INCOME TAXES

Income from continuing operations before income taxes and equity income for U.S. and non-U.S. operations are as follows:



	Year Ended December 31,
	2016		2015		2014
	(in millions)
U.S. income	$	214	$	356	$	232
Non-U.S. income	1,211		1,152		1,383
Income from continuing operations before income taxes and equity income	$	1,425	$	1,508	$	1,615

The provision (benefit) for income taxes from continuing operations is comprised of:



	Year Ended December 31,
	2016			2015			2014
	(in millions)
Current income tax expense (benefit):
U.S. federal	$	63		$	49		$	46
Non-U.S.	300			236			205
U.S. state and local	4			(1		)	9
Total current	367			284			260
Deferred income tax (benefit) expense, net:
U.S. federal	(98		)	(12		)	(32		)
Non-U.S.	(26		)	(7		)	29
U.S. state and local	(1		)	(2		)	(2		)
Total deferred	(125		)	(21		)	(5		)
Total income tax provision	$	242		$	263		$	255

The current income tax payable was reduced by $0, $11 million and $9 million in the years ended December 31, 2016, 2015 and 2014, respectively, for excess tax deductions attributable to stock-based compensation, including amounts attributable to discontinued operations. The related income tax benefits are recorded as increases to additional paid-in capital.

Cash paid or withheld for income taxes was $312 million, $292 million and $266 million for the years ended December 31, 2016, 2015 and 2014, respectively.

For purposes of comparability and consistency, the Company uses the notional U.S. federal income tax rate when presenting the Company’s reconciliation of the income tax provision. The Company is a U.K. resident taxpayer and as such is not generally subject to U.K. tax on remitted foreign earnings. As a result, the Company does not anticipate foreign earnings would be subject to a 35% tax rate upon repatriation to the U.K., as is the case when U.S. based companies repatriate earnings to the U.S. A reconciliation of the provision for income taxes compared with the amounts at the notional U.S. federal statutory rate was:



	Year Ended December 31,
	2016			2015			2014
	(in millions)
Notional U.S. federal income taxes at statutory rate	$	499		$	527		$	566
Income taxed at other rates	(175		)	(207		)	(286		)
Change in valuation allowance	(17		)	15			18
Other change in tax reserves	81			8			(4		)
Withholding taxes	49			57			57
Tax credits	(196		)	(133		)	(89		)
Change in tax law	(1		)	11			—
Other adjustments	2			(15		)	(7		)
Total income tax expense	$	242		$	263		$	255
Effective tax rate	17		%	17		%	16		%

The Company’s tax rate is affected by the fact that its parent entity is a U.K. resident taxpayer, the tax rates in the U.K. and other jurisdictions in which the Company operates, the relative amount of income earned by jurisdiction and the relative amount of losses or income for which no tax benefit or expense was recognized due to a valuation allowance. Included in the non-U.S. income taxed at other rates are tax incentives obtained in various non-U.S. countries, primarily the High and New Technology Enterprise ("HNTE") status in China, a Free Trade Zone exemption in Honduras and the Special Economic Zone exemption in Turkey of $60 million in 2016, $92 million in 2015, and $67 million in 2014, as well as tax benefit for income earned, and no tax benefit for losses incurred, in jurisdictions where a valuation allowance has been recorded. The Company currently benefits from tax holidays in various non-U.S. jurisdictions with expiration dates from 2016 through 2026. The income tax benefits attributable to these tax holidays are approximately $11 million ($0.04 per share) in 2016, $16 million ($0.06 per share) in 2015 and $28 million ($0.09 per share) in 2014.

The effective tax rate in the year ended December 31, 2016 was impacted by favorable geographic income mix in 2016 as compared to 2015, primarily due to changes in the underlying operations of the business, as well as $17 million for releases of valuation allowances as a result of the Company's determination that it was more likely than not that certain deferred tax assets would be realized. These benefits were offset by $81 million of reserve adjustments recorded for uncertain tax positions, which included reserves for ongoing audits in foreign jurisdictions, as well as for changes in estimates based on relevant new or additional evidence obtained related to certain of the Company's tax positions, including tax authority administrative pronouncements and court decisions. These reserve adjustments resulted in foreign tax credit benefits of approximately $18 million. Additionally, following a change in U.S. tax regulation during 2016, the Company recorded a tax credit benefit of approximately $16 million during the year ended December 31, 2016.

