INCOME TAXES



Domestic and Foreign Components of Income Before Income Taxes
In millions	2016		2015		2014
Domestic (1) (2)	$	485	$	5,313	$	1,652
Foreign (1)	3,928		4,617		3,613
Total	$	4,413	$	9,930	$	5,265


(1)	In 2016, the domestic component of "Income Before Income Taxes" included approximately $2.1 billion ($3.5 billion in 2015) and the foreign component contained zero ($1.1 billion in 2015) of income from portfolio actions. Amounts include gains from transactions noted below in the Reconciliation to U.S. Statutory Rate table.


(2)	In 2016, the domestic component of “Income Before Income Taxes” included approximately $2.6 billion of expenses related to the urethane matters class action lawsuit and opt-out cases settlements, asbestos-related charge and charges for environmental matters.



Provision for Income Taxes
	2016								2015							2014
In millions	Current		Deferred			Total			Current		Deferred			Total		Current			Deferred			Total
Federal (1)	$	91	$	(1,255	)	$	(1,164	)	$	583	$	358		$	941	$	(161	)	$	442		$	281
State and local	21		(10		)	11			38		(8		)	30		(4		)	43			39
Foreign	1,156		6			1,162			1,221		(45		)	1,176		1,125			(19		)	1,106
Total	$	1,268	$	(1,259	)	$	9		$	1,842	$	305		$	2,147	$	960		$	466		$	1,426


(1)	The 2016 amount reflects the tax impact of accrued one-time items and reduced domestic income which limited the utilization of tax credits. The 2014 amount reflects the impact of accelerated deductions.



Reconciliation to U.S. Statutory Rate
In millions	2016			2015			2014
Taxes at U.S. statutory rate	$	1,545		$	3,476		$	1,843
Equity earnings effect	(52		)	(197		)	(307		)
Foreign income taxed at rates other than 35% (1)	(309		)	(398		)	(195		)
U.S. tax effect of foreign earnings and dividends	(204		)	130			54
Goodwill impact from divestitures	5			57			—
Discrete equity earnings (2)	—			21			26
Change in valuation allowances	8			(32		)	33
Unrecognized tax benefits	(34		)	81			(30		)
Federal tax accrual adjustments	(6		)	13			(3		)
Gain on ownership restructure of Dow Corning (3)	(993		)	—			—
Non-deductible costs associated with transactions and productivity actions	33			—			—
Impact from split-off of chlorine value chain (4)	21			(763		)	—
Gain on Univation step acquisition (3)	—			(124		)	—
Gain on sale of MEGlobal (5)	—			(120		)	—
Other – net	(5		)	3			5
Total tax provision	$	9		$	2,147		$	1,426
Effective tax rate	0.2		%	21.6		%	27.1		%


(1)	Includes the tax provision for statutory taxable income in foreign jurisdictions for which there is no corresponding amount in “Income Before Income Taxes.”


(2)	Includes nonrecurring charges related to equity in earnings of nonconsolidated affiliates in 2015 and 2014.


(3)	See Note 4 for further information.


(4)	See Note 6 for further information.


(5)	See Note 5 for further information.

The tax rate for 2016 was favorably impacted by the non-taxable gain on the DCC Transaction and a tax benefit on the reassessment of a deferred tax liability related to the basis difference in the Company’s investment in Dow Corning. The tax rate was also favorably impacted by the geographic mix of earnings, the availability of foreign tax credits and the deductibility of both the urethane matters class action lawsuit and opt-out cases settlements and the asbestos-related charge. A reduction in equity earnings and non-deductible costs associated with transactions and productivity actions unfavorably impacted the tax rate. These factors resulted in an effective tax rate of 0.2 percent for 2016.

The tax rate for 2015 was favorably impacted by portfolio actions, specifically the tax-efficient split-off of the chlorine value chain, the non-taxable gain from the Univation step acquisition and the sale of MEGlobal. The geographic mix of earnings favorably impacted the tax rate with the gain from the ANGUS Chemical Company divestiture and continued profitability improvement in Europe and Asia Pacific providing most of the benefit. The tax rate was unfavorably impacted by foreign subsidiaries repatriating cash to the United States, which was primarily derived from divestiture proceeds. Reduced equity earnings and continued increases in statutory income in Latin America and Canada due to local currency devaluations also unfavorably impacted the tax rate. These factors resulted in an effective tax rate of 21.6 percent for 2015.

The tax rate for 2014 was favorably impacted by the geographic mix of earnings, with the most notable components being improved profitability in Europe and Asia Pacific as well as equity earnings providing additional favorable impact on the tax rate. The tax rate was also favorably impacted by a reduction in the tax on remittances by foreign subsidiaries to the United States. The tax rate was unfavorably impacted by a continued increase in statutory income in Latin America due to local currency devaluations, and increase in valuation allowances, primarily in Asia Pacific. These factors resulted in an effective tax rate of 27.1 percent for 2014.



