INCOME TAXES

We incur income taxes on the earnings of our U.S. and foreign operations. The following table, based on the locations of the taxable entities from which sales were derived (rather than the location of customers), presents the U.S. and foreign components of our income before income taxes:



	2015		2016		2017
United States	$	912	$	1,184	$	806
Foreign	90		305		127
	$	1,002	$	1,489	$	933

The income shown above was determined according to GAAP. Because those standards sometimes differ from the tax rules used to calculate taxable income, there are differences between: (a) the amount of taxable income and pretax financial income for a year; and (b) the tax bases of assets or liabilities and their amounts as recorded in our financial statements. As a result, we recognize a current tax liability for the estimated income tax payable on the current tax return, and deferred tax liabilities (income tax payable on income that will be recognized on future tax returns) and deferred tax assets (income tax refunds from deductions that will be recognized on future tax returns) for the estimated effects of the differences mentioned above.

Deferred tax assets and liabilities as of the end of each of the last two years were as follows:



April 30,	2016			2017
Deferred tax assets:
Postretirement and other benefits	$	183		$	173
Accrued liabilities and other	10			17
Inventories	26			27
Loss and credit carryforwards	39			44
Valuation allowance	(25		)	(30		)
Total deferred tax assets, net	233			231
Deferred tax liabilities:
Intangible assets	(225		)	(262		)
Property, plant, and equipment	(83		)	(90		)
Other	(9		)	(15		)
Total deferred tax liabilities	(317		)	(367		)
Net deferred tax liability	$	(84	)	$	(136	)

As of April 30, 2017, the gross amounts of loss carryforwards include a $49 net operating loss in Brazil (no expiration); a U.K. non-trading loss of $27 (no expiration); a $65 net operating loss in Finland (expires in varying amounts between 2024 and 2027); and other foreign and domestic net operating, capital, and non-trading losses of $43 ($14 that do not expire and $29 that expire in varying amounts between 2018 and 2028).

The $30 valuation allowance at April 30, 2017 ($25 at April 30, 2016), relates primarily to a $17 ($12 at April 30, 2016) net operating loss in Brazil. Although the losses in Brazil can be carried forward indefinitely, it is uncertain that we will realize sufficient taxable income to allow us to use these losses. The valuation allowance also includes $8 ($7 at April 30, 2016) related to other foreign net operating and non-trading losses,$2 that do not expire and $6 that expire between 2018 and 2028. The remaining valuation allowance relates to a $5 ($6 at April 30, 2016) non-trading loss carryforward in the United Kingdom that was generated during 2009. Although the non-trading losses can be carried forward indefinitely, we know of no significant transactions that will let us use them.

During 2014, we deferred a tax benefit of $95 that resulted primarily from the release of certain deferred tax liabilities in connection with an intercompany transfer of assets, composed primarily of an intangible asset. We are amortizing the deferred benefit to tax expense over approximately six years for financial reporting purposes, in accordance with Accounting Standard Codification (ASC) 740-10-25-3(e) (Income Taxes) and ASC 810-45-8 (Consolidation), resulting in a tax benefit of $5 in 2014, $15 in 2015, $16 in 2016, and $16 in 2017. The remaining balance of the deferred benefit, which is included in “other liabilities” on the accompanying balance sheet, was $43 as of April 30, 2017. As discussed in Note 1, revised accounting guidance issued in October 2016 will require the recognition of income tax consequences of intercompany transfers of assets other than inventory when the transfer occurs. Our adoption of this revised guidance will result in the balance of the deferred tax benefit as of the beginning of fiscal 2019 ($27) being recognized as an increase in retained earnings rather than as a reduction in income tax expense.

Deferred tax liabilities were not provided on undistributed earnings of foreign subsidiaries ($1,005 and $1,053 at April 30, 2016 and 2017, respectively) because we expect these undistributed earnings to be reinvested indefinitely outside the United States. If these amounts were not considered permanently reinvested, additional deferred tax liabilities of approximately $222 would have been provided at both April 30, 2016 and 2017.

Total income tax expense for a year includes the tax associated with the current tax return (“current tax expense”) and the change in the net deferred tax asset or liability (“deferred tax expense”). Our total income tax expense for each of the last three years was as follows:



	2015			2016			2017
Current:
U.S. federal	$	259		$	347		$	226
Foreign	42			47			40
State and local	11			18			8
	312			412			274
Deferred:
U.S. federal	$	15		$	24		$	(1	)
Foreign	(11		)	(17		)	(9		)
State and local	2			3			—
	6			10			(10		)
	$	318		$	422		$	264

Our consolidated effective tax rate usually differs from current statutory rates due to the recognition of amounts for events or transactions with no tax consequences. The following table reconciles our effective tax rate to the federal statutory tax rate in the United States:



	Percent of Income Before Taxes
	2015		2016		2017
U.S. federal statutory rate	35.0	%	35.0	%	35.0	%
State taxes, net of U.S. federal tax benefit	1.0	%	1.0	%	0.9	%
Income taxed at other than U.S. federal statutory rate	(0.5	%)	(2.5	%)	(1.7	%)
Tax benefit from U.S. manufacturing	(2.5	%)	(2.4	%)	(2.4	%)
Tax impact of sale of business	—	%	(1.1	%)	—	%
Amortization of deferred tax benefit from intercompany transactions	(1.6	%)	(1.6	%)	(1.7	%)
Excess tax benefits from stock-based awards	—	%	—	%	(1.0	%)
Other, net	0.3	%	(0.1	%)	(0.8	%)
Effective rate	31.7	%	28.3	%	28.3	%

At April 30, 2017, we had $9 of gross unrecognized tax benefits, $6 of which would reduce our effective income tax rate if recognized. A reconciliation of the beginning and ending unrecognized tax benefits follows:



	2015			2016			2017
Unrecognized tax benefits at beginning of year	$	11		$	13		$	9
Additions for tax positions provided in prior periods	2			1			2
Additions for tax positions provided in current period	1			—			—
Decreases for tax positions provided in prior years	(1		)	(4		)	(2		)
Settlements of tax positions in the current period	—			(1		)	—
Unrecognized tax benefits at end of year	$	13		$	9		$	9

We file income tax returns in the United States, including several state and local jurisdictions, as well as in several other countries in which we conduct business. The major jurisdictions and their earliest fiscal years that are currently open for tax examinations are 2011 for one state in the United States; 2015 in the United Kingdom; 2013 in Australia; 2012 in the Netherlands, Finland, and Mexico; and 2011 in Brazil, Germany, and Poland. The audit of our fiscal 2015 U.S. federal tax return was concluded in the first quarter of fiscal 2017. In addition, we are participating in the Internal Revenue Service’s Compliance Assurance Program for our fiscal 2017 tax year.

We believe there will be no material change in our gross unrecognized tax benefits in the next 12 months.