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Tax Matters (Tables)
 12 Months Ended
Dec. 31, 2016
Income Tax Disclosure [Abstract]  
Schedule of Income before Income Tax, Domestic and Foreign
The components of Income before provision for taxes on income follow:
 
 
Year Ended December 31,
(MILLIONS OF DOLLARS)
 
2016

 
2015

 
2014

United States
 
$
723

 
$
469

 
$
455

International
 
505

 
76

 
365

Income before provision for taxes on income
 
$
1,228

 
$
545

 
$
820
Schedule Of Components Of Provision For Income Taxes
The components of Provision for taxes on income based on the location of the taxing authorities follow:
 
 
Year Ended December 31,
(MILLIONS OF DOLLARS)
 
2016

 
2015

 
2014

United States:
 
 
 
 
 
 
Current income taxes:
 
 
 
 
 
 
Federal
 
$
281

 
$
221

 
$
179

State and local
 
3

 
19

 
13

Deferred income taxes:
 
 
 
 
 
 
Federal
 
(38
)
 
(63
)
 
(14
)
State and local
 
11

 
(15
)
 
(3
)
Total U.S. tax provision
 
257

 
162

 
175

International:
 
 
 
 
 
 
Current income taxes
 
179

 
50

 
90

Deferred income taxes
 
(27
)
 
(6
)
 
(32
)
Total international tax provision
 
152

 
44

 
58

Provision for taxes on income(a)(b)(c)
 
$
409

 
$
206

 
$
233

(a)
In 2016, the Provision for taxes on income reflects the following:
•
the change in the jurisdictional mix of earnings, which includes the impact of the location of earnings from (i) operations and (ii) restructuring charges related to the operational efficiency initiative and supply network strategy, as well as repatriation costs. The jurisdictional mix of earnings can vary as a result of repatriation decisions and as a result of operating fluctuations in the normal course of business, the impact of non-deductible items and the extent and location of other income and expense items, such as restructuring charges/(benefits), asset impairments and gains and losses on asset divestitures;
•
U.S. tax benefit related to U.S. Research and Development Tax Credit and the U.S. Domestic Production Activities deduction;
•
a $15 million discrete tax benefit recorded in the fourth quarter of 2016 related to prior period tax adjustments;
•
a $10 million discrete tax benefit recorded in the first quarter of 2016 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 impact of a new accounting standard adopted in 2016 requiring the excess tax benefits for share-based payments to be recognized as a component of Provision for taxes on income;
•
a $2 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;
•
a net tax expense of approximately $35 million mainly recorded in the first half of 2016 related to the impact of the European Commission’s negative decision on the excess profits rulings in Belgium. This net charge represents the recovery of prior tax benefits for the periods 2013 through 2015 offset by the revaluation of the company’s deferred tax assets and liabilities using the rates expected to be in place at the time of the reversal and without consideration of implementation of any future operational changes, and does not include any benefits associated with a successful appeal of the decision;
•
tax expense related to the changes in valuation allowances and the resolution of other tax items;
•
tax expense related to changes in uncertain tax positions (see D. Tax Contingencies).
(b) 
In 2015, the Provision for taxes on income reflects the following:
•
the change in the jurisdictional mix of earnings, which includes the impact of the location of earnings from (i) operations and (ii) restructuring charges related to the operational efficiency initiative and supply network strategy, as well as repatriation costs. The jurisdictional mix of earnings can vary as a result of repatriation decisions and as a result of operating fluctuations in the normal course of business, the impact of non-deductible items and the extent and location of other income and expense items, such as restructuring charges/(benefits), asset impairments and gains and losses on asset divestitures;
•
the tax expense related to the non-deductible revaluation of the net monetary assets in Venezuela to the SIMADI exchange rate recorded in the fourth quarter of 2015;
•
tax expense related to the changes in valuation allowances and the resolution of other tax items;
•
tax expense related to changes in uncertain tax positions (see D. Tax Contingencies);
•
a $9 million discrete tax benefit recorded in the first quarter of 2015 related to a revaluation of deferred taxes as a result of a change in tax rates;
•
a $6 million discrete tax benefit recorded in the second quarter of 2015 related to prior period tax adjustments; and
•
U.S. tax benefit related to U.S. Research and Development Tax Credit which was permanently extended on December 18, 2015, and the U.S. Domestic Production Activities deduction.
(c) 
In 2014, the Provision for taxes on income reflects the following:
•
tax expense related to an $8 million discrete tax item during the first quarter of 2014 related to an intercompany inventory adjustment;
•
U.S. tax expense of approximately $2 million as a result of providing U.S. deferred income taxes on certain current-year income earned outside the United States that will not be indefinitely reinvested overseas;
•
tax expense related to changes in uncertain tax positions (see D. Tax Contingencies);
•
U.S. tax benefit related to U.S. Research and Development Tax Credit which was extended on December 19, 2014, and the U.S. Domestic Production Activities deduction; and
•
tax benefit related to the changes in valuation allowances and the resolution of other tax items.
Schedule of Effective Income Tax Rate Reconciliation
The reconciliation of the U.S. statutory income tax rate to our effective tax rate follows:
 
 
Year Ended December 31,
 
 
2016

 
2015

 
2014

U.S. statutory income tax rate
 
35.0
 %
 
35.0
 %
 
35.0
 %
State and local taxes, net of federal benefits
 
0.8

 
(1.1
)
 
0.4

Taxation of non-U.S. operations(a)(b)
 
(3.0
)
 
(3.2
)
 
(8.9
)
Unrecognized tax benefits and tax settlements and resolution of certain tax positions(c)
 
0.4

 
1.8

 
1.0

Venezuela revaluation(d)
 