As described above, certain of the Company's Chinese subsidiaries benefit from a reduced corporate income tax rate as a result of their HNTE status. Delphi submitted applications for new 6-year HNTE grants for certain of these subsidiaries and received the relevant regulatory approvals during 2016, which entitled these entities to use the reduced HNTE income tax rate retroactive to the expiration date of the prior grants. As a result, there was no change in the tax status of these entities as compared to the year ended December 31, 2015.

The effective tax rate in the year ended December 31, 2015 was impacted by increased tax expense of $15 million resulting from changes in judgment related to deferred tax asset valuation allowances, as well as the enactment of the UK Finance (No. 2) Act 2015 (the “UK 2015 Finance Act”) on November 18, 2015, which provides for a reduction of the corporate income tax rate from 20% to 19% effective April 1, 2017, with a further reduction to 18% effective April 1, 2020. The income tax accounting effect, including any retroactive effect, of a tax law change is accounted for in the period of enactment, which in this case was the fourth quarter of 2015. As a result, the effective tax rate was impacted by an increased tax expense of approximately $11 million for the year ended December 31, 2015 due to the resultant impact on the net deferred tax asset balances. Additionally, the effective tax rate in the year ended December 31, 2015 was impacted by unfavorable geographic income mix in 2015 as compared to 2014, primarily due to changes in the underlying operations of the business, offset by tax planning initiatives and the resulting favorable impact on foreign tax credits.

The effective tax rate in the year ended December 31, 2014 was impacted by favorable geographic income mix in 2014 as compared to 2013, primarily due to changes in the underlying operations of the business as well as tax planning initiatives, and the resulting favorable impact on foreign tax credits. These favorable impacts were offset by net increases resulting from changes in judgment related to deferred tax asset valuation allowances of $18 million in 2014.

Deferred Income Taxes

The Company accounts for income taxes and the related accounts under the liability method. Deferred income tax assets and liabilities reflect the impact of temporary differences between amounts of assets and liabilities for financial reporting purposes and the bases of such assets and liabilities as measured by tax laws. Significant components of the deferred tax assets and liabilities are as follows:



	December 31,
	2016			2015
	(in millions)
Deferred tax assets:
Pension	$	175		$	167
Employee benefits	27			24
Net operating loss carryforwards	1,415			902
Warranty and other liabilities	139			128
Other	254			156
Total gross deferred tax assets	2,010			1,377
Less: valuation allowances	(1,458		)	(910		)
Total deferred tax assets (1)	$	552		$	467
Deferred tax liabilities:
Fixed assets	$	29		$	51
Tax on unremitted profits of certain foreign subsidiaries	66			70
Intangibles	332			360
Total gross deferred tax liabilities	427			481
Net deferred tax assets (liabilities)	$	125		$	(14	)


(1)	Reflects gross amount before jurisdictional netting of deferred tax assets and liabilities.

Deferred tax liabilities and assets are classified as long-term in the consolidated balance sheet. Net deferred tax assets and liabilities are included in the consolidated balance sheets as follows:



	December 31,
	2016			2015
	(in millions)
Long-term assets	$	283		$	238
Long-term liabilities	(158		)	(252		)
Total deferred tax asset (liability)	$	125		$	(14	)

The net deferred tax assets of $125 million as of December 31, 2016 are primarily comprised of deferred tax asset amounts in the U.K., U.S. and China, offset by deferred tax liability amounts in Japan and Singapore.

Net Operating Loss and Tax Credit Carryforwards

As of December 31, 2016, the Company has gross deferred tax assets of approximately $1,415 million for non-U.S. net operating loss (“NOL”) carryforwards with recorded valuation allowances of $1,255 million. These NOL’s are available to offset future taxable income and realization is dependent on generating sufficient taxable income prior to expiration of the loss carryforwards. The NOL’s primarily relate to France, Luxembourg, Germany and Spain. The NOL carryforwards have expiration dates ranging from one year to an indefinite period. The NOL carryforwards available for use on tax returns are $1,415 million as of December 31, 2016.

Deferred tax assets include $101 million and $53 million of tax credit carryforwards with recorded valuation allowances of $37 million and $31 million at December 31, 2016 and 2015, respectively. These tax credit carryforwards expire in 2017 through 2025.

Cumulative Undistributed Foreign Earnings

No income taxes have been provided on indefinitely reinvested earnings of certain foreign subsidiaries aggregating $293 million at December 31, 2016. The amount of the unrecognized deferred income tax liability with respect to such earnings is $107 million.

