Income Taxes

Income Tax Provision

Earnings (loss) from continuing operations before tax by jurisdiction are as follows:



	Year Ended December 31,
	2015	2014	2013
	(In $ millions)
US	231	534	806
International⁽¹⁾	257	407	803
Total	488	941	1,609

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⁽¹⁾	Includes aggregate earnings generated by operations in Bermuda, Luxembourg, the Netherlands and Hong Kong of $330 million, $308 million and $275 million for the years ended December 31, 2015, 2014 and 2013, respectively, which have an aggregate effective income tax rate of 6.1%, 4.8% and 4.0% for each year, respectively.

The income tax provision (benefit) consists of the following:



	Year Ended December 31,
	2015		2014		2013
	(In $ millions)
Current
US	28		108		78
International	152		56		83
Total	180		164		161
Deferred
US	54		156		194
International	(33	)	(6	)	153
Total	21		150		347
Total	201		314		508

A reconciliation of the significant differences between the US federal statutory tax rate of 35% and the effective income tax rate on income from continuing operations is as follows:



	Year Ended December 31,
	2015		2014		2013
	(In $ millions, except percentages)
Income tax provision computed at US federal statutory tax rate	171		329		563
Change in valuation allowance	124		49		89
Equity income and dividends	(33	)	(50	)	(44	)
(Income) expense not resulting in tax impact, net	(32	)	(34	)	(33	)
US tax effect of foreign earnings and dividends	15		49		35
Foreign tax credits	(4	)	(34	)	(38	)
Other foreign tax rate differentials	(41	)	(33	)	(55	)
Legislative changes	—		—		(19	)
Tax-deductible interest on foreign equity investments and other related items	—		12		11
State income taxes, net of federal benefit	6		9		11
Other, net	(5	)	17		(12	)
Income tax provision (benefit)	201		314		508

Effective income tax rate	41	%	33	%	32	%

Federal and state income taxes have not been provided on accumulated but undistributed earnings of $3.9 billion as of December 31, 2015 as such earnings have been permanently reinvested in the business or may be remitted substantially free of incremental US federal tax liability. The determination of the amount of the unrecognized deferred tax liability related to the undistributed earnings is not practicable.

The higher effective tax rate for the year ended December 31, 2015 is primarily attributable to an increase in the valuation allowance due to an increase in losses in jurisdictions with no tax benefit. The increase in losses primarily relates to a $123 million long-lived asset impairment recorded to fully write-off certain ethanol related assets at the Company's acetyl facility in Nanjing, China and a $174 million charge related to the termination of a raw materials contract with a supplier in Singapore (Note 18). The tax impact of these events was partially offset by decreases in uncertain tax positions of $29 million due to audit closures and technical jurisdictional clarifications. The effective tax rate was comparable for the years ended December 31, 2014 and 2013.

In February 2015, the Company established a centralized European headquarters for the purpose of improving the operational efficiencies and profitability of its European operations and certain global product lines. These activities directly impacted the Company's mix of earnings and product flows and resulted in both favorable and unfavorable tax rate impacts in the jurisdictions in which the Company operates. These impacts have been reflected in Other foreign tax rate differentials included in the reconciliation of the significant differences between the US federal statutory tax rate and the effective income tax rate.

Deferred Income Taxes

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the consolidated deferred tax assets and liabilities are as follows:



	As of December 31,
	2015		2014
	(In $ millions)
Deferred Tax Assets
Pension and postretirement obligations	434		424
Accrued expenses	40		41
Inventory	14		10
Net operating loss	683		468
Tax credit carryforwards	88		100
Other	202		165
Subtotal	1,461		1,208
Valuation allowance⁽¹⁾	(448	)	(413	)
Total	1,013		795
Deferred Tax Liabilities
Depreciation and amortization	380		416
Investments in affiliates	395		143
Other	114		102
Total	889		661
Net deferred tax assets (liabilities)	124		134

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⁽¹⁾	Includes deferred tax asset valuation allowances for the Company's deferred tax assets in the US, Luxembourg, Spain, China, Singapore, the United Kingdom, Canada and France. These valuation allowances relate primarily to net operating loss carryforward benefits and other net deferred tax assets, all of which may not be realizable.

