INCOME TAXES

Pretax earnings from continuing operations consist of the following:



	2016		2017	2018
United States	$	1,312	1,350	1,652
Non-U.S.	1,004		985	1,015
Total pretax earnings	$	2,316	2,335	2,667

The principal components of income tax expense follow:



	2016			2017		2018
Current:
U.S. federal	$	394		351		341
State and local	11			40		52
Non-U.S.	305			311		300

Deferred:
U.S. federal	2			7		(224	)
State and local	4			4		(11	)
Non-U.S.	(19		)	(53	)	(15	)
Income tax expense	$	697		660		443

Reconciliations of the U.S. federal statutory income tax rate to the Company's effective tax rate follow. For fiscal 2018, the U.S. federal statutory rate was 35 percent for one quarter and 21 percent for three quarters.



	2016		2017		2018
U.S. federal statutory rate	35.0	%	35.0	%	24.5	%
State and local taxes, net of U.S. federal tax benefit	0.5		1.2		1.2
Non-U.S. rate differential	(2.9	)	(3.6	)	0.8
Non-U.S. tax holidays	(1.1	)	(1.0	)	(0.8	)
U.S. manufacturing deduction	(1.8	)	(1.7	)	(1.1	)
Gain on divestiture	—		—		1.0
Subsidiary restructuring	—		(1.8	)	(2.0	)
Transition impact of Tax Act	—		—		(7.1	)
Other	0.4		0.2		0.1
Effective income tax rate	30.1	%	28.3	%	16.6	%

On December 22, 2017, the U.S. government enacted tax reform, the Tax Cuts and Jobs Act (the “Act”), which made comprehensive changes to U.S. federal income tax laws by moving from a global to a modified territorial tax regime. The Act includes a reduction of the U.S. corporate income tax rate from 35 percent to 21 percent in calendar year 2018 along with the elimination of certain deductions and credits, and a one-time “deemed repatriation” of accumulated foreign earnings. During 2018, the Company recognized a net tax benefit of $189 ($0.30 per share) due to impacts of the Act, consisting of a $94 benefit on revaluation of net deferred income tax liabilities to the lower tax rate, $35 of expense for the tax on deemed repatriation of accumulated foreign earnings and withholding taxes, and the reversal of $130 accrued in previous periods for the planned repatriation of non-U.S. cash.

On August 1, 2018, the U.S. Treasury and Internal Revenue Service released proposed regulations relating to the one-time tax on deemed repatriation of accumulated foreign earnings. The proposed regulations were subject to a 60-day comment period and final regulations are expected to be issued after consideration of comments received. The Company is currently evaluating the impact of the proposed regulations and anticipates finalizing its provisional estimates after fully evaluating the final regulations.

The changes made by the Act are broad and complex. As such, the final one-time deemed repatriation tax may differ materially from these provisional amounts due to additional regulatory guidance expected to be issued, changes in interpretations, or any legislative actions to address questions arising from the Act, as well as further evaluation of the Company’s actions, assumptions and interpretations.

Non-U.S. tax holidays reduce tax rates in certain foreign jurisdictions and are expected to expire over the next four years.

Following are changes in unrecognized tax benefits before considering recoverability of any cross-jurisdictional tax credits (U.S. federal, state and non-U.S.) and temporary differences. The amount of unrecognized tax benefits is not expected to change significantly within the next 12 months.



	2017			2018
Unrecognized tax benefits, beginning	$	86		132
Additions for current year tax positions	54			13
Additions for prior year tax positions	4			8
Reductions for prior year tax positions	(6		)	(8	)
Acquisitions and divestitures	9			21
Reductions for settlements with tax authorities	(4		)	(3	)
Reductions for expiration of statutes of limitations	(11		)	(5	)
Unrecognized tax benefits, ending	$	132		158

If none of the unrecognized tax benefits shown is ultimately paid, the tax provision and the calculation of the effective tax rate would be favorably impacted by $117, which is net of cross-jurisdictional tax credits and temporary differences. The Company accrues interest and penalties related to income taxes in income tax expense. Total interest and penalties recognized were $2, $(1) and $2 in 2018, 2017 and 2016, respectively. As of September 30, 2018 and 2017, total accrued interest and penalties were $23 and $16, respectively.

The U.S. is the major jurisdiction for which the Company files income tax returns. U.S. federal tax returns are closed through 2013. The status of state and non-U.S. tax examinations varies due to the numerous legal entities and jurisdictions in which the Company operates.

The principal items that gave rise to deferred income tax assets and liabilities follow:



	2017			2018
Deferred tax assets:
Net operating losses and tax credits	$	444		396
Accrued liabilities	319			238
Postretirement and postemployment benefits	70			37
Employee compensation and benefits	173			119
Pensions	72			—
Other	196			151
Total	$	1,274		941

Valuation allowances	$	(309	)	(341	)

Deferred tax liabilities:
Intangibles	$	(753	)	(693	)
Pensions	—			(43	)
Property, plant and equipment	(265		)	(187	)
Undistributed non-U.S. earnings	(249		)	(52	)
Other	(37		)	(35	)
Total	$	(1,304	)	(1,010	)

Net deferred income tax liability	$	(339	)	(410	)

As of September 30, 2017 and 2018, all deferred tax assets and liabilities were presented as noncurrent. Total income taxes paid were approximately $680, $1,420 and $950 in 2018, 2017 and 2016, respectively. More than half of the $396 of net operating losses and tax credits expire over varying periods within the next 20 years, while the remainder can be carried forward indefinitely.