INTEREST AND OTHER FINANCIAL CHARGES (In billions) 2019 2018 2017
GE $ 2.1 $ 2.4 $ 2.5
GE Capital 2.5 3.0 3.1
Consolidated $ 4.2 $ 4.8 $ 4.7
The decrease in GE interest and other financial charges for the year ended December 31, 2019 was driven primarily by lower expenses on sales of GE current and long-term receivables as well as the reversal of $0.1 billion of accrued interest on tax liabilities due to the completion of the 2012-2013 Internal Revenue Service (IRS) audit in June 2019, partially offset by the $0.3 billion loss resulting from the completion of a tender offer to purchase GE senior notes (including fees and other costs associated with the tender). The primary components of GE interest and other financial charges are interest on short- and long-term borrowings and financing costs on sales of receivables. Total GE interest and other financial charges of $1.3 billion and $1.5 billion were recorded at Corporate and $0.8 billion and
$0.9 billion were recorded by GE segments for the years ended December 31, 2019 and 2018, respectively.
The decrease in GE Capital interest and other financial charges for the year ended December 31, 2019 were primarily due to lower average borrowings balances due to maturities and lower net interest on assumed debt resulting from an increase in intercompany loans to GE which bear the right of offset (see the Borrowings section of Capital Resources and Liquidity within MD&A for an
explanation of assumed debt and right-of-offset loans), partially offset by an increase in average interest rates due to changes in market rates. GE Capital average borrowings were $61.8 billion, $78.7 billion and $103.8 billion in 2019, 2018 and 2017, respectively. The GE Capital average composite effective interest rate (including interest allocated to discontinued operations) was 4.2%, 3.9% and 3.1% in 2019, 2018 and 2017, respectively.
POSTRETIREMENT BENEFIT PLANS. The Employee Retirement Income Security Act (ERISA) determines minimum pension funding requirements in the U.S. We made $6.0 billion in contributions to the GE Pension Plan in 2018. On an ERISA basis, our preliminary estimate is that the GE Pension Plan was approximately 93% funded at January 1, 2020. The ERISA funded status is higher than the GAAP funded status (81% funded) primarily because the ERISA prescribed interest rate is calculated using an average interest rate. As a result, the ERISA interest rate is higher than the year-end GAAP discount rate. The higher ERISA interest rate lowers pension liabilities for ERISA funding purposes. Our 2018 contributions satisfied our minimum ERISA funding requirement of $1.5 billion and the remaining $4.5 billion was a voluntary contribution to the plan. This voluntary contribution is sufficient to satisfy our minimum ERISA funding requirement for 2019 and 2020. In October 2019, we announced our intent to contribute approximately $4 to $5 billion to the GE Pension Plan in 2020. We expect this amount to equal our estimated future minimum ERISA funding requirements at least through 2022.
We expect 2020 postretirement benefit plans cost to be about $3.2 billion, which is a decrease of approximately $0.6 billion from 2019.
We expect to contribute in 2020 approximately $0.5 billion and $0.4 billion to our other pension plans and principal retiree benefit plans, respectively.
The funded status of our postretirement benefit plans and future effects on operating results depend on economic conditions, interest rates and investment performance. See the Critical Accounting Estimates section within MD&A and Note 13 to the consolidated financial statements for further information about our benefit plans, pension actions and the effects of this activity on our financial statements.
INCOME TAXES
CONSOLIDATED (Dollars in billions) 2019 2018 2017
Effective tax rate (ETR) 63.2% (0.4)% 24.8%
Provision (benefit) for income taxes $ 0.7 $ 0.1 $ (2.8)
Cash income taxes paid(a) 2.2 1.9 2.4
(a) Included taxes paid related to discontinued operations.
For the year ended December 31, 2019, the consolidated income tax provision was $0.7 billion. The increase in the tax provision for 2019 was primarily due to tax expense associated with the preparatory internal restructuring for the planned BioPharma sale and the effect of higher pre-tax income excluding non-deductible impairment charges, partially offset by the benefit from the completion of the IRS audit of the 2012-2013 consolidated U.S. income tax returns.
