The source of pre-tax income and the components of income tax expense are as follows:



	Year Ended December 31,
(in millions)	2016			2015			2014
Income components:
Domestic	$	80		$	116		$	118
Foreign	260			287			303
Total pre-tax income	$	340		$	403		$	421
Income tax expense components:
Current:
Domestic – federal	$	19		$	32		$	44
Domestic – state and local	5			6			7
Foreign	42			34			62
Total Current	66			72			113
Deferred:
Domestic – federal	$	19		$	1		$	(14	)
Domestic – state and local	1			1			—
Foreign	(6		)	(11		)	(15		)
Total Deferred	14			(9		)	(29		)
Total income tax provision	$	80		$	63		$	84
Effective income tax rate	23.5		%	15.6		%	19.8		%

Reconciliations between taxes at the U.S. federal income tax rate and taxes at our effective income tax rate on earnings before income taxes are as follows:



	Year Ended December 31,
	2016		2015		2014
Tax provision at U.S. statutory rate	35.0	%	35.0	%	35.0	%
Increase (decrease) in tax rate resulting from:
State income taxes	0.8		1.0		1.0
Settlements of tax examinations	(6.4	)	0.5		0.4
Valuation allowance	18.5		8.6		22.9
Tax exempt interest	(14.3	)	(13.1	)	(26.3	)
Foreign tax rate differential	(7.9	)	(7.2	)	(4.2	)
Repatriation of foreign earnings, net of foreign tax credits	5.9		0.2		(1.7	)
Tax incentives	(8.9	)	(7.8	)	(6.2	)
Other – net	0.8		(1.6	)	(1.1	)
Effective income tax rate	23.5	%	15.6	%	19.8	%

We operate under tax incentives, which are effective January 2013 through December 2023 and may be extended if certain additional requirements are satisfied. The tax incentives are conditional upon our meeting and maintaining

certain employment thresholds. The inability to meet the thresholds would have a prospective impact and at this time we continue to believe we will meet the requirements.

Deferred tax assets and liabilities are determined based on temporary differences between the financial reporting and tax bases of assets and liabilities, applying enacted tax rates in effect for the year in which we expect the differences will reverse.

The following is a summary of the components of the net deferred tax assets and liabilities recognized in the Consolidated Balance Sheets:



	December 31,
(in millions)	2016			2015
Deferred tax assets:
Employee benefits	$	126		$	106
Accrued expenses	53			24
Loss and other tax credit carryforwards	387			285
Inventory	6			7
Other	—			3
	572			425
Valuation allowance	(311		)	(248		)
Net deferred tax asset	$	261		$	177
Deferred tax liabilities:
Intangibles	$	434		$	168
Investment in foreign subsidiaries	4			4
Property, plant, and equipment	61			17
Other	48			35
Total deferred tax liabilities	$	547		$	224

Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to realize existing deferred tax assets. On the basis of this evaluation, as of December 31, 2016, a valuation allowance of $311 million has been established to reduce the deferred income tax asset related to certain U.S. and foreign net operating losses, U.S. foreign tax credits, and U.S. and foreign capital loss carryforwards.

A reconciliation of our valuation allowance on deferred tax assets is as follows:



(in millions)	2016			2015			2014
Valuation allowance — January 1	$	248		$	427		$	349
Change in assessment (a)	17			(5		)	(4		)
Current year operations	38			39			100
Foreign currency and other (b)	(32		)	(213		)	(18		)
Acquisitions	40			—			—
Valuation allowance — December 31	$	311		$	248		$	427

Deferred taxes are classified net of unrecognized tax benefits in the Consolidated Balance Sheets as follows:



	December 31,
(in millions)	2016			2015
Non-current assets	$	66		$	71
Non-current liabilities	(352		)	(118		)
Total net deferred tax liabilities	$	(286	)	$	(47	)

Tax attributes available to reduce future taxable income begin to expire as follows:



(in millions)	December 31, 2016		First Year of Expiration
U.S. net operating loss	$	54	December 31, 2024
State net operating loss	175		December 31, 2017
U.S. tax credits	52		December 31, 2020
State tax credits	1		Indefinitely
Foreign net operating loss	1,270		December 31, 2018

As of December 31, 2016, we have provided a deferred tax liability of $6 million on the excess of $81 million of financial reporting over the tax basis of investments in certain foreign subsidiaries that has not been indefinitely reinvested. However, we have not provided for deferred taxes on the excess of financial reporting over the tax basis of investments in certain foreign subsidiaries in the amount of $1.9 billion because we plan to reinvest such amounts indefinitely outside the U.S. The determination of the amount of federal and state income taxes is not practicable because of complexities of the hypothetical calculation.

We recognize tax benefits from uncertain tax positions only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such positions are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:



(in millions)	2016			2015			2014
Unrecognized tax benefits — January 1	$	47		$	44		$	30
Current year tax positions	12			4			9
Prior year tax positions	(22		)	1			7
Acquisitions	30			—			—
Settlements	—			(2		)	(2		)
Unrecognized tax benefits — December 31	$	67		$	47		$	44

The amount of unrecognized tax benefits at December 31, 2016 which, if ultimately recognized, will reduce our annual effective tax rate is $67 million. We do not believe that the unrecognized tax benefits will significantly change within the next 12 months.

The following table summarizes our earliest open tax years by major jurisdiction:



Jurisdiction		Earliest Open Year
Italy		2011
Luxembourg		2013
Sweden		2011
Germany		2010
United Kingdom		2009
United States		2014
Switzerland		2011