For the year ended December 31, 2015, the valuation allowance increased by $35 million primarily due to $124 million of losses generated with no currently realizable income tax benefit, primarily associated with the long-lived asset impairment recorded to fully write-off certain ethanol assets at the Company's acetyl facility in Nanjing, China and the termination of a raw materials contract with a supplier in Singapore (Note 18), partially offset by $22 million related to exchange rate changes and net operating loss expirations and utilization of previously unbenefited loss carryforwards of $67 million.

Legislative Changes

In October 2013, the Mexican National Congress passed new tax legislation. Among other things, the new legislation maintains a corporate tax rate of 30%, eliminates the tax consolidation rules and repeals the business flat tax ("IETU") for years beginning after December 31, 2013. The Company was subject to the IETU in 2013 and for prior periods and is now required to record deferred income taxes on an income tax basis. As a result, the Company realized a deferred income tax benefit of $46 million for the year ended December 31, 2013.

The Company has historically filed consolidated income tax returns in Mexico. Under the new tax legislation, the Company was required to recapture previously deferred income taxes related to income tax loss carryforwards, intercompany dividends and differences between consolidated and individual company taxable earnings. The Company recorded additional tax expense of $27 million related to these new rules for the year ended December 31, 2013, resulting in a net income tax benefit of $19 million.

Net Operating Loss Carryforwards

As of December 31, 2015, the Company has US federal net operating loss carryforwards of $26 million that are subject to limitation. These net operating loss carryforwards begin to expire in 2021. At December 31, 2015, the Company also had state net operating loss carryforwards, net of federal tax impact, of $47 million, $46 million of which are offset by a valuation allowance due to uncertain recoverability. The Company also has foreign net operating loss carryforwards as of December 31, 2015 of $2.3 billion primarily for Luxembourg, Spain, Canada, China, Singapore and the United Kingdom, with various expiration dates. Net operating losses in China have various carryforward periods and began to expire in 2011. Net operating losses in most other foreign jurisdictions do not have an expiration date.

Uncertain Tax Positions

Activity related to uncertain tax positions is as follows:



	Year Ended December 31,
	2015			2014		2013
	(In $ millions)
As of the beginning of the year	228			244		218
Increases in tax positions for the current year	13			7		3
Increases in tax positions for prior years	76			24		57
Decreases in tax positions for prior years	(126	)		(46	)	(32	)
Decreases due to settlements	(33	)		(1	)	(2	)
As of the end of the year	158			228		244

Total uncertain tax positions that if recognized would impact the effective tax rate	144			245		258
Total amount of interest expense (benefit) and penalties recognized in the consolidated statements of operations	(12	)	⁽¹⁾	2		12
Total amount of interest expense and penalties recognized in the consolidated balance sheets	43			67		65

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⁽¹⁾	This amount reflects interest on uncertain tax positions, the impact of currency and release of certain tax positions as a result of audit closure that was reflected in the consolidated statements of operations. In addition, the Company also paid an additional $12 million of previously accrued amounts due to settlements of tax examinations.

The Company primarily operates in the US, Germany, Belgium, Canada, China, Mexico and Singapore. Examinations are ongoing in a number of these jurisdictions, including Germany for the years 2005 to 2012 and the US for the years 2009 through 2012. The Company's US federal income tax returns for 2004 and forward are open for examination under statute. The Company's German corporate tax returns for 2005 and forward are open for examination under statute. In addition, certain statutes of limitations are scheduled to expire in the near future. The decrease in uncertain tax positions for the year-ended December 31, 2015 is primarily due to audit closures and technical judicial clarifications. It is reasonably possible that a further change in the unrecognized tax benefits may occur within the next twelve months related to the settlement of one or more of these audits. Amounts immediately determinable have been reflected in the current portion of uncertain tax positions.

In December 2013, the French Tax Authority ("FTA") issued audit assessment claims against the Company that could result in incremental tax expense of €81 million, including interest and penalties. The assessment suggests that for the years 2008 to 2010, the Company transferred value from its otherwise profitable facility in Pardies, France to subsidize other global manufacturing operations outside of France. During the three months ended June 30, 2014, the Company completed a settlement of the examination with the FTA. As a result of the settlement, the Company utilized €141 million of previously unbenefited net operating loss carryforwards. The settlement did not result in any material additional cash tax liability.