L. Income Taxes – The effective tax rate was 41.3% (provision on income) and 90.2% (provision on income) for the 2017 and 2016 third quarters, respectively, and 34.8% (provision on income) and 456.4% (provision on a loss) for the 2017 and 2016 nine-month periods, respectively.

Alcoa Corporation’s estimated annual effective tax rate for 2017 was 34.2% as of September 30, 2017. This rate differs from the U.S. federal statutory rate of 35% primarily due to foreign income taxed in lower rate jurisdictions, mostly offset by domestic losses not tax benefitted. The domestic losses are net of the gain on the sale of Yadkin (see Note C).

For the 2017 nine-month period, the Provision for income taxes was composed of three components as follows: (i) the application of the estimated annual effective tax rate for 2017 of 34.2% to pretax income of $943, (ii) a net discrete income tax charge of $11, including $10 related to a tax holiday (see below), and (iii) a favorable impact of $6 related to the interim period treatment of operational losses in certain jurisdictions for which no tax benefit was recognized (expected to reverse by the end of 2017).

For the 2017 third quarter, the Provision for income taxes is composed of three components as follows: (i) the difference between the application of the estimated annual 2017 effective tax rate as of September 30, 2017 of 34.2% to pretax income for the 2017 nine-month period of $943 and the application of the estimated annual 2017 effective tax rate as of June 30, 2017 of 31.9% to pretax income for the 2017 six-month period of $655, (ii) a net discrete income tax charge of $13, including $10 related to a tax holiday (see below), and (iii) a favorable impact of $8 related to the interim period treatment of operational losses in certain jurisdictions for which no tax benefit was recognized (expected to reverse by the end of 2017).

In the 2017 third quarter, AWAB received approval for a tax holiday related to the operation of the Juruti (Brazil) bauxite mine. This tax holiday is effective as of January 1, 2017 (retroactively) and decreases AWAB’s income tax rate from 34% to 15.25%, which will result in future cash tax savings over a 10-year period. As a result of this income tax rate change, AWAB’s existing deferred tax assets that are expected to reverse during the holiday period were required to be remeasured at the lower tax rate. This remeasurement resulted in both a decrease to AWAB’s deferred tax assets and a noncash charge to earnings of $10 ($6 after noncontrolling interest).

The rate for the 2016 third quarter differs from the U.S. federal statutory rate of 35% primarily due to U.S. losses and tax credits with no tax benefit realizable by Alcoa Corporation, somewhat offset by foreign income taxed in lower rate jurisdictions and tax benefits on interest expense eliminated to Parent Company net investment.

The rate for the 2016 nine-month period differs (by (491.4) percentage points) from the U.S. federal statutory rate of 35% primarily due to U.S. losses and tax credits with no tax benefit realizable by Alcoa Corporation, slightly offset by foreign income taxed in lower rate jurisdictions and tax benefits on interest expense eliminated to Parent Company net investment.

The composition of Alcoa Corporation’s net deferred tax asset by jurisdiction as of December 31, 2016 was as follows:


	Domestic			Foreign			Total
Deferred tax assets	$	1,346		$	1,742		$	3,088
Valuation allowance		(1,057	)		(698	)		(1,755	)
Deferred tax liabilities		(272	)		(612	)		(884	)

	$	17		$	432		$	449

The Company has several income tax filers in various foreign countries. Of the $432 million net deferred tax asset included under the “Foreign” column in the table above, approximately 90% relates to four of the Company’s income tax filers as follows: a $259 million net deferred tax asset for Alcoa Alumínio S.A. (“Alumínio”) in Brazil; a $195 million net deferred tax asset for Alcoa World Alumina Brasil Ltda. (“AWAB”) in Brazil; a $108 million deferred tax asset for Alúmina Española, S.A. (“Española” and collectively with Alumínio and AWAB, the “Foreign Filers”) in Spain; and a $177 million net deferred tax liability for Alcoa of Australia Limited in Australia.

The future realization of the net deferred tax asset for each of the Foreign Filers was based on projections of the respective future taxable income (defined as the sum of pretax income, other comprehensive income, and permanent tax differences), exclusive of reversing temporary differences and carryforwards. The realization of the net deferred tax assets of the Foreign Filers is not dependent on any tax planning strategies. Historically, the Foreign Filers each generated taxable income in the three-year cumulative period ending December 31, 2016. Management has also forecasted taxable income for each of the Foreign Filers in 2017 and for the foreseeable future. This forecast is based on macroeconomic indicators and involves assumptions related to, among others: commodity prices; volume levels; and key inputs and raw materials, such as bauxite, caustic soda, alumina, calcined petroleum coke, liquid pitch, energy (fuel oil, natural gas, electricity), labor, and transportation costs. These are the same assumptions used by management to develop a financial and operating plan, which is used to run the Company and measure performance against actual results.

The majority of the Foreign Filers’ net deferred tax assets relate to tax loss carryforwards. The Foreign Filers do not have a history of tax loss carryforwards expiring unused. Additionally, tax loss carryforwards have an infinite life under the respective income tax codes in Brazil and Spain. That said, utilization of an existing tax loss carryforward is limited to 30% and 25% of taxable income in a particular year in Brazil and Spain, respectively.

Accordingly, management concluded that the net deferred tax assets of the Foreign Filers will more likely than not be realized in future periods, resulting in no need for a partial or full valuation allowance as of December 31, 2016.

As of September 30, 2017, Alcoa Corporation’s net deferred tax asset was $562, of which $554 relates to the Foreign Filers. There has not been a material change in the facts and circumstances underlying the analysis described above. As such, management concluded that the net deferred tax assets of the Foreign Filers will more likely than not be realized in future periods, resulting in no need for a partial or full valuation allowance as of September 30, 2017.