Deferred Tax Balances at December 31	2016					2015
In millions	Deferred Tax Assets (1)			Deferred Tax Liabilities (1)		Deferred Tax Assets			Deferred Tax Liabilities
Property (2)	$	307		$	2,860	$	130		$	2,097
Tax loss and credit carryforwards	2,450			—		1,647			—
Postretirement benefit obligations (2)	3,715			75		2,939			84
Other accruals and reserves (2)	1,964			883		1,389			882
Intangibles	128			1,536		208			692
Inventory (3)	50			197		13			218
Investments	179			119		204			242
Other – net (2)	737			643		780			542
Subtotal	$	9,530		$	6,313	$	7,310		$	4,757
Valuation allowances	(1,061		)	—		(1,000		)	—
Total	$	8,469		$	6,313	$	6,310		$	4,757


(1)	The Company assumed $999 million of deferred tax assets and $1,858 million of deferred tax liabilities as part of the DCC Transaction. See Note 4 for additional information.


(2)	Prior year was adjusted to conform to the current year presentation.


(3)	Prior year was adjusted to conform to the current year presentation for the reclassification of $293 million of prepaid tax assets to "Other current assets." See Note 1 for additional information.

Gross operating loss carryforwards amounted to $10,580 million at December 31, 2016 and $10,364 million at December 31, 2015. At December 31, 2016, $1,922 million of the operating loss carryforwards were subject to expiration in 2017 through 2021. The remaining operating loss carryforwards expire in years beyond 2021 or have an indefinite carryforward period. Tax credit carryforwards at December 31, 2016 amounted to $928 million ($128 million at December 31, 2015), net of uncertain tax positions. The increase in tax credit carryforwards in 2016 was primarily due to reduced domestic income which limited the utilization of tax credits. Tax credit carryforwards of $28 million are subject to expiration in 2017 through 2021 and the remaining expire in years beyond 2021 or have an indefinite carryforward period.

The Company had valuation allowances that primarily related to the realization of recorded tax benefits on tax loss carryforwards from operations in the United States, Brazil and Asia Pacific of $1,061 million at December 31, 2016 and $1,000 million at December 31, 2015.

Undistributed earnings of foreign subsidiaries and related companies that are deemed to be permanently invested amounted to $18,668 million at December 31, 2016, $18,773 million at December 31, 2015 and $18,037 million at December 31, 2014. It is not practicable to calculate the unrecognized deferred tax liability on undistributed earnings.

In the fourth quarter of 2016, a settlement of $206 million was reached on a tax matter associated with a historical change in the legal ownership structure of a nonconsolidated affiliate. As a result of the settlement, the Company recorded a net decrease in uncertain tax positions of $67 million, included in “Other noncurrent obligations” in the consolidated balance sheets, and an unfavorable impact of $13 million to “Provision for income taxes” in the consolidated statements of income. The following table provides a reconciliation of the Company's unrecognized tax benefits:



Total Gross Unrecognized Tax Benefits
In millions	2016			2015			2014
Balance at January 1	$	280		$	240		$	266
Increases related to positions taken on items from prior years (1)	153			92			42
Decreases related to positions taken on items from prior years	(12		)	(6		)	(57		)
Increases related to positions taken in the current year (2)	135			10			10
Settlement of uncertain tax positions with tax authorities (1)	(325		)	(56		)	(13		)
Decreases due to expiration of statutes of limitations	—			—			(8		)
Balance at December 31	$	231		$	280		$	240


(1)	Includes the impact of a settlement agreement related to a historical change in the legal ownership structure of a nonconsolidated affiliate.


(2)	Includes $126 million assumed in the DCC Transaction.

At December 31, 2016, the total amount of unrecognized tax benefits which would impact the effective tax rate if recognized was $223 million ($206 million at December 31, 2015).

Interest and penalties are recognized as components of the “Provision for income taxes,” and totaled a benefit of $55 million in 2016, a charge of $80 million in 2015 and a charge of $15 million in 2014. The Company’s accrual for interest and penalties associated with uncertain tax positions was $59 million at December 31, 2016 and $159 million at December 31, 2015.

On January 9, 2017, the U.S. Supreme Court denied certiorari in the Company’s tax treatment of partnerships and transactions associated with Chemtech, a wholly owned subsidiary. The Company has fully accrued the position and does not expect a future impact to “Provision for income taxes” in the consolidated statements of income as a result of the ruling.

Tax years that remain subject to examination for the Company’s major tax jurisdictions are shown below:



Tax Years Subject to Examination by Major Tax Jurisdiction at December 31
	Earliest Open Year
Jurisdiction	2016	2015
Argentina	2009	2008
Brazil	2006	2006
Canada	2012	2010
Germany	2006	2006
Italy	2012	2011
The Netherlands	2015	2013
Switzerland	2012	2012
United States:
Federal income tax	2004	2004
State and local income tax	2004	2004

The Company is currently under examination in a number of tax jurisdictions. It is reasonably possible that some of these examinations may be resolved within twelve months. As a result, it is reasonably possible that the total gross unrecognized tax benefits of the Company at December 31, 2016, may range from an increase of $10 million to a decrease of $61 million in the next twelve months as a result of these resolved examinations. The impact on the Company’s results of operations is not expected to be material.

The reserve for non-income tax contingencies related to issues in the United States and foreign locations was $108 million at December 31, 2016 and $64 million at December 31, 2015. This is management’s best estimate of the potential liability for non-income tax contingencies. Inherent uncertainties exist in estimates of tax contingencies due to changes in tax law, both legislated and concluded through the various jurisdictions’ tax court systems. It is the opinion of the Company’s management that the possibility is remote that costs in excess of those accrued will have a material impact on the Company’s consolidated financial statements.