NOTE 9 – Income Taxes

The components of income before income taxes and the provision for income taxes are shown below:


(in millions)	2017		2016		2015
Income before income taxes:
U.S.	$	226	$	176	$	109
Foreign		543		566		490
Total income before income taxes		769		742		599
Provision for income taxes:
Current tax (benefit) expense:
U.S. federal		(13)		95		26
State and local		4		8		3
Foreign		179		148		164
Total current tax expense		170		251		193
Deferred tax expense (benefit):
U.S. federal		77		13		(8)
State and local		4		1		(1)
Foreign		(14)		(19)		3
Total deferred tax expense (benefit)		67		(5)		(6)
Total provision for income taxes	$	237	$	246	$	187

Deferred income taxes are provided for the tax effects of temporary differences between the financial reporting basis and tax basis of assets and liabilities. Significant temporary differences as of December 31, 2017 and 2016 are summarized as follows:


(in millions)	2017		2016
Deferred tax assets attributable to:
Employee benefit accruals	$	20	$	39
Pensions and postretirement plans		20		30
Derivative contracts		5		3
Net operating loss carryforwards		32		18
Foreign tax credit carryforwards		—		4
Other		—		24
Gross deferred tax assets		77		118
Valuation allowances		(34)		(21)
Net deferred tax assets		43		97
Deferred tax liabilities attributable to:
Property, plant and equipment		185		206
Identified intangibles		37		55
Other		11		—
Gross deferred tax liabilities		233		261
Net deferred tax liabilities	$	190	$	164

Of the $32 million of tax-effected net operating loss carryforwards as of December 31, 2017, approximately $9 million are for state loss carryforwards and approximately $23 million are for foreign loss carryforwards. Of the $18 million of tax-effected net operating loss carryforwards as of December 31, 2016, approximately $8 million are for state loss carryforwards. Income tax accounting requires that a valuation allowance be established when it is more likely than not that all or a portion of a deferred tax asset will not be realized. In making this assessment, management considers the level of historical taxable income, scheduled reversal of deferred tax liabilities, tax planning strategies, tax carryovers, and projected future taxable income. As of December 31, 2017, the Company maintains valuation allowances of $9 million for state loss carryforwards, $2 million for state credits, and $21 million for foreign loss carryforwards that management has determined will more likely than not expire prior to realization. As of December 31, 2016, the Company maintains valuation allowances of $8 million for state loss carryforwards, $2 million for state credits and $9 million for foreign loss carryforwards that management has determined will more likely than not expire prior to realization. In addition, the Company maintains valuation allowances on foreign subsidiaries’ net deferred tax assets of $2 million for both the years ended December 31, 2017 and 2016.

A reconciliation of the U.S. federal statutory tax rate to the Company’s effective tax rate follows:


	2017		2016		2015
Provision for tax at U.S. statutory rate	35.0	%	35.0	%	35.0	%
Tax rate difference on foreign income	(5.6)		(5.5)		(5.8)
State and local taxes, net	0.7		0.3		0.3
Tax impact of fluctuations in Mexican peso to U.S. dollar	(0.5)		2.4		2.9
Net impact of U.S. foreign tax credits	0.3		(2.3)		0.9
Net impact of U.S.-Canada tax settlement	(1.3)		3.2		—
Net impact of valuation allowance in Argentina	2.0		1.0		—
Net impact of transition tax	2.7		—		—
Net impact of U.S. deferred tax remeasurement	(4.9)		—		—
Net impact of provision for taxes on unremitted earnings	4.3		0.5		—
Other items, net	(1.9)		(1.5)		(2.1)
Provision at effective tax rate	30.8	%	33.1	%	31.2	%

The Company has significant operations in Canada, Mexico, and Pakistan where the statutory tax rates are 25 percent, 30 percent and 30 percent in 2017, respectively. In addition, the Company's subsidiary in Brazil has a statutory tax rate of 34 percent before local incentives that vary each year.