In June 2019, the IRS completed the audit of our consolidated U.S. income tax returns for 2012-2013, which resulted in a decrease in our balance of unrecognized tax benefits (i.e., the aggregate tax effect of differences between tax return positions and the benefits recognized in our financial statements). The Company recognized a resulting non-cash continuing operations tax benefit of $0.4 billion plus an additional net interest benefit of $0.1 billion. Of these amounts, GE recorded $0.4 billion of tax benefits and $0.1 billion of net interest benefits, and GE Capital recorded insignificant amounts of tax and net interest benefits. GE Capital also recorded a non-cash benefit in discontinued operations of $0.3 billion of tax benefits and an insignificant amount of net interest benefits. See Notes 2 and 15 to the consolidated financial statements for further information.
For the year ended December 31, 2018, the consolidated income tax provision was $0.1 billion. The effective tax rate was negative for 2018 reflecting a tax expense on a consolidated pre-tax loss. The increase in the consolidated provision for income taxes for 2018 was primarily attributable to the decrease in benefit from global operations including an increase in valuation allowances on non-U.S.
deferred tax assets and the decrease in pre-tax loss (excluding non-deductible goodwill impairments) with a tax benefit above the average tax rate. Partially offsetting this increase was the decrease in the consolidated provision for income taxes attributable to an insignificant charge in 2018 to adjust the provisional estimate of the impact of the 2017 enactment of U.S. tax reform compared to the
$4.5 billion charge in 2017 for the estimated impact of enactment.
Absent the effects of U.S. tax reform and non-U.S. losses without a tax benefit, our consolidated income tax provision is generally reduced because of the benefits of lower-taxed global operations. The benefit from non-U.S. rates below the U.S. statutory rate was significant prior to the decrease in the U.S. statutory rate to 21% beginning in 2018. While reduced, there is still generally a benefit as certain non-U.S. income is subject to local country tax rates that are below the new U.S. statutory tax rate.
The rate of tax on our profitable non-U.S. earnings is below the U.S. statutory tax rate because we have significant business operations subject to tax in countries where the tax on that income is lower than the U.S. statutory rate and because GE funds certain non-U.S.
operations through foreign companies that are subject to low foreign taxes. Most of these earnings have been reinvested in active non-U.S. business operations and as of December 31, 2019, we have not decided to repatriate these earnings to the non-U.S. Given non-U.S. tax reform, substantially all of our prior unrepatriated earnings were subject to U.S. tax and accordingly we expect to have the ability to repatriate available non-U.S. cash without additional U.S. federal tax cost and any foreign withholding taxes on a repatriation to the U.S.
would potentially be partially offset by a U.S. foreign tax credit.
A substantial portion of the benefit for lower-taxed non-U.S. earnings related to business operations subject to tax in countries where the tax on that income is lower than the U.S. statutory rate is derived from our GECAS aircraft leasing operations located in Ireland where the earnings are taxed at 12.5%, from our Power operations located in Switzerland where the earnings are taxed at between 9%
and 18.6%, and our Healthcare operations in Europe where tax deductions are allowed for certain intangible assets and earnings are taxed below the historic U.S. statutory rate.
The rate of tax on non-U.S. operations is increased, however, because we also incur losses in foreign jurisdictions where it is not likely that the losses can be utilized and no tax benefit is provided for those losses and valuation allowances against loss carryforwards are provided when it is no longer likely that the losses can be utilized. In addition, as part of U.S. tax reform, the U.S. has enacted a tax on
“base eroding” payments from the U.S. We are continuing to undertake restructuring actions to mitigate the impact from this provision.
The U.S. has also enacted a minimum tax on foreign earnings (global intangible low tax income). Because we have tangible assets outside the U.S. and pay significant foreign taxes, we generally do not expect a significant increase in tax liability from this new U.S.
minimum tax. Overall, these newly enacted provisions increase the rate of tax on our non-U.S. operations.
