Income Taxes


A.	Taxes on Income

The effective tax rate was 28.8% for the three months ended October 2, 2016, compared with 30.4% for the three months ended September 27, 2015. The lower effective tax rate for the three months ended October 2, 2016, was primarily attributable to:


•	a $7 million discrete tax benefit related to a revaluation of the company’s deferred tax assets and liabilities using the tax rates expected to be in place going forward as a result of the implementation of operational changes; and


•	the impact of the extent and location of restructuring charges related to the operational efficiency initiative, supply network strategy, asset impairments and gains and losses on asset divestitures,

partially offset by:


•	changes in the jurisdictional mix of earnings, which includes the impact of the location of earnings from operations and repatriation costs. The jurisdictional mix of earnings can vary as a result of repatriation decisions and operating fluctuations in the normal course of business and the impact of non-deductible items.

The effective tax rate was 33.3% for the nine months ended October 2, 2016, compared with 33.0% for the nine months ended September 27, 2015. The higher effective tax rate for the nine months ended October 2, 2016, was primarily attributable to:


•	changes in the jurisdictional mix of earnings, which includes the impact of the location of earnings from operations and repatriation costs. The jurisdictional mix of earnings can vary as a result of repatriation decisions and operating fluctuations in the normal course of business and the impact of non-deductible items;

•

a $38 million net discrete tax expense recorded in the first half of 2016, related to changes in uncertain tax positions due to the impact of the European Commission’s negative decision on the excess profits rulings in Belgium (see C. Tax Contingencies), partially offset by a revaluation of the company's deferred tax assets and liabilities using the tax rates expected to be in place going forward as a result of the decision; and


•	a valuation allowance of $3 million recorded in the second quarter of 2015,

partially offset by:


•	a $7 million discrete tax benefit recorded in the third quarter of 2016, related to a revaluation of the company’s deferred tax assets and liabilities using the tax rates expected to be in place going forward as a result of the implementation of operational changes;


•	a $10 million and $9 million discrete tax benefit recorded in the first quarter of 2016 and 2015, respectively, related to a revaluation of deferred taxes as a result of a change in statutory tax rates;


•	a $7 million discrete tax benefit related to the adoption of a new accounting standard in 2016 requiring the excess tax benefits for share-based payments to be recognized as a component of Provision for taxes on income. See Note 3. Significant Accounting Policies;


•	the impact of the extent and location of restructuring charges related to the operational efficiency initiative, supply network strategy, asset impairments and gains and losses on asset divestitures; and


•	a $6 million discrete tax benefit recorded in the second quarter of 2015 related to prior period tax adjustments.


B.	Deferred Taxes

As of October 2, 2016, the total net deferred income tax liability of $147 million is included in Noncurrent deferred tax assets ($119 million) and Noncurrent deferred tax liabilities ($266 million).

As of December 31, 2015, the total net deferred income tax liability of $182 million is included in Noncurrent deferred tax assets ($82 million) and Noncurrent deferred tax liabilities ($264 million).


C.	Tax Contingencies

As of October 2, 2016, the tax liabilities associated with uncertain tax positions of $87 million (exclusive of interest and penalties related to uncertain tax positions of $10 million) are included in Noncurrent deferred tax assets ($5 million) and Other taxes payable ($82 million).

As of December 31, 2015, the tax liabilities associated with uncertain tax positions of $61 million (exclusive of interest and penalties related to uncertain tax positions of $7 million) are included in Noncurrent deferred tax assets ($6 million) and Other taxes payable ($55 million).

The increase in tax liabilities associated with uncertain tax positions as of October 2, 2016, is primarily due to a net tax charge of approximately $22 million. The components of this net charge is a tax liability of $50 million related to the impact of the European Commission’s negative decision on January 11, 2016, regarding the excess profits rulings in Belgium, reduced by a cash settlement of $28 million for the 2013-2014 periods. This charge does not include any benefits associated with a successful appeal of the decision.

Aside from the above, our tax liabilities for uncertain tax positions relate primarily to issues common among multinational corporations. Any settlements or statute of limitations expirations could result in a significant decrease in our uncertain tax positions. Substantially all of these unrecognized tax benefits, if recognized, would impact our effective income tax rate.

We believe that it is reasonably possible that our reserves for uncertain tax positions could decrease within the next twelve months by approximately $22 million due to the expected remaining payment due related to the impact of the European Commission’s negative decision on the excess profits rulings in Belgium. Our assessments are based on estimates and assumptions that have been deemed reasonable by management, but our estimates of uncertain tax positions and potential tax benefits may not be representative of actual outcomes, and any variation from such estimates could materially affect our financial statements in the period of settlement or when the statutes of limitations expire, as we treat these events as discrete items in the period of resolution. Finalizing audits with the relevant taxing authorities can include formal administrative and legal proceedings, and, as a result, it is difficult to estimate the timing and range of possible changes related to our uncertain tax positions, and such changes could be significant.