
(In millions)	2019		2018		2017
Current
Federal ^(a)	$	10	$	(2)	$	47
State	5		6		8
Non-U.S.	19		17		14
	34		21		69
Deferred
Federal	24		136		106
State	—		9		12
Non-U.S.	(1)		—		(1)
	23		145		117
Income tax expense	$	57	$	166	$	186

The following table presents pre-tax income and the principal components of the reconciliation between the effective tax rate and the U.S. federal statutory income tax rate in effect for the years ended September 30:


(In millions)	2019			2018			2017
Income before income taxes
United States	$	212		$	282		$	433
Non-U.S.	53			50			57
Total income before income taxes	$	265		$	332		$	490

U.S. statutory tax rate^(a)	21.0		%	24.5		%	35.0		%
Income taxes computed at U.S. statutory tax rate	$	56		$	81		$	171
Increase (decrease) in amount computed resulting from:
Unrecognized tax benefits	5			—			2
State taxes, net of federal benefit	9			14			21
International rate differential	2			—			(7)
Permanent items	(3)			(3)			(8)
Remeasurement of net deferred taxes	(4)			73			—
Return-to-provision adjustments	(6)			—			1
Deemed repatriation	—			4			—
Change in valuation allowance	(4)			1			(4)
Tax Matters Agreement activity	1			(2)			10
Other	1			(2)			—
Income tax expense	$	57		$	166		$	186
Effective tax rate	21.5		%	50.0		%	38.0		%

(a)As a result of U.S. tax reform legislation which generally became effective January 1, 2018, the federal corporate income tax rate was lowered from 35% to 21%. Based on the effective date of the rate reduction, the Company's federal corporate statutory income tax rate was a blended rate of 24.5% for fiscal 2018.

The decreases in income tax expense and the effective tax rate in fiscal 2019 from the prior year periods were principally driven by the prior year enactment of U.S. and Kentucky tax reform legislation, which resulted in the full year benefit of lower corporate statutory income tax rates in fiscal 2019, benefits from accelerated deductions permitted by the provisions of U.S. tax reform, a benefit related to the expected utilization of tax attributes as a result of the clarification of certain provisions of Kentucky tax reform legislation during fiscal 2019, and reduced tax expense of approximately $78 million related to the prior year enactment of tax reform legislation. Additionally, a benefit of $4 million was recognized in fiscal 2019 as a result of the release of a valuation allowance.

U.S. tax reform legislation was signed into law on December 22, 2017, and the Company recorded its provisional estimates of enactment during fiscal 2018. Valvoline's provisional estimates were finalized during the first fiscal quarter of 2019, which resulted in no significant adjustments. In response to U.S. tax reform legislation, many states also enacted state-specific tax reform. In general, these impacts were not material to the Company’s financial statements. Valvoline is incorporated in Kentucky, which enacted income tax reform legislation on April 13, 2018. Kentucky tax reform generally became effective in fiscal 2019 and included a number of provisions, notably lowering the corporate income tax rate from a maximum of 6% to 5%.

•Income tax expense of $4 million related to the deemed repatriation tax on undistributed non-U.S. earnings and profits and $2 million for withholding taxes due to the Company’s change in indefinite reinvestment assertion regarding its undistributed earnings; and

•Increased pre-tax expense of $3 million and income tax expense of $1 million related to the remeasurement of net indemnity liabilities associated with the Tax Matters Agreement primarily due to the reduced federal benefit of state tax deductions, which drove increases in the higher expected utilization of tax attributes payable to Ashland.

As a result of the clarification of specific provisions of Kentucky tax reform legislation in fiscal 2019, a tax benefit of $5 million and pre-tax expense of $3 million was recognized related to the higher expected utilization of tax attributes, which included certain legacy tax attributes.

Deferred income taxes are provided for income and expense items recognized in different years for tax and financial reporting purposes. A summary of the deferred tax assets and liabilities included in the Consolidated Balance Sheets follows as of September 30:


(In millions)	2019		2018
Deferred tax assets
Non-U.S. net operating loss carryforwards ^(a)	$	2	$	2
State net operating loss carryforwards ^(b)	19		19
Employee benefit obligations	98		86
Compensation accruals	21		21
Credit carryforwards^(c)	19		36
Other ^(d)	22		9
Valuation allowances ^(e)	(2)		(7)
Net deferred tax assets	179		166
Deferred tax liabilities
Goodwill and other intangibles	9		3
Property, plant and equipment	46		23
Undistributed earnings	2		2
Total deferred tax liabilities	57		28
Total net deferred tax assets	$	122	$	138

(d)Due to netting of deferred tax assets and liabilities by jurisdiction, a $1 million liability included in this deferred tax asset balance is included in Other noncurrent liabilities on the Consolidated Balance Sheet as of September 30, 2019.

Prior to U.S. tax reform, the Company had not provided for U.S. income taxes on undistributed earnings and other outside basis differences of its non-U.S. subsidiaries as it was the Company’s intention for these tax basis differences to remain indefinitely reinvested. Valvoline began to record estimated incremental withholding taxes during fiscal 2018 and account for certain of its non-U.S. subsidiaries as being immediately subject to tax, while certain other outside basis differences restricted by regulations, operational or investing needs for non-U.S. subsidiaries remained indefinitely reinvested. If these outside basis differences were no longer to be indefinitely reinvested in the future, the Company may be subject to additional income and withholding taxes, which are not practicable to estimate.

The Tax Matters Agreement was entered into on September 22, 2016 between Ashland and Valvoline (the “Tax Matters Agreement”) and generally provides that Valvoline is required to indemnify Ashland for the following items:

•Certain U.S. federal, state or local taxes for the pre-IPO period of Ashland and/or its subsidiaries that arise on audit or examination and are directly attributable to neither the Valvoline business nor the Ashland chemicals business;

For the periods prior to the Distribution, Valvoline was included in Ashland’s consolidated U.S. and state income tax returns and in the income tax returns of certain Ashland international subsidiaries (collectively, the “Ashland Group Returns”). For the taxable periods that began on and after the Distribution, Valvoline has not been included in the Ashland Group Returns and files tax returns that include only Valvoline and/or its subsidiaries, as appropriate. Portions of the Tax Matters Agreement obligation relative to the tax attributes transferred in the Contribution will be settled with Ashland five years following the filing of the last taxable period Valvoline was included within the Ashland Group Returns.

Under the Tax Matters Agreement, Valvoline made tax-sharing payments to Ashland, inclusive of tax attributes utilized, generally determined as if Valvoline and each of its relevant subsidiaries included in the Ashland Group Returns filed their own consolidated, combined or separate tax returns for the period from the IPO to the Distribution. Valvoline made $48 million of net tax-sharing payments to Ashland during fiscal 2017. Valvoline has joint and several liability with Ashland to the U.S. Internal Revenue Service (“IRS”) for the consolidated U.S. federal income taxes of the Ashland consolidated group for the taxable periods in which Valvoline was part of the Ashland Group Returns. Valvoline has joint control with Ashland, over any audit or examination related to taxes for which Valvoline is required to indemnify Ashland. Accordingly, these portions of the Tax Matters Agreement will be settled as examinations of the pre-Distribution periods are completed.

Adjustments to the net obligations to Ashland under the Tax Matters Agreement are recorded within Legacy and separation-related expenses, net, with any resulting impacts to Valvoline's stand-alone income tax provision due to taxing authorities recorded in Income tax expense within the Consolidated Statements of Comprehensive Income. Total liabilities related to obligations owed to Ashland under the Tax Matters Agreement are primarily recorded in Other noncurrent liabilities in the Consolidated Balance Sheets and were $66 million as of September 30, 2019 and 2018.

Based on information available at this time, the Company has established adequate accruals for its obligations under the Tax Matters Agreement. In certain circumstances, the actual amounts ultimately required to satisfy these obligations could significantly exceed those currently reflected in the consolidated financial statements. Such estimates cannot currently be made given the uncertainty with regard to the nature and extent of items that could arise upon examination of the pre-Distribution periods, which include the Contribution and Distribution transactions. For example, if the tax-free nature of the Contribution and/or Distribution transactions is not sustained, if certain reorganization transactions undertaken in connection with the separation and the Distribution are determined to be taxable, or if additional matters arise upon examination of the pre-Distribution periods, Valvoline could have a substantial indemnification obligation to Ashland in excess of those currently provided.


(In millions)	2019		2018		2017
Gross unrecognized tax benefits as of October 1	$	10	$	10	$	8
Increases related to tax positions from prior years	5		2		—
Increases related to tax positions taken during the current year	—		1		2
Settlements with tax authorities	—		(2)		—
Lapses of statutes of limitation	(1)		(1)		—
Gross unrecognized tax benefits as of September 30^(a)	$	14	$	10	$	10

(a)These unrecognized tax benefits would favorably impact the effective income tax rate if recognized. Accruals for interest and penalties were $2 million and $1 million as of September 30, 2019 and 2018, respectively.

The Company's U.S. federal income tax returns remain open to examination from fiscal 2014 forward and certain U.S. state jurisdictions remain open from fiscal 2011 forward. With certain exceptions, years beginning on or after fiscal 2007 generally remain open to examination by certain non-U.S. taxing authorities.

Because Valvoline is routinely under examination by various taxing authorities, it is reasonably possible that the amount of unrecognized tax benefits will change during the next twelve months. An estimate of the amount or range of such change cannot be made at this time. However, the Company does not expect the change, if any, to have a material effect on the Company’s consolidated financial statements within the next twelve months. Given the indemnification of Ashland and the years remaining open to examination, a significant portion of the Company’s liability for unrecognized tax benefits as of September 30, 2019 and 2018 is included in the Tax Matters Agreement obligation to Ashland summarized above within Other noncurrent liabilities in the Consolidated Balance Sheets.