BENEFIT/(EXPENSE) FROM GLOBAL OPERATIONS (In billions) 2019 2018 2017
Benefit/(expense) of foreign tax rate difference on non-U.S. earnings $ — $ (0.3) $ 0.5
Benefit of audit resolutions 0.1 0.2 —
Other (1.1) (0.9) 2.9
Total benefit/(expense) $ (1.0) $ (1.0) $ 3.4
The amounts reported above exclude the impact of U.S. tax reform which is reported as a separate line in the reconciliation of the U.S.
federal statutory income tax rate to the actual tax rate in Note 15 to the consolidated financial statements.
For the year ended December 31, 2019, the increase in expense from global operations reflects the tax expense associated with the preparatory internal restructuring for the planned BioPharma sale and an increase in valuation allowances on non-U.S. deferred tax assets offset by a benefit from change in foreign rate and by a tax benefit from additional guidance on provisions enacted as part of U.S. tax reform.
For the year ended December 31, 2018, the decrease in benefit from lower-taxed global operations reflects the lower U.S. statutory tax rate and losses without tax benefit. The decrease in other benefits reflects increases in incremental valuation allowances on non-U.S. deferred tax assets and for 2018 newly enacted taxes on non-non-U.S. earnings and the nonrecurrence of 2017 benefits associated with repatriation of foreign earnings.
A more detailed analysis of differences between the U.S. federal statutory rate and the consolidated effective rate, as well as other information about our income tax provisions, is provided in the Critical Accounting Estimates section within MD&A and Note 15 to the consolidated financial statements. The nature of business activities and associated income taxes differ for GE and for GE Capital;
therefore, a separate analysis of each is presented in the paragraphs that follow.
GE EFFECTIVE TAX RATE (EXCLUDING GE CAPITAL EARNINGS) (Dollars in billions) 2019 2018 2017
GE ETR, excluding GE Capital earnings* 72.7% (2.3)% 271.0%
GE provision for income taxes $ 1.3 $ 0.5 $ 3.5
For the year ended December 31, 2019, the GE provision for income taxes increased compared to 2018 primarily due to tax expense associated with the preparatory internal restructuring for the planned BioPharma sale and the effect of higher pre-tax income excluding non-deductible impairment charges, partially offset by the benefit from the completion of the IRS audit of the 2012-2013 consolidated U.S. income tax returns.
For the year ended December 31, 2018, the GE provision for income taxes decreased compared to 2017 because of the nonrecurrence of the $4.9 billion charge for the provisional charge associated with the enactment of U.S. tax reform. Excluding the 2017 charge associated with U.S. tax reform, the GE tax provision increased by $1.9 billion. The increase was primarily due to the decrease in benefit from global operations including an increase in valuation allowances on non-U.S. deferred tax assets partially offset by the effect of lower pretax income excluding non-deductible impairment charges.
GE CAPITAL EFFECTIVE TAX RATE (Dollars in billions) 2019 2018 2017
GE Capital ETR 89.3% 99.7% 49.9%
GE Capital provision (benefit) for income taxes $ (0.6) $ (0.4) $ (6.3)
For the year ended December 31, 2019, the increase in the tax benefit at GE Capital from a benefit of $0.4 billion in 2018 to a benefit of $0.6 billion in 2019 is primarily due to a benefit from additional guidance on the transition tax on historic foreign earnings enacted as part of U.S. tax reform, compared to a charge associated with the enactment of U.S. tax reform during 2018.
For the year ended December 31, 2018, the decrease in the tax benefit at GE Capital from a benefit of $6.3 billion in 2017 to a benefit of $0.4 billion in 2018 is primarily due to the decrease in the pre-tax loss with a tax benefit above the average tax rate including the nonrecurrence of the one-time charge to revalue insurance reserves.
RESEARCH AND DEVELOPMENT. We conduct research and development (R&D) activities to continually enhance our existing products and services, develop new products and services to meet our customers’ changing needs and requirements, and address new market opportunities. R&D expenses are classified in cost of goods and services sold in our consolidated Statement of Earnings (Loss). In addition, R&D funding from customers, principally the U.S. government, is recorded as an offset to such costs.