Withholding taxes of $66 million have been accrued on undistributed earnings that are not indefinitely reinvested and are primarily related to China, South Korea, Honduras, and Morocco. There are no other material liabilities for income taxes on the undistributed earnings of foreign subsidiaries, as the Company has concluded that such earnings are either indefinitely reinvested or should not give rise to additional income tax liabilities as a result of the distribution of such earnings.

Uncertain Tax Positions

The Company recognizes tax benefits only for tax positions that are more likely than not to be sustained upon examination by tax authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. Unrecognized tax benefits are tax benefits claimed in the Company's tax returns that do not meet these recognition and measurement standards.

A reconciliation of the gross change in the unrecognized tax benefits balance, excluding interest and penalties is as follows:



	Year Ended December 31,
	2016			2015			2014
	(in millions)
Balance at beginning of year	$	48		$	57		$	61
Additions related to current year	94			9			11
Additions related to prior years	67			—			—
Reductions related to prior years	(12		)	(15		)	(7		)
Reductions due to expirations of statute of limitations	(8		)	—			(6		)
Settlements	(1		)	(3		)	(2		)
Balance at end of year	$	188		$	48		$	57

A portion of the Company's unrecognized tax benefits would, if recognized, reduce its effective tax rate. The remaining unrecognized tax benefits relate to tax positions for which only the timing of the benefit is uncertain. Recognition of these tax benefits would reduce the Company’s effective tax rate only through a reduction of accrued interest and penalties. As of December 31, 2016 and 2015, the amounts of unrecognized tax benefit that would reduce the Company’s effective tax rate were $129 million and $35 million, respectively. In addition, $77 million and $15 million for 2016 and 2015, respectively, would be offset by the write-off of a related deferred tax asset, if recognized.

The Company recognizes interest and penalties relating to unrecognized tax benefits as part of income tax expense. Total accrued liabilities for interest and penalties were $18 million and $11 million at December 31, 2016 and 2015, respectively. Total interest and penalties recognized as part of income tax expense was a $7 million expense, a $1 million benefit and a $3 million benefit for the years ended December 31, 2016, 2015 and 2014, respectively.

The Company files tax returns in multiple jurisdictions and is subject to examination by taxing authorities throughout the world. Taxing jurisdictions significant to Delphi include China, Brazil, France, Germany, Mexico, Poland, the U.S. and the U.K. Open tax years related to these taxing jurisdictions remain subject to examination and could result in additional tax liabilities. In general, the Company's affiliates are no longer subject to income tax examinations by foreign tax authorities for years before 2001. It is reasonably possible that audit settlements, the conclusion of current examinations or the expiration of the statute of limitations in several jurisdictions could impact the Company’s unrecognized tax benefits.

Tax Return Filing Determinations and Elections

Delphi Automotive LLP, which acquired certain assets in a bankruptcy court approved transaction (the "Bankruptcy Plan") on October 6, 2009 (the "Acquisition Date"), was established on August 19, 2009 as a limited liability partnership incorporated under the laws of England and Wales. At the time of its formation, Delphi Automotive LLP elected to be treated as a partnership for U.S. federal income tax purposes. On June 24, 2014, the Internal Revenue Service (the “IRS”) issued us a Notice of Proposed Adjustment (the "NOPA") asserting that it believes Section 7874(b) of the Internal Revenue Code applied to Delphi Automotive LLP and that it should be treated as a domestic corporation for U.S. federal income tax purposes, retroactive to the Acquisition Date. If Delphi Automotive LLP was treated as a domestic corporation for U.S. federal income tax purposes, the Company also expected that, although Delphi Automotive PLC is incorporated under the laws of Jersey and a tax resident in the U.K., it would also have been treated as a domestic corporation for U.S. federal income tax purposes. If these entities were treated as domestic corporations for U.S. federal income tax purposes, the Company would have been subject to U.S. federal income tax on its worldwide taxable income, including distributions, as well as deemed income inclusions from some of its non-U.S. subsidiaries.

Delphi contested the conclusions reached in the NOPA through the IRS’s administrative appeals process, and on April 8, 2016, the IRS Office of Appeals issued fully-executed Forms 870-AD, concluding that Section 7874(b) does not apply to Delphi, and therefore no adjustments for the tax years subject to the appeals process (2009 and 2010) are necessary. Consistent with the IRS’s determination and conclusion related to this matter, Delphi Automotive PLC will continue to prepare and file its financial statements and tax filings as a UK tax-resident.