INCOME TAXES

Ford Motor Credit Company LLC is a disregarded entity for United States income tax purposes and Ford’s consolidated United States federal and state income tax returns include certain of our domestic subsidiaries. In accordance with our intercompany tax sharing agreement with Ford, United States income tax liabilities or credits are allocated to us generally on a separate return basis calculated as if we were taxable as a corporation.

We account for U.S. tax on global intangible low-tax income in the period incurred.

The Provision for income taxes for the years ended December 31 was estimated as follows (in millions):



	2016			2017			2018
Current
Federal	$	(41	)	$	(6	)	$	72
Non-U.S.	222			241			153
State and local	(15		)	(9		)	(81		)
Total current	166			226			144
Deferred
Federal	284			(1,016		)	283
Non-U.S.	1			30			(125		)
State and local	55			63			101
Total deferred	340			(923		)	259
Provision for / (Benefit from) income taxes	$	506		$	(697	)	$	403

A reconciliation of the Provision for income taxes with the United States statutory tax rate as a percentage of Income before income taxes for the years ended December 31 is as follows:



	2016		2017		2018
U.S. statutory tax rate	35.0	%	35.0	%	21.0	%
Effect of (in percentage points):
Non-U.S. tax rates under U.S. rate	(3.8	)	(4.0	)	1.7
State and local income taxes	1.3		1.5		0.6
Dispositions and restructurings	—		—		(8.9	)
U.S. tax on non-U.S. earnings	(4.9	)	15.6		0.4
Enacted change in tax laws	—		(78.1	)	—
Other	(0.7	)	(0.2	)	0.5
Effective tax rate	26.9	%	(30.2	)%	15.3	%

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 was signed into law. This act includes, among other items, a permanent reduction to the U.S. corporate income tax rate from 35% to 21% effective January 1, 2018, and requires immediate taxation of accumulated, unremitted non-U.S. earnings. As a result, at December 31, 2017, we recognized a tax benefit of $1.8 billion from revaluing U.S. net deferred tax liabilities and tax expense of $375 million to record U.S. tax on unremitted non-U.S. earnings.

At December 31, 2018, $3.1 billion of non-U.S. earnings are considered indefinitely reinvested in operations outside the United States, for which deferred taxes have not been provided. Repatriation of these earnings in their entirety would result in an incremental liability of about $110 million.

NOTE 12. INCOME TAXES (Continued)

Deferred tax assets and liabilities are recognized based on the future tax consequences attributable to temporary differences that exist between the financial statement carrying value of assets and liabilities and their respective tax bases, and net operating loss carryforwards and tax credit carryforwards on a taxing jurisdiction basis. We measure deferred tax assets and liabilities using enacted tax rates that will apply in the years in which we expect the temporary differences to be recovered or paid.

Our accounting for deferred tax consequences represents our best estimate of the likely future tax consequences of events that have been recognized in our financial statements or tax returns and their future probability. In assessing the need for a valuation allowance, we consider both positive and negative evidence related to the likelihood of realization of the deferred tax assets. If, based on the weight of available evidence, it is more likely than not that the deferred tax assets will not be realized, we record a valuation allowance.

The components of deferred tax assets and liabilities at December 31 were as follows (in millions):



	2017			2018
Deferred tax assets
Net operating loss carryforwards	$	1,310		$	339
Provision for credit losses	204			175
Other foreign	79			106
Employee benefit plans	33			28
Foreign tax credits	1,244			