Income Taxes

On December 31, 2017, the Tax Cuts and Jobs Act (the "TCJA") was enacted and was effective January 1, 2018. In accordance with ASC 740, Accounting for Income Taxes, which 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 accumulated approximately $3.0 billion as of December 31, 2017, was taxed at 8% to the extent those earnings were reinvested in non-cash foreign assets, while previously unremitted earnings that had not been reinvested, computed based upon a two-year historical average of foreign cash and cash equivalents balances, was taxed at 15.5%. The Company recorded a net charge of $197 million for this deemed repatriation in 2017, for which it does not expect a material cash outlay due to available foreign tax credit carryforwards.

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 were effective for taxable years beginning after December 31, 2017. The Company has elected to not record deferred taxes related to the future tax effects expected from the global minimum income tax.

The US Treasury issued several proposed regulations supplementing the TCJA in 2018, including detailed guidance clarifying the calculation of the mandatory tax on previously unrepatriated earnings, application of the existing foreign tax credit rules to newly created categories and expanding details for application of the base erosion tax on affiliate payments. These proposed regulations are intended to be applied retroactively and would not materially impact the Company's 2018 tax rate if finalized in current form. The Company currently does not expect these regulations to have a material impact on income tax expense upon final adoption.

The US Treasury's proposed 2018 regulations also seek to clarify the application of the TCJA provisions for the limitation of interest expense, including treatment of depreciation and other deductions in arriving at adjusted taxable income and application of the rules to controlled foreign affiliates. These regulations remain open for comment and are not effective until published in the federal register. As a result, the Company will monitor their impact to the Company's filing positions and will record the impacts as discrete income tax expense adjustments in the period that the guidance is finalized.

Due to the timing and significance of the TCJA, the Staff of the Securities and Exchange Commission (the "SEC") issued Staff Accounting Bulletin No. 118 ("SAB 118"), which provided registrants a measurement period through 2018 to report the impact of the new US tax law. In 2017, the Company previously 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 offsetting foreign tax credit carryforwards. In 2018, the Company recorded additional income tax expense resulting from a decrease in SAB 118 provisional estimates of foreign tax credits (net of associated valuation allowances) of $66 million and an income tax benefit of $7 million that resulted from adjusting provisional estimates of the deferred tax rate change effects of the TCJA. The Company also recorded a decrease to the SAB 118 provisional estimates of deemed repatriation tax under the new law of $59 million, which was entirely offset by US foreign tax credit carryforwards. As of December 31, 2018, the Company has completed its accounting for the TCJA, including the proposed 2018 clarifying guidance.

Income Tax Provision

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



	Year Ended December 31,
	2018	2017	2016
	(In $ millions)
US	480	262	326
International	1,030	813	704
Total	1,510	1,075	1,030

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



	Year Ended December 31,
	2018		2017		2016
	(In $ millions)
Current
US	(184	)	201		(22	)
International	143		158		60
Total	(41	)	359		38
Deferred
US	314		(110	)	108
International	19		(36	)	(24	)
Total	333		(146	)	84
Total	292		213		122

A reconciliation of the significant differences between the US federal statutory tax rate of 21% (35% for 2017 and 2016) and the effective income tax rate on income from continuing operations is as follows:



	Year Ended December 31,
	2018		2017		2016
	(In $ millions, except percentages)
Income tax provision computed at US federal statutory tax rate	317		376		361
Change in valuation allowance	94		218		(18	)
Equity income and dividends	(48	)	(87	)	(60	)
(Income) expense not resulting in tax impact, net	(51	)	(157	)	(152	)
US tax effect of foreign earnings and dividends	25		521		302
Foreign tax credits	(20	)	(759	)	(293	)
Other foreign tax rate differentials	17		(38	)	(48	)
Legislative changes	(59	)	116		4
State income taxes, net of federal benefit	4		12		8
Other, net	13		11		18
Income tax provision (benefit)	292		213		122

Effective income tax rate	19	%	20	%	12	%

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 offshore cash balances. The Company has not recorded a deferred tax liability for foreign withholding or other foreign local tax that would be due when cash is actually repatriated to the US because those 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 effective tax rate for the year ended December 31, 2018 was comparable to the effective tax rate for the year ended December 31, 2017. The effective tax rate for 2018 was slightly less than the statutory US tax rate primarily due to the positive impact from jurisdictional mix of earnings, largely offset by increased valuation allowances established on certain deferred tax assets, particularly related to increases in provisionally recorded estimates of valuation allowances on foreign tax credits in the US and net operating loss carryforwards in Luxembourg, due to certain restructuring transactions completed to facilitate future repatriation of cash to the US.