GE funded Customer and Partner funded(b) Total R&D
(In millions) 2019 2018 2017 2019 2018 2017 2019 2018 2017
Power $ 310 $ 407 $ 641 $ 16 $ 7 $ 35 $ 327 $ 414 $ 676
Renewable Energy 522 413 448 9 11 3 531 424 451
Aviation 906 950 907 911 564 586 1,817 1,514 1,492
Healthcare 994 968 908 25 23 26 1,019 991 934
Corporate(a) 382 675 1,271 89 48 65 471 722 1,336
Total $ 3,115 $ 3,414 $ 4,175 $ 1,049 $ 652 $ 715 $ 4,164 $ 4,065 $ 4,890
(a) Includes Global Research Center and Digital.
(b) Customer funded is principally U.S. Government funded in our Aviation segment. R&D funded through consolidated partnerships was immaterial for all periods presented.
DISCONTINUED OPERATIONS. Discontinued operations primarily include our Baker Hughes and Transportation segments, our mortgage portfolio in Poland, residual assets and liabilities related to our exited U.S. mortgage business (WMC), as discussed in Notes 2 and 23 to the consolidated financial statements, and trailing liabilities associated with the sale of our GE Capital businesses.
In September 2019, we sold a total of 144.1 million shares in Baker Hughes for $3.0 billion in cash (net of certain deal related costs) which reduced our ownership interest from 50.2% to 36.8%. As a result, we have deconsolidated our Baker Hughes segment and reclassified its results to discontinued operations for all periods presented. In addition, as disclosed in prior filings, including our 2018 Form 10-K, we expected to record a significant loss upon deconsolidation. In 2019, we recorded a loss of $8.7 billion ($8.2 billion after-tax) in discontinued operations.
In February 2019, as a result of the spin-off and subsequent merger of our Transportation business with Wabtec, we reclassified our Transportation segment to discontinued operations for all periods presented. In the first quarter of 2019, we recorded a gain of $3.5 billion ($2.5 billion after-tax) in discontinued operations. See Notes 2 and 3 to the consolidated financial statements for further information.
*Non-GAAP Financial Measure
In June 2019, GE Capital recorded $0.3 billion of tax benefits and an insignificant amount of net interest benefits due to a decrease in our balance of unrecognized tax benefits. See the Consolidated Income Tax section above and Note 15 to the consolidated financial statements for further information.
In January 2019, we announced an agreement in principle with the United States to settle the investigation by the U.S. Department of Justice (DOJ) regarding potential violations of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) by WMC and GE Capital, and in April 2019, the parties entered into a definitive settlement agreement. Under the agreement, which concludes this investigation, GE, without admitting liability or wrongdoing, paid the United States a civil penalty of $1.5 billion. See Note 23 to the consolidated financial statements for further information.
The mortgage portfolio in Poland (Bank BPH) comprises floating rate residential mortgages, with approximately 86% of the portfolio indexed to or denominated in foreign currencies (primarily Swiss francs) and the remaining 14% denominated in the local currency in Poland. At December 31, 2019, the total portfolio had a carrying value of $2.5 billion with a 1.4% 90-day delinquency rate and an average loan to value ratio of approximately 65%. The portfolio is recorded at fair value less cost to sell and includes a $0.3 billion impairment, which reflects our best estimate of the effects of potential legislative relief to borrowers and of ongoing litigation in Poland related to foreign currency-denominated mortgages. Future adverse developments in the potential for legislative relief or in litigation across the Polish banking industry could result in further impairment or other losses related to these loans in future reporting periods.
See Note 23 to the consolidated financial statements for further information.
FINANCIAL INFORMATION FOR DISCONTINUED OPERATIONS (In billions) 2019 2018 2017
Earnings (loss) of discontinued operations, net of taxes $ 0.3 $ (1.4) $ (0.4)
Gain (loss) on disposal, net of taxes (5.7) — 0.1
Earnings (loss) from discontinued operations, net of taxes $ (5.3) $ (1.4) $ (0.3) See Note 2 to the consolidated financial statements for further information for our businesses in discontinued operations.