INCOME TAXES

We are subject to Canadian and United States federal, state, and local income taxes as well as other foreign income taxes. The domestic (Canada) and foreign components of our "Income before income taxes" (and after removing our "Equity in net loss of non-consolidated affiliates") are as follows (in millions).



	Year Ended March 31,
	2015			2014			2013
Domestic (Canada)	$	(267	)	$	(294	)	$	(263	)
Foreign (all other countries)	434			421			565
Pre-tax income before equity in net loss of non-consolidated affiliates	$	167		$	127		$	302

The components of the "Income tax provision" are as follows (in millions).



	Year Ended March 31,
	2015			2014			2013
Current provision (benefit):
Domestic (Canada)	$	4		$	12		$	11
Foreign (all other countries)	98			128			103
Total current	102			140			114
Deferred provision (benefit):
Domestic (Canada)	—			—			—
Foreign (all other countries)	(88		)	(129		)	(31		)
Total deferred	(88		)	(129		)	(31		)
Income tax provision	$	14		$	11		$	83

The reconciliation of the Canadian statutory tax rates to our effective tax rates are shown below (in millions, except percentages).



	Year Ended March 31,
	2015			2014			2013
Pre-tax income before equity in net loss on non-consolidated affiliates	$	167		$	127		$	302
Canadian Statutory tax rate	25		%	25		%	26		%
Provision at the Canadian statutory rate	$	42		$	32		$	79
Increase (decrease) for taxes on income (loss) resulting from:
Exchange translation items	(22		)	—			(2		)
Exchange remeasurement of deferred income taxes	(31		)	(20		)	(19		)
Change in valuation allowances	95			94			84
Tax credits and other allowances	(22		)	(38		)	(8		)
Income items not subject to tax	2			(6		)	—
State tax (benefit) expense, net	(7		)	(7		)	3
Dividends not subject to tax	(52		)	(52		)	(53		)
Enacted tax rate changes	(1		)	3			1
Tax rate differences on foreign earnings	7			(4		)	9
Uncertain tax positions	10			8			2
Prior year adjustments	2			(1		)	(5		)
Income tax settlements	(6		)	—			—
Other — net	(3		)	2			(8		)
Income tax provision	$	14		$	11		$	83
Effective tax rate	8		%	9		%	27		%

Our effective tax rate differs from the Canadian statutory rate primarily due to the following factors: (1) pre-tax foreign currency gains or losses with no tax effect and the tax effect of U.S. dollar denominated currency gains or losses with no pre-tax effect, which is shown above as exchange translation items; (2) the remeasurement of deferred income taxes due to foreign currency changes, which is shown above as exchange remeasurement of deferred income taxes; (3) changes in valuation allowances; (4) non-taxable dividends; (5) income tax settlements; (6) differences between the Canadian statutory and foreign effective tax rates applied to entities in different jurisdictions shown above as tax rate differences on foreign earnings; (7) tax credits in various jurisdictions; (8) state income tax benefit; and (9) increases or decreases in uncertain tax positions recorded under the provisions of ASC 740.

On March 31, 2014, New York State enacted corporate tax reform legislation that overhauls the State corporate tax rate. One of the changes is the enactment of a zero tax rate for qualified New York manufacturers effective for tax years beginning on or after January 1, 2014.

We continue to maintain valuation allowances in Canada and certain foreign jurisdictions primarily related to tax losses where we believe it is more likely than not that we will be unable to utilize those losses. The impact on our income tax provision of the change in these valuation allowances during the year ended March 31, 2015 was an increase of $95 million.

We earn tax credits in a number of the jurisdictions in which we operate. Primarily comprised of empire zone credits in New York in the current year of $8 million, and foreign tax credits in the U.K. of $11 million. The impact on our income tax provision of these credits during the year ended March 31, 2015 was a benefit of $22 million. However, the current year empire zone credits in New York are offset with a corresponding valuation allowance of $8 million.

In 2005, we entered into a tax sharing and disaffiliation agreement with Alcan that provides indemnification if certain factual representations are breached or if certain transactions are undertaken or certain actions are taken that have the effect of negatively affecting the tax treatment of our spin-off from Alcan. It further governs the disaffiliation of the tax matters of Alcan and its subsidiaries or affiliates other than us, on the one hand, and us and our subsidiaries or affiliates, on the other hand. In this respect it allocates taxes accrued prior to the spin-off and after the spin-off as well as transfer taxes resulting there from. It also allocates obligations for filing tax returns and the management of certain pending or future tax contests and creates mutual collaboration obligations with respect to tax matters.

We receive the benefits of favorable tax holidays in various jurisdictions, which resulted in a $9 million reduction to tax expense for the year ended March 31, 2015, and phase out as of December 31, 2015.

Deferred Income Taxes

Deferred income taxes recognize the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the carrying amounts used for income tax purposes, and the impact of available net operating loss (NOL) and tax credit carryforwards. These items are stated at the enacted tax rates that are expected to be in effect when taxes are actually paid or recovered.

Our deferred income tax assets and deferred income tax liabilities are as follows (in millions).