The Tax Cuts and Jobs Act (“TCJA”) was enacted on December 22, 2017. The TCJA introduced numerous changes in the U.S. federal tax laws. Changes that have a significant impact on our effective tax rate are a reduction in the U.S. corporate tax rate from 35 percent to 21 percent and the imposition of a U.S. tax on our global intangible low-taxed income (“GILTI”). The TCJA also provides for a one-time transition tax on the deemed repatriation of cumulative foreign earnings as of December 31, 2017, and eliminates the tax on dividends from our foreign subsidiaries by allowing a 100 percent dividends received deduction.

On December 22, 2017, Staff Accounting Bulletin No. 118 (“SAB 118”) was issued to provide guidance on the application of GAAP to situations in which the registrant does not have all the necessary information available, prepared or analyzed (including computations) in sufficient detail to complete the accounting for the income tax effects of the TCJA.

The Company has calculated what it believes is a reasonable estimate of the impact of the TCJA in accordance with SAB 118 and its understanding of the TCJA, including published guidance as of the date of this filing, and has recorded $23 million of provisional income tax expense in the fourth quarter of 2017, the period in which the TCJA was enacted. The provisional amount of $23 million is composed of the following four items:


(in millions)
One-time transition tax	$	21
Remeasurement of deferred tax assets and liabilities		(38)
Net impact of provision for taxes on unremitted earnings		33
Other items, net		7
Net impact of the TCJA on our 2017 income tax expense	$	23

The Company may update its estimate in 2018 as additional information, including guidance from federal and state regulatory agencies, becomes available and it finalizes its computations, which are complex and subject to interpretation. Any adjustment to these provisional tax amounts will be recorded in the quarter of 2018 in which the analysis is completed.

Under a provision in the TCJA, all of the undistributed earnings of our foreign subsidiaries were deemed to be repatriated at December 31, 2017, and were subjected to a transition tax. As a result, a provisional transition tax liability of $21 million, or 2.7 percentage points on effective tax rate, was recorded in income from continuing operations in the fourth quarter of 2017. Although these earnings that were deemed to be repatriated are not subject to additional U.S. federal income tax upon distribution, these earnings could be subject to foreign withholding and state income tax upon distribution. In addition, distributions of these previously-taxed earnings could give rise to taxable exchange gain or loss in the U.S.

As a result of the reduction in the U.S. corporate tax rate, the Company recorded a provisional tax benefit of $38 million, or 4.9 percentage points on the effective tax rate, due to the remeasurement of its U.S. net deferred tax liabilities.

Due to a change in the U.S. tax treatment of dividends received from foreign subsidiaries, the Company has recorded a provisional tax liability of $33 million, or 4.3 percentage points on the effective tax rate, for foreign dividend withholding and state income taxes payable upon the distribution of unremitted earnings from certain foreign subsidiaries from which it expects to receive cash distributions in 2018 and beyond.

The net impact of the TCJA on its 2017 tax expense includes a provisional tax liability of $7 million, or 0.9 percentage points on the effective tax rate (included in other items, net), for the difference in its 2017 tax expense as calculated with and without the changes triggered by the TCJA.

Because of the complexity of the new GILTI rules, the Company is continuing to evaluate this provision of the TCJA for the application of ASC 740. Under GAAP, the Company is allowed to make an accounting policy choice of either treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred (the “period cost method”) or factoring such amounts into our measurement of our deferred taxes (the “deferred method”). The Company has not made any adjustments related to potential GILTI tax in its financial statements, as it has not made a policy decision regarding whether to record deferred taxes on GILTI.

The Company had been pursuing relief from double taxation under the U.S.-Canada tax treaty for the years 2004 through 2013. During the fourth quarter of 2016, a tentative settlement was reached between the U.S. and Canada and, consequently, the Company established a net reserve of $24 million, including interest thereon, recorded as a $70 million cost and a $46 million benefit, or 3.2 percentage points, on the effective tax rate. In addition, as a result of the settlement, for the years 2014 through 2016, the Company had established a net reserve of $7 million, or 1.0 percentage points, on the effective tax rate in 2016. In the third quarter of 2017, the two countries finalized the agreement, which eliminated the double taxation, and the Company paid $63 million to the U.S. Internal Revenue Service to settle the liability. As a result of that agreement, the Company is entitled to a net tax benefit of $10 million primarily due to a foreign exchange loss deduction on its 2017 U.S. federal income tax return, or 1.3 percentage points, on the effective tax rate.

