Income Taxes

Income Tax Provision

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



	Year Ended December 31,
	2016	2015	2014
	(In $ millions)
US	326	231	534
International⁽¹⁾	704	257	407
Total	1,030	488	941

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⁽¹⁾	Includes aggregate earnings generated by operations in Bermuda, Luxembourg, the Netherlands and Hong Kong of $621 million, $330 million and $308 million for the years ended December 31, 2016, 2015 and 2014, respectively, which have an aggregate effective income tax rate of 1.9%, 6.1% and 4.8% for each year, respectively.

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



	Year Ended December 31,
	2016		2015		2014
	(In $ millions)
Current
US	(22	)	28		108
International	60		152		56
Total	38		180		164
Deferred
US	108		54		156
International	(24	)	(33	)	(6	)
Total	84		21		150
Total	122		201		314

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,
	2016		2015		2014
	(In $ millions, except percentages)
Income tax provision computed at US federal statutory tax rate	361		171		329
Change in valuation allowance	(18	)	124		49
Equity income and dividends	(60	)	(33	)	(50	)
(Income) expense not resulting in tax impact, net	(152	)	(32	)	(34	)
US tax effect of foreign earnings and dividends	302		15		49
Foreign tax credits	(293	)	(4	)	(34	)
Other foreign tax rate differentials	(44	)	(41	)	(33	)
Tax-deductible interest on foreign equity investments and other related items	—		—		12
State income taxes, net of federal benefit	8		6		9
Other, net	18		(5	)	17
Income tax provision (benefit)	122		201		314

Effective income tax rate	12	%	41	%	33	%

Federal and state income taxes have not been provided on accumulated but undistributed earnings of $4.3 billion as of December 31, 2016 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 lower effective tax rate for the year ended December 31, 2016 is primarily attributable to the release of valuation allowances in foreign jurisdictions due to internal restructuring in Canada, improved operating results in China and settlement of uncertain tax positions and technical clarifications in Germany and the US. The higher effective rate for the year ended December 31, 2015 was due to increased losses in jurisdictions with no tax benefit. The increased losses primarily related 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). These losses without tax benefit impacted 2015, but did not recur in 2016. 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.

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 net favorable tax rate impacts in the jurisdictions in which the Company operates. These impacts have been reflected in (Income) expense not resulting in tax impact, net and 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,
	2016		2015
	(In $ millions)
Deferred Tax Assets
Pension and postretirement obligations	313		434
Accrued expenses	61		40
Inventory	11		14
Net operating loss	661		683
Tax credit carryforwards	136		88
Other	161		202
Subtotal	1,343		1,461
Valuation allowance⁽¹⁾	(386	)	(448	)
Total	957		1,013
Deferred Tax Liabilities⁽²⁾
Depreciation and amortization	366		380
Investments in affiliates	475		395
Other	87		114
Total	928		889
Net deferred tax assets (liabilities)	29		124

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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.


⁽²⁾	Includes deferred tax liabilities from the acquisition of SOFTER (Note 4).

For the year ended December 31, 2016, the valuation allowance decreased by $62 million primarily due to internal restructuring in Canada, improved operating results in China, foreign currency fluctuation and net operating loss adjustments and expirations.

Net Operating Loss Carryforwards

As of December 31, 2016, the Company has US federal net operating loss carryforwards of $36 million that are subject to limitation. These net operating loss carryforwards begin to expire in 2021. At December 31, 2016, the Company also had state net operating loss carryforwards, net of federal tax impact, of $54 million, $50 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, 2016 of $2.3 billion primarily for Luxembourg, Spain, Canada, China, Singapore and the United Kingdom, with various expiration dates. Net operating loss carryforwards of $418 million in China are set to expire beginning in 2017 through 2021. 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,
	2016		2015		2014
	(In $ millions)
As of the beginning of the year	158		228		244
Increases in tax positions for the current year	9		13		7
Increases in tax positions for prior years⁽¹⁾	11		76		24
Decreases in tax positions for prior years	(9	)	(126	)	(46	)
Decreases due to settlements	(55	)	(33	)	(1	)
As of the end of the year	114		158		228

Total uncertain tax positions that if recognized would impact the effective tax rate	87		144		245
Total amount of interest expense (benefit) and penalties recognized in the consolidated statements of operations⁽²⁾	(16	)	(12	)	2
Total amount of interest expense and penalties recognized in the consolidated balance sheets	26		43		67

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⁽¹⁾	Includes uncertain tax positions related to the SOFTER acquisition (Note 4) of $19 million for the year ended December 31, 2016.


⁽²⁾	This amount reflects interest on uncertain tax positions and release of certain tax positions as a result of audit closure that was reflected in the consolidated statements of operations. In addition, for the years ended December 31, 2016 and 2015, the Company also paid an additional $1 million and $12 million, respectively, 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. The Company's US tax returns for the years 2009 through 2012 are currently under audit by the US Internal Revenue Service. Outside of the US, the Company's German tax returns for the years 2008 through 2010 are under audit as well as certain of the Company's other subsidiaries within their respective jurisdictions.

The decrease in uncertain tax positions for the year-ended December 31, 2016 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.

In connection with the Company's US federal income tax audit for 2009 and 2010, the Company has received $192 million of proposed pre-tax adjustments related to various intercompany charges. In the event the Company is wholly unsuccessful in its defense, an actual tax assessment would result in the consumption of up to $67 million of prior foreign tax credit carryforwards. The Company believes these proposed adjustments to be without merit and is vigorously defending its position.