The higher effective tax rate for the year ended December 31, 2017, compared to the effective tax rate for the year ended December 31, 2016, was primarily due to the impact of the TCJA (reflected in the Change in valuation allowance and Legislative changes lines, above), increased losses in jurisdictions with no tax benefit and current year taxes related to the restructuring of the Company's Acetate Tow segment (reflected 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 related to $52 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 was recorded in the Change in valuation allowance line above.

During 2017, the Company undertook various reorganization transactions to separate certain Acetate Tow assets to reorganize the holdings of its various foreign subsidiaries. As a result, the Company generated additional net foreign tax credit carryforwards of approximately $240 million, the gross impacts of which were reflected in the Foreign tax credits line and the US tax effect of foreign earnings lines above, that will be carried forward to future tax periods. These new credit carryforwards, as well as other credits carried forward 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 was reflected in the Change in valuation allowance line in the effective tax rate reconciliation 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, reflected in the Other, net line above.

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,
	2018		2017
	(In $ millions)
Deferred Tax Assets
Pension and postretirement obligations	138		143
Accrued expenses	61		50
Inventory	13		10
Net operating loss carryforwards	616		703
Tax credit carryforwards⁽¹⁾	330		478
Other	195		192
Subtotal	1,353		1,576
Valuation allowance⁽²⁾	(899	)	(618	)
Total	454		958
Deferred Tax Liabilities
Depreciation and amortization	375		307
Investments in affiliates	203		427
Other	47		69
Total	625		803
Net deferred tax assets (liabilities)	(171	)	155

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⁽¹⁾	For the year ended December 31, 2018, the tax credit carryforwards decreased primarily due to the consumption of US foreign tax credits resulting from the deemed repatriation tax required by the TCJA.


⁽²⁾	Includes deferred tax asset valuation allowances for the Company's deferred tax assets in the US, Luxembourg, Spain, China, 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.

Tax Carryforwards


•	Net Operating Loss Carryforwards

As of December 31, 2018, the Company had available US federal net operating loss carryforwards of $33 million that are subject to limitation. These net operating loss carryforwards begin to expire in 2021. As of December 31, 2018, the Company also had available state net operating loss carryforwards, net of federal tax impact, of $73 million, $65 million of which are offset by a valuation allowance due to uncertain recoverability. The Company also has foreign net operating loss carryforwards available as of December 31, 2018 of $2.1 billion primarily for Luxembourg, China and Spain, with various expiration dates. Net operating loss carryforwards of $450 million in China are scheduled to expire beginning in 2019 through 2021. Net operating losses in most other foreign jurisdictions do not have an expiration date.


•	Tax Credit Carryforwards

The Company had available $301 million of foreign tax credit carryforwards, which are mostly offset by a valuation allowance of $277 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 expire beginning in 2027. The alternative minimum tax credits are subject to annual limitation due to prior ownership changes, but have an unlimited carryforward period and can be used to offset federal tax liability in future years.

The Company evaluates its deferred tax assets on a quarterly basis to determine whether a valuation allowance is necessary. Realization of deferred tax assets ultimately depends on the existence of sufficient taxable income in the applicable carryback or carryforward periods. Changes in the Company's estimates of future taxable income and prudent and feasible tax planning strategies will affect the estimate of the realization of the tax benefits of these foreign tax carryforwards. As such, the Company is currently evaluating tax planning strategies to enable use of the foreign tax credit carryforwards that may decrease the Company's effective tax rate in future periods as the valuation allowance is reversed.

Uncertain Tax Positions

Activity related to uncertain tax positions is as follows:



	Year Ended December 31,
	2018		2017		2016
	(In $ millions)
As of the beginning of the year	119		114		158
Increases in tax positions for the current year	61		14		9
Increases in tax positions for prior years⁽¹⁾	4		4		11
Decreases in tax positions for prior years	(21	)	(7	)	(9	)
Decreases due to settlements	(1	)	(6	)	(55	)
As of the end of the year	162		119		114

Total uncertain tax positions that if recognized would impact the effective tax rate	154		100		87
Total amount of interest expense (benefit) and penalties recognized in the consolidated statements of operations⁽²⁾	1		6		(16	)
Total amount of interest expense and penalties recognized in the consolidated balance sheets	38		38		26

______________________________


⁽¹⁾	Includes uncertain tax positions related to the Nilit acquisition (Note 4) of $4 million for the year ended December 31, 2018.


⁽²⁾	This amount reflects interest on uncertain tax positions and release of certain tax positions as a result of an audit closure that was reflected in the consolidated statements of operations.

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 increase in uncertain tax positions for the year ended December 31, 2018 was primarily due to progress of tax examinations. 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. The Company has entered the appeals process for the 2009 and 2010 exam cycle. 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 foreign tax credit carryforwards. The Company believes these proposed adjustments to be without merit and is vigorously defending its position.