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



	Year Ended December 31,
(in millions)	2019			2018			2017
Income components:
Domestic	$	203		$	208		$	162
Foreign	213			377			304
Total pre-tax income	$	416		$	585		$	466
Income tax expense components:
Current:
Domestic – federal	$	39		$	9		$	109
Domestic – state and local	13			13			9
Foreign	40			61			51
Total Current	92			83			169
Deferred:
Domestic – federal	$	7		$	17		$	(29	)
Domestic – state and local	(1		)	5			10
Foreign	(83		)	(69		)	(14		)
Total Deferred	(77		)	(47		)	(33		)
Total income tax provision	$	15		$	36		$	136
Effective income tax rate	3.7		%	6.1		%	29.2		%

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,
	2019		2018		2017
Tax provision at U.S. statutory rate	21.0	%	21.0	%	35.0	%
Increase (decrease) in tax rate resulting from:
State income taxes	2.7		2.3		1.6
Uncertain tax positions	0.4		2.6		1.6
Valuation allowance	1.2		(47.1	)	3.3
Tax exempt interest	(3.0	)	(1.4	)	(10.6	)
Foreign tax rate differential	0.7		2.9		(6.7	)
Impact of foreign earnings, net	1.6		(1.7	)	37.0
Tax incentives	(9.6	)	(6.2	)	(6.6	)
Intercompany sale of assets	—		35.5		—
Other – net	1.7		(0.3	)	(0.5	)
Rate change	(18.1	)	—		(22.9	)
Goodwill impairment	7.8		—		—
Federal R&D tax credit	(1.2	)	(0.8	)	(1.0	)
Stock compensation	(1.5	)	(0.7	)	(1.0	)
Effective income tax rate	3.7	%	6.1	%	29.2	%

Certain prior year amounts included within the table of rate reconciliation above have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the reported consolidated balance sheets, consolidated statements of income, comprehensive income, stockholders’ equity, or cash flow. Additional line items have been included as of December 31, 2019 and for consistency the prior year balances have been adjusted to conform with the current year presentation.

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

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)	2019			2018
Deferred tax assets:
Employee benefits	$	106		$	97
Accrued expenses	26			30
Loss and other tax credit carryforwards	240			279
Inventory	6			7
Lease Liabilities	57			—
Other	3			11
	438			424
Valuation allowance	(191		)	(234		)
Net deferred tax asset	$	247		$	190
Deferred tax liabilities:
Intangibles	$	160		$	247
Investment in foreign subsidiaries	7			8
Property, plant, and equipment	78			69
Lease right-of-use assets	57			—
Other	29			29
Total deferred tax liabilities	$	331		$	353

Management assesses all available positive and negative evidence, including prudent and feasible tax planning strategies, and estimates if sufficient future taxable income will be generated to realize existing deferred tax assets. On the basis of this evaluation, as of December 31, 2019, a valuation allowance of $191 million has been established to reduce the deferred income tax asset related to certain U.S. and foreign net operating losses and U.S. and foreign capital loss carryforwards.

A reconciliation of the change in valuation allowance on deferred tax assets is as follows:



(in millions)	2019			2018			2017
Valuation allowance — January 1	$	234		$	350		$	311
Change in assessment (a)	(2		)	1			(28		)
Current year operations	2			(271		)	48
Foreign currency and other (b)	(43		)	154			19
Valuation allowance — December 31	$	191		$	234		$	350

Deferred taxes are classified in the Consolidated Balance Sheets as follows:



	December 31,
(in millions)	2019			2018
Non-current assets	$	226		$	140
Non-current liabilities	(310		)	(303		)
Total net deferred tax liabilities	$	(84	)	$	(163	)

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



(in millions)	December 31, 2019		First Year of Expiration
U.S. net operating loss	$	8	December 31, 2024
State net operating loss	98		December 31, 2020
State excess interest expense	9		Indefinitely
State tax credits	2		Indefinitely
Foreign net operating loss	1,018		December 31, 2020
Foreign tax credits	3		December 31, 2030

The Company has provided a deferred tax liability of $9 million for net foreign withholding taxes and state income taxes on $505 million of earnings expected to be repatriated to the U.S. parent, as of December 31, 2019. The Company currently does not intend to repatriate approximately $1.3 billion taxed under the Tax Act. The amount of deferred tax that would be recorded if such amounts were repatriated is not reasonably estimable.

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 or upon the completion of the litigation process, 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 resolution. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:



(in millions)	2019			2018			2017
Unrecognized tax benefits — January 1	$	136		$	130		$	67
Current year tax positions	3			—			56
Prior year tax positions	(5		)	7			7
Acquisitions	—			—			—
Settlements	(5		)	(1		)	—
Unrecognized tax benefits — December 31	$	129		$	136		$	130

The amount of unrecognized tax benefits at December 31, 2019 which, if ultimately recognized, will reduce our effective tax rate is $129 million. We believe that it is reasonably possible that unrecognized tax benefits will be reduced by approximately $4 million within the next 12 months as a result of the expiration of certain statute of limitations.

We classify interest relating to unrecognized tax benefits as a component of other non-operating (expense) income, net and tax penalties as a component of income tax expense in our Consolidated Income Statements. The amount of accrued interest relating to unrecognized tax benefits as of December 31, 2019 and 2018 was $8 million and $7 million.

During 2019, Xylem’s Swedish subsidiary received a tax assessment for the 2013 tax year related to the tax treatment of an intercompany transfer of certain intellectual property that was made in connection with a reorganization of our European businesses. The assessment asserts an aggregate amount of approximately $80 million for tax, penalties and interest. Xylem filed an appeal with the Administrative Court of Stockholm. Management, in consultation with external legal advisors, believes it is more likely than not that Xylem will prevail on the proposed assessment and is vigorously defending our position through litigation. As of December 31, 2019, we have not recorded any unrecognized tax benefits related to this uncertain tax position.

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



Jurisdiction		Earliest Open Year
Italy		2013
Luxembourg		2016
Sweden		2013
Germany		2009
United Kingdom		2013
United States		2016
Switzerland		2017