—

 
5.6

 
—

Annulment of Belgium Excess Profit Ruling(e)
 
2.9

 
—

 
—

U.S. Research and Development Tax Credit and U.S. Domestic Production Activities deduction(f)
 
(1.4
)
 
(2.8
)
 
(1.5
)
Stock-based compensation(g)
 
(0.5
)
 
—

 
—

Non-deductible / non-taxable items(h)
 
0.2

 
1.3

 
0.5

All other—net
 
(1.1
)
 
1.2

 
1.9

Effective tax rate
 
33.3
 %
 
37.8
 %
 
28.4
 %
(a)
The rate impact of taxation of non-U.S. operations was a decrease to our effective tax rate in 2014 through 2016 due to (i) the jurisdictional mix of earnings as tax rates outside the United States are generally lower than the U.S. statutory income tax rate; and (ii) incentive tax rulings in Belgium and in Singapore in 2015 and 2014.
(b)
In all years, the impact to the rate due to increases in uncertain tax positions was more than offset by the jurisdictional mix of earnings and other U.S. tax implications of our foreign operations described in the above footnotes.
(c) 
For a discussion about unrecognized tax benefits and tax settlements and resolution of certain tax positions, see A. Taxes on Income and D. Tax Contingencies.
(d) 
The rate impact related to the non-deductible revaluation of the net monetary assets in Venezuela to the SIMADI exchange rate was an increase to our effective tax rate in 2015.
(e) 
The rate impact related to the European Commission’s negative decision on the excess profits rulings in Belgium was an increase to our effective tax rate in 2016. This net charge represents the recovery of prior tax benefits for the periods 2013 through 2015 offset by the revaluation of the company’s deferred tax assets and liabilities using the rates expected to be in place at the time of the reversal and without consideration of implementation of any future operational changes, and does not include any benefits associated with a successful appeal of the decision.
(f) 
In all years, the decrease in the rate was due to the benefit associated with the U.S. Research and Development Tax Credit and the U.S. Domestic Production Activities deduction.
(g) 
The rate impact of the adoption of a new accounting standard requiring the excess tax benefits for share-based payments to be recognized as a component of Provision for taxes on income was a decrease to our effective tax rate in 2016.
(h) 
In all years, non-deductible items include meals and entertainment expenses.
Schedule of Deferred Tax Assets and Liabilities
The components of our deferred tax assets and liabilities follow:
 
 
As of December 31,
 
 
2016

 
2015

(MILLIONS OF DOLLARS)
 
Assets (Liabilities)
Prepaid/deferred items
 
$
52

 
$
61

Inventories
 
47

 
19

Intangibles
 
(203
)
 
(223
)
Property, plant and equipment
 
(101
)
 
(97
)
Employee benefits
 
63

 
48

Restructuring and other charges
 
9

 
37

Legal and product liability reserves
 
18

 
15

Net operating loss/credit carryforwards
 
94

 
86

Unremitted earnings
 
—

 
(3
)
All other
 
(2
)
 
(1
)
Subtotal
 
(23
)
 
(58
)
Valuation allowance
 
(125
)
 
(124
)
Net deferred tax liability(a)(b)
 
$
(148
)
 
$
(182
)
(a) 
The decrease in the total net deferred tax liability from December 31, 2015, to December 31, 2016, is primarily attributable to a decrease in deferred tax liabilities related to intangibles, an increase in deferred tax assets related to inventory, employee benefits, and net operating loss/credit carryforwards, partially offset by a decrease in deferred tax assets related to restructuring and other charges, prepaid/deferred items and an increase in valuation allowances representing the amounts determined to be unrecoverable.
(b) 
In 2016, included in Noncurrent deferred tax assets ($96 million) and Noncurrent deferred tax liabilities ($244 million). In 2015, included in Noncurrent deferred tax assets ($82 million) and Noncurrent deferred tax liabilities ($264 million).
Schedule of Unrecognized Tax Benefits Roll Forward
The reconciliation of the beginning and ending amounts of gross unrecognized tax benefits follows:
(MILLIONS OF DOLLARS)
 
2016

 
2015

 
2014

Balance, January 1
 
$
(61
)
 
$
(54
)
 
$
(45
)
Increases based on tax positions taken during a prior period(a)(b)
 
(48
)
 
—

 
(1
)
Decreases based on tax positions taken during a prior period(a)(c)
 
2

 
6

 
6

Increases based on tax positions taken during the current period(a)
 
(9
)
 
(14
)
 
(15
)
Settlements(d)
 
46

 
—

 
—

Lapse in statute of limitations
 
2

 
1

 
1

Balance, December 31(e)
 
$
(68
)
 
$
(61
)
 
$
(54
)
(a) 
Primarily included in Provision for taxes on income.
(b) 
In 2016, the increases are primarily related to the impact of the European Commission’s negative decision on the excess profits rulings in Belgium. See A. Taxes on Income.
(c) 
In 2016, the decreases are primarily related to movements on prior year positions. In 2015 and 2014, the decreases are primarily related to movements in foreign translation adjustments on prior year positions and effective settlement of certain issues with the U.S. tax authorities and foreign tax authorities. See A. Taxes on Income.
(d) 
In 2016, the decreases are due to cash payments related to the impact of the European Commission’s negative decision on the excess profits rulings in Belgium. See A. Taxes on Income.
(e)
In 2016, included in Noncurrent deferred tax assets ($3 million) and Other taxes payable ($65 million). In 2015, included in Noncurrent deferred tax assets ($6 million) and Other taxes payable ($55 million). In 2014, included in Noncurrent deferred tax assets ($6 million) and Other taxes payable ($48 million).