The Company uses the U.S. dollar as the functional currency for its subsidiaries in Mexico. Because of the increase in the value of the Mexican peso versus the U.S. dollar in 2017, the Mexican tax provision includes decreased tax expense of approximately $4 million, or 0.5 percentage points, on the effective tax rate. In 2016 and 2015, a decline in value of the Mexican peso versus the U.S. dollar increased tax expense by $18 million and $17 million, or 2.4 percentage points and 2.9 percentage points on the effective tax rate, respectively. These impacts are largely associated with foreign currency translation gains and losses for local tax purposes on net U.S. dollar monetary assets held in Mexico for which there is no corresponding gain or loss in pre-tax income.

During 2017, the Company increased the valuation allowance on the net deferred tax assets in Argentina. As a result, the Company recorded a valuation allowance in the amount of $16 million, or 2.0 percentage points on the effective tax rate, compared to $7 million and or 1.0 percentage points on the effective tax rate in 2016.

During 2015, an audit was settled at a National Starch subsidiary related to a pre-acquisition period for which we are indemnified by Akzo Nobel N.V. (“Akzo”). In the third quarter of 2014, the Company recognized increased tax expense to reserve approximately $7 million ($5 million of tax and $2 million of interest) or 1.3 percentage points in the effective tax rate for the audit. In the third quarter of 2015 the reserve was reduced by approximately $4 million ($3 million of tax and $1 million of interest) which resulted in a decrease of 0.7 percentage points in the 2015 effective tax rate. These impacts are included in the rate reconciliation as “Other items, net.” The $7 million of tax expense and $4 million of reduced tax expense were recorded in the tax provision of the subsidiary, while the reimbursement from Akzo under the indemnity is recorded as other income, which results in no impact in net income for all periods.

As of December 31, 2017, for U.S. tax purposes all of the undistributed earnings and profits of our foreign subsidiaries were deemed to be repatriated and subjected to a transition tax. In addition, during 2017 we recorded a provisional liability of $33 million for foreign withholding and state income taxes on certain unremitted earnings from foreign subsidiaries. However, we have not provided for foreign withholding taxes, state income taxes and federal and state taxes on foreign currency gains/losses on distributions of approximately $2.7 billion of unremitted earnings of our foreign subsidiaries; as such amounts are considered permanently reinvested. It is not practicable to estimate the additional income taxes, including applicable foreign withholding taxes that would be due upon the repatriation of these earnings.

A reconciliation of the beginning and ending amounts of unrecognized tax benefits, excluding interest and penalties, for 2017 and 2016 is as follows:


(in millions)	2017		2016
Balance at January 1	$	86	$	12
Additions for tax positions related to prior years		—		72
Reductions for tax positions related to prior years		—		(9)
Additions based on tax positions related to the current year		12		12
Settlements		(58)		—
Reductions related to a lapse in the statute of limitations		(1)		(1)
Balance at December 31	$	39	$	86

Of the $39 million of unrecognized tax benefits as of December 31, 2017, $15 million represents the amount that, if recognized, could affect the effective tax rate in future periods. The remaining $24 million includes an offset of $23 million for an income tax receivable and $1 million of federal benefit created as part of the U.S.-Canada tax settlement described previously.

The Company accounts for interest and penalties related to income tax matters within the provision for income taxes. The Company has accrued $2 million of interest expense related to the unrecognized tax benefits as of December 31, 2017. The accrued interest expense was $9 million as of December 31, 2016.

The Company is subject to U.S. federal income tax as well as income tax in multiple states and non-U.S. jurisdictions. The U.S. federal tax returns are subject to audit for the years 2014 to 2017. In general, the Company’s foreign subsidiaries remain subject to audit for years 2011 and later.

It is also reasonably possible that the total amount of unrecognized tax benefits including interest and penalties will increase or decrease within 12 months of December 31, 2017. The Company has classified none of the unrecognized tax benefits as current because they are not expected to be resolved within the next 12 months.