Taxes on Earnings

The provision for income taxes on earnings consists of the following:



	2017		2016			2015
Income taxes:
Currently payable:
Federal	$	238	$	235		$	246
State	39		34			31
Non-U.S.	36		47			55
	313		316			332
Deferred:
Federal	77		(17		)	(47		)
State	2		—			1
Non-U.S.	14		(13		)	(3		)
	93		(30		)	(49		)
	$	406	$	286		$	283



	2017		2016		2015
Earnings before income taxes:
United States	$	1,103	$	705	$	803
Non-U.S.	190		144		146
	$	1,293	$	849	$	949

The following is a reconciliation of the effective income tax rate to the U.S. federal statutory income tax rate:



	2017		2016		2015
Federal statutory income tax rate	35.0	%	35.0	%	35.0	%
State income taxes (net of federal tax benefit)	2.1		2.7		2.2
Tax effect of international items	(2.1	)	(3.0	)	(2.5	)
Settlement of tax contingencies	—		—		(0.8	)
Federal manufacturing deduction	(2.1	)	(3.2	)	(2.9	)
Goodwill impairment	3.4		4.3		—
Claim settlement	—		(0.8	)	—
Foreign exchange losses⁽¹⁾	(3.9	)	—		—
Other	(1.0	)	(1.3	)	(1.2	)
Effective income tax rate	31.4	%	33.7	%	29.8	%

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⁽¹⁾	The 2017 rate was favorably impacted by a $52 benefit primarily related to the sale of intercompany notes receivable to a financial institution, which resulted in the recognition of foreign exchange losses.

Deferred tax liabilities and assets are comprised of the following:



	2017			2016
Depreciation	$	355		$	362
Amortization	521			541
Other	20			23
Deferred tax liabilities	896			926
Benefits and compensation	241			266
Pension benefits	98			185
Tax loss carryforwards	36			37
Capital loss carryforwards	92			88
Other	95			113
Gross deferred tax assets	562			689
Deferred tax asset valuation allowance	(120		)	(118		)
Deferred tax assets, net of valuation allowance	442			571
Net deferred tax liability	$	454		$	355

At July 30, 2017, our U.S. and non-U.S. subsidiaries had tax loss carryforwards of approximately $170. Of these carryforwards, $149 expire between 2018 and 2037, and $21 may be carried forward indefinitely. At July 30, 2017, deferred tax asset valuation allowances have been established to offset $137 of these tax loss carryforwards. Additionally, at July 30, 2017, our non-U.S. subsidiaries had capital loss carryforwards of approximately $323, which were fully offset by valuation allowances.

The net change in the deferred tax asset valuation allowance in 2017 was an increase of $2. The increase was primarily due to the impact of currency and the recognition of additional valuation allowances on tax loss carryforwards, partially offset by the expiration of tax losses. The net change in the deferred tax asset valuation allowance in 2016 was a decrease of $4. The decrease was primarily due to the expiration of tax losses, partially offset by the recognition of additional valuation allowance on tax loss carryforwards.

As of July 30, 2017, other deferred tax assets included $1 of state tax credit carryforwards related to various states that expire between 2021 and 2029. As of July 31, 2016, other deferred tax assets included $2 of state tax credit carryforwards related to various states that expire between 2018 and 2025. No valuation allowances have been established related to these deferred tax assets.

As of July 30, 2017, U.S. income taxes have not been provided on approximately $820 of undistributed earnings of non-U.S. subsidiaries, which are deemed to be permanently reinvested. It is not practical to estimate the tax liability that might be incurred if such earnings were remitted to the U.S.

A reconciliation of the activity related to unrecognized tax benefits follows:



	2017			2016		2015
Balance at beginning of year	$	63		$	58	$	71
Increases related to prior-year tax positions	4			2		9
Decreases related to prior-year tax positions	—			—		—
Increases related to current-year tax positions	4			3		5
Settlements	(7		)	—		(27		)
Lapse of statute	—			—		—
Balance at end of year	$	64		$	63	$	58

The amount of unrecognized tax benefits that, if recognized, would impact the annual effective tax rate was $43 as of July 30, 2017, $42 as of July 31, 2016, and $39 as of August 2, 2015. The total amount of unrecognized tax benefits can change due to audit settlements, tax examination activities, statute expirations and the recognition and measurement criteria under accounting for uncertainty in income taxes. We are unable to estimate what this change may be within the next 12 months, but do not believe that it will be material to the financial statements. Approximately $5 of unrecognized tax benefits, including interest and penalties, were reported in Accounts receivable in the Consolidated Balance Sheets as of July 30, 2017, and July 31, 2016.

Our accounting policy with respect to interest and penalties attributable to income taxes is to reflect any expense or benefit as a component of our income tax provision. The total amount of interest and penalties recognized in the Consolidated Statements of Earnings was $4 in 2017, $3 in 2016 and $1 in 2015. The total amount of interest and penalties recognized in the Consolidated Balance Sheets in Other liabilities was $5 as of July 30, 2017, and $6 as of July 31, 2016.

We do business internationally and, as a result, file income tax returns in the U.S. federal jurisdiction and various state and non-U.S. jurisdictions. In the normal course of business, we are subject to examination by taxing authorities throughout the world, including such major jurisdictions as the U.S., Australia, Canada and Denmark. The 2017 tax year is currently under audit by the Internal Revenue Service. In addition, several state income tax examinations are in progress for the years 1999 to 2016.

With limited exceptions, we have been audited for income tax purposes in Australia through 2010, Denmark through 2013, and in Canada through 2014.