Income Taxes

On December 22, 2017, the Tax Cuts and Jobs Act (the "TCJA") was enacted and is effective January 1, 2018. ASC 740, Accounting for Income Taxes, requires companies to recognize the effects of tax law changes in the period of enactment. This overhaul of the US tax law made a number of substantial changes, including the reduction of the corporate tax rate from 35% to 21%, establishing a dividends received deduction for dividends paid by foreign subsidiaries to the US, elimination or limitation of certain deductions (interest, domestic production activities and executive compensation), imposing a mandatory tax on previously unrepatriated earnings accumulated offshore since 1986 and establishing global minimum income tax and base erosion tax provisions related to offshore activities and affiliated party payments.

The deemed repatriation of previously unremitted foreign earnings, of which the Company had approximately $3.0 billion as of December 31, 2017, will be taxed at 8% to the extent those earnings were reinvested in non-cash foreign assets, while previously unremitted earnings that have not been reinvested, computed based upon a two-year historical average of foreign cash and cash equivalents balances, will be taxed at 15.5%. The Company estimated its gross charge for the deemed repatriation of foreign earnings to be approximately $370 million. The deemed repatriation requires the recognition of both unrepatriated earnings, as well as various existing offshore foreign tax credits and attributes, resulting in an estimated net charge for the deemed repatriation of $197 million recorded in 2017. In addition to offshore foreign tax credits, existing foreign tax credit carryforwards in the US will be available to offset this tax charge. Due to the availability of foreign tax credit carryforwards, the Company does not expect a material cash impact from this repatriation provision and any remaining portion of the tax not covered by tax credits will be paid in installments over an eight year period.

The Company was also required to adjust the recorded amounts of its US deferred tax assets and liabilities resulting from the reduction in the US corporate tax rate and the impact of the dividends received deduction provisions on its deferred tax liabilities related to outside basis differences in certain joint venture investments. As a result of these changes, the Company recognized a tax benefit of approximately $107 million in 2017.

The global minimum income tax and base erosion provisions are effective for taxable years beginning after December 31, 2017. The Company does not currently expect these provisions to have a material impact on its tax rate. Based on initial guidance from the FASB, the Company has elected not to record deferred taxes related to future liabilities due to the minimum tax on global low taxed intangible income.

Due to the timing of the new tax law and the substantial changes it brings, the Staff of the Securities and Exchange Commission (the "SEC") issued Staff Accounting Bulletin No. 118 ("SAB 118"), which provides registrants a measurement period to report the impact of the new US tax law. During the measurement period, provisional amounts for the effects of the law are recorded to the extent a reasonable estimate can be made. To the extent that all information necessary is not available, prepared or analyzed, companies may recognize provisional estimated amounts for a period of up to one year following enactment of the TCJA.

The Company has recorded provisional amounts for several of the impacts of the new tax law including: the deemed repatriation tax on post-1986 accumulated earnings and profits, the deferred tax rate change effect of the new law, gross foreign tax credit carryforwards and related valuation allowances to offset foreign tax credit carryforwards. Certain items or estimates that result in impacts of the TCJA being provisional include: detailed foreign earnings calculations for the most recent period, projected foreign cash balances for certain foreign subsidiaries and finalized computations of foreign tax credit availability. In addition, the Company's 2017 US federal income tax return will not be finalized until later in 2018, and while historically this process has resulted in offsetting changes in estimates in current and deferred taxes for items which are timing related, the reduction of the US tax rate will result in adjustments to the Company's income tax (provision) benefit when recorded. Finally, the Company considers it likely that further technical guidance regarding certain of the new provisions included in the TCJA, as well as clarity regarding state income tax conformity to current federal tax code, may be issued.

Income Tax Provision

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



	Year Ended December 31,
	2017	2016	2015
	(In $ millions)
US	262	326	231
International	813	704	257
Total	1,075	1,030	488

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



	Year Ended December 31,
	2017		2016		2015
	(In $ millions)
Current
US	201		(22	)	28
International	158		60		152
Total	359		38		180
Deferred
US	(110	)	108		54
International	(36	)	(24	)	(33	)
Total	(146	)	84		21
Total	213		122		201

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,
	2017		2016		2015
	(In $ millions, except percentages)
Income tax provision computed at US federal statutory tax rate	376		361		171
Change in valuation allowance	218		(18	)	124
Equity income and dividends	(87	)	(60	)	(33	)
(Income) expense not resulting in tax impact, net	(157	)	(152	)	(32	)
US tax effect of foreign earnings and dividends	521		302		15
Foreign tax credits	(759	)	(293	)	(4	)
Other foreign tax rate differentials	(38	)	(48	)	(47	)
Legislative changes	116		4		9
State income taxes, net of federal benefit	12		8		6
Other, net	11		18		(8	)
Income tax provision (benefit)	213		122		201

Effective income tax rate	20	%	12	%	41	%

As a result of the TCJA, US federal and state income taxes have been recorded on undistributed foreign earnings accumulated from 1986 through December 31, 2017. Based on the provisions of the law, the Company's previously taxed income for its foreign subsidiaries significantly exceeds its cash balances offshore. The Company has not recorded a deferred tax liability for foreign withholding or other foreign local tax that would be due when cash is repatriated to the US as such foreign earnings are considered permanently reinvested in the business or may be remitted substantially free of any additional local taxes. 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, 2017 is primarily due to the impact of the TCJA (which is recorded in the Change in valuation allowance and Legislative changes lines, in the effective tax rate reconciliation above), increased losses in jurisdictions with no tax benefit and current year taxes related to internal restructuring for the Company's proposed acetate tow joint venture with Blackstone (Note 4) (which is recorded in the US tax effect of foreign earnings and dividends and the Foreign tax credits lines, above). The increases in losses without tax benefit primarily relate to $51 million of plant/office closure costs related to the Company's notice of termination of a contract with a key raw materials supplier at its ethanol production unit in Nanjing, China (Note 18), which is recorded in the Change in valuation allowance line above.

The lower effective tax rate for the year ended December 31, 2016 was primarily due to the settlement of uncertain tax positions and technical clarifications in Germany and the US of $55 million, which was recorded in the Other, net line above.

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), which was recorded in the Change in valuation allowance line above. 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, which was recorded in the Other, net line above.

During 2017, the Company undertook various internal reorganization transactions to separate certain assets to reorganize the holdings of its various foreign subsidiaries in preparation for contribution of those assets to its proposed acetate tow joint venture with Blackstone (Note 4). As a result, the Company generated additional net foreign tax credit carryforwards of approximately $240 million, the gross impacts of which are reflected in the Foreign tax credit line and the US tax effect of foreign earnings lines above in the effective tax rate reconciliation, that will be carried forward to future tax periods. These new credit carryforwards, as well as balances carried into 2017, were evaluated for realizability under the provisions of the TCJA. Due to the TCJA and uncertainty as to future sources of general limitation foreign source income to allow for utilization of these credits, the Company recorded a valuation allowance on these foreign tax credits in the amount of $164 million, which is recorded in the Change in valuation allowance line in the effective tax rate reconciliation.

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,
	2017		2016
	(In $ millions)
Deferred Tax Assets
Pension and postretirement obligations⁽¹⁾	143		313
Accrued expenses	50		61
Inventory	10		11
Net operating loss	703		661
Tax credit carryforwards⁽²⁾	478		136
Other	192		161
Subtotal	1,576		1,343
Valuation allowance⁽³⁾	(618	)	(386	)
Total	958		957
Deferred Tax Liabilities
Depreciation and amortization	307		366
Investments in affiliates	427		475
Other	69		87
Total	803		928
Net deferred tax assets (liabilities)	155		29

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⁽¹⁾	For the year ended December 31, 2017, the pension and postretirement obligations decreased primarily due to $316 million in employer contributions made to the US defined benefit plans (Note 15).


⁽²⁾	For the year ended December 31, 2017, the tax credit carryforwards increased primarily due to internal reorganization transactions made in preparation for the proposed acetate tow joint venture with Blackstone discussed herein and Note 4.

⁽³⁾

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, 2017, the valuation allowance increased primarily due to the impact of the TCJA on excess foreign tax credits.

Net Operating Loss Carryforwards and Tax Credit Carryforwards

As of December 31, 2017, the Company has US federal net operating loss carryforwards of $35 million that are subject to limitation. These net operating loss carryforwards begin to expire in 2021. As of December 31, 2017, the Company also had state net operating loss carryforwards, net of federal tax impact, of $42 million, $38 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, 2017 of $2.6 billion primarily for Luxembourg, Spain, Canada, China, Singapore and the United Kingdom, with various expiration dates. Net operating loss carryforwards of $473 million in China are set to expire beginning in 2018 through 2022. Net operating losses in most other foreign jurisdictions do not have an expiration date.

The Company's tax credit carryforwards primarily consist of $452 million of foreign tax credit carryforwards, which are partially offset by a valuation allowance of $164 million due to uncertain recoverability and $21 million of alternative minimum tax credit carryforwards in the US. The foreign tax credit carryforwards are subject to a ten-year carryforward period and will begin to expire in 2027 if not utilized prior to that time. The alternative minimum tax credits are subject to annual limitation due to prior ownership changes, but have an unlimited carryforward period and will be used to offset federal tax liability in future years.

Uncertain Tax Positions

Activity related to uncertain tax positions is as follows:



	Year Ended December 31,
	2017		2016		2015
	(In $ millions)
As of the beginning of the year	114		158		228
Increases in tax positions for the current year	14		9		13
Increases in tax positions for prior years⁽¹⁾	4		11		76
Decreases in tax positions for prior years	(7	)	(9	)	(126	)
Decreases due to settlements	(6	)	(55	)	(33	)
As of the end of the year	119		114		158

Total uncertain tax positions that if recognized would impact the effective tax rate	100		87		144
Total amount of interest expense (benefit) and penalties recognized in the consolidated statements of operations⁽²⁾	6		(16	)	(12	)
Total amount of interest expense and penalties recognized in the consolidated balance sheets	38		26		43

______________________________


⁽¹⁾	Includes uncertain tax positions related to the Nilit acquisition (Note 4) of $4 million for the year ended December 31, 2017.


⁽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 2015 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 2015 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. While 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, the Company is unable to estimate the amount of any such change.

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 January 2018, the Company received proposed pre-tax adjustments for its 2011 and 2012 audit cycle in the amount of $198 million. In the event the Company is wholly unsuccessful in its defense and absent expected off-setting adjustments from foreign tax authorities, the proposed adjustments would result in the consumption of approximately $136 million of prior foreign tax credit carryforwards. The Company believes these proposed adjustments to be without merit and is vigorously defending its position.