	March 31,
	2015			2014
Deferred income tax assets:
Provisions not currently deductible for tax purposes	$	366		$	315
Tax losses/benefit carryforwards, net	627			493
Depreciation and amortization	38			46
Other assets	4			8
Total deferred income tax assets	1,035			862
Less: valuation allowance	(528		)	(426		)
Net deferred income tax assets	$	507		$	436
Deferred income tax liabilities:
Depreciation and amortization	$	477		$	529
Inventory valuation reserves	102			87
Monetary exchange gains, net	9			46
Other liabilities	26			34
Total deferred income tax liabilities	$	614		$	696
Net deferred income tax liabilities	$	107		$	260

ASC 740 requires that we reduce our deferred income tax assets by a valuation allowance if, based on the weight of the available evidence, it is more likely than not that all or a portion of a deferred tax asset will not be realized. After consideration of all evidence, both positive and negative, management concluded that it is more likely than not that we will be unable to realize a portion of our deferred tax assets and that valuation allowances of $528 million and $426 million were necessary as of March 31, 2015 and 2014, respectively.

It is reasonably possible that our estimates of future taxable income may change within the next 12 months, resulting in a change to the valuation allowance in one or more jurisdictions.

As of March 31, 2015, we had net operating loss carryforwards of approximately $515 million (tax effected) and tax credit carryforwards of $112 million, which will be available to offset future taxable income and tax liabilities, respectively. The carryforwards will begin expiring in fiscal year 2019 with some amounts being carried forward indefinitely. As of March 31, 2015, valuation allowances of $381 million, $99 million and $48 million had been recorded against net operating loss carryforwards, tax credit carryforwards and other deferred tax assets, respectively, where it appeared more likely than not that such benefits will not be realized. The net operating loss carryforwards are predominantly in Canada, the U.S., Italy, Germany, Switzerland, China and the U.K.

As of March 31, 2014, we had net operating loss carryforwards of approximately $396 million (tax effected) and tax credit carryforwards of $97 million, which will be available to offset future taxable income and tax liabilities, respectively. The carryforwards will begin expiring in fiscal 2020 with some amounts being carried forward indefinitely. As of March 31, 2014, valuation allowances of $287 million, $84 million and $55 million had been recorded against net operating loss carryforwards, tax credit carryforwards and other deferred tax assets, respectively, where it appeared more likely than not that such benefits will not be realized. The net operating loss carryforwards are predominantly in Canada, the U.S., Italy, and the U.K.

Although realization is not assured, management believes it is more likely than not that all the remaining net deferred tax assets will be realized. In the near term, the amount of deferred tax assets considered realizable could be reduced if we do not generate sufficient taxable income in certain jurisdictions.

As of March 31, 2015, we had cumulative earnings of approximately $2 billion for which we had not provided Canadian income tax or withholding taxes because we consider them to be indefinitely reinvested. We acknowledge that we would need to accrue and pay taxes should we decide to repatriate cash and short term investments generated from earnings of our foreign subsidiaries that are considered indefinitely reinvested. Except for those jurisdictions where we have already distributed and paid taxes on the earnings, we have reinvested and expect to continue to reinvest undistributed earnings of foreign subsidiaries indefinitely. Cash and cash equivalents held by foreign subsidiaries that are indefinitely reinvested are used to cover expansion and short-term cash flow needs of such subsidiaries. The amounts considered indefinitely reinvested would be subject to possible Canadian taxation only if remitted as dividends. However, due to our full valuation allowance position of $446 million in Canada, in excess of $357 million of net operating loss carryforwards, exempt surpluses for Canadian tax purposes, and $46 million of tax credits in Canada, a portion of the cumulative earnings would not be taxed if distributed. Due to the complex structure of our international holdings, and the various methods available for repatriation, quantification of the deferred tax liability, if any, associated with these undistributed earnings is not practicable.

Tax Uncertainties

As of March 31, 2015 and 2014, the total amount of unrecognized benefits that, if recognized, would affect the effective income tax rate in future periods based on anticipated settlement dates is $37 million and $39 million, respectively.

Tax authorities continue to examine certain other of our tax filings for fiscal years 2005 through 2013. As a result of further settlement of audits, judicial decisions, the filing of amended tax returns or the expiration of statutes of limitations, our reserves for unrecognized tax benefits, as well as reserves for interest and penalties, may decrease in the next 12 months by an amount up to approximately $13 million. With few exceptions, tax returns for all jurisdictions for all tax years before 2003 are no longer subject to examination by taxing authorities.

Our policy is to record interest and penalties related to unrecognized tax benefits in the income tax provision (benefit). As of March 31, 2015, 2014 and 2013, we had $5 million, $4 million and $3 million accrued, respectively, for interest and penalties. For the year ended March 31, 2015, we recognized $1 million expense related to accrued interest and penalties. For the years ended March 31, 2014 and 2013 we recognized a tax expense and benefit of $1 million and $8 million, respectively, related to reductions in accrued interest and penalties.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in millions):



	Year Ended March 31,
	2015			2014		2013
Beginning balance	$	39		$	30	$	28
Additions based on tax positions related to the current period	7			7		5
Additions based on tax positions of prior years	3			1		3
Reductions based on tax positions of prior years	(1		)	—		—
Settlements	(3		)	—		(5		)
Foreign exchange	(8		)	1		(1		)
Ending Balance	$	37		$	39	$	30

Income Taxes Payable

Our consolidated balance sheets include income taxes payable (net) of $14 million and $52 million as of March 31, 2015 and 2014, respectively. Of these amounts, $11 million and $31 million are reflected in “Accrued expenses and other current liabilities” as of March 31, 2015 and 2014, respectively.