amount of these carry-forwards related to the Company’s Europe operations.
($ in millions)
Unrecognized tax benefits
Penalties and interest related to unrecognized
tax benefits Total
Classification as unrecognized tax items on January 1, 2015 705 146 851
Increase relating to prior year tax positions 52 38 90
Decrease relating to prior year tax positions (33) (3) (36)
Increase relating to current year tax positions 155 — 155
Decrease due to settlements with tax authorities (38) (13) (51)
Decrease as a result of the applicable statute of limitations (62) (15) (77)
Exchange rate differences (35) (8) (43)
Balance at December 31, 2015, which would, if recognized, affect the effective tax rate 744 145 889
Increase relating to prior year tax positions 88 74 162
Decrease relating to prior year tax positions (21) (20) (41)
Increase relating to current year tax positions 167 13 180
Decrease due to settlements with tax authorities (96) (21) (117)
Decrease as a result of the applicable statute of limitations (95) (13) (108)
Exchange rate differences (27) (6) (33)
Balance at December 31, 2016, which would, if recognized, affect the effective tax rate 760 172 932
Increase relating to prior year tax positions 115 103 218
Decrease relating to prior year tax positions (76) (37) (113)
Increase relating to current year tax positions 223 — 223
Decrease due to settlements with tax authorities (23) (2) (25)
Decrease as a result of the applicable statute of limitations (75) (12) (87)
Exchange rate differences 101 18 119
Balance at December 31, 2017, which would, if recognized, affect the effective tax rate 1,025 242 1,267
In 2017, 2016 and 2015, the “Increase relating to current year tax positions” included a total of $193 million,
$132 million and $127 million, respectively, in taxes related to the interpretation of tax law and double tax treaty agreements by competent tax authorities.
At December 31, 2017, the Company expected the resolution, within the next twelve months, of
uncertain tax positions related to pending court cases amounting to $32 million for taxes, penalties and interest. Otherwise, the Company had not identified any other significant changes which were
considered reasonably possible to occur within the next twelve months.
At December 31, 2017, the earliest significant open tax years that remained subject to examination were the following:
Region Year
Europe 2011
The Americas 2014
Asia, Middle East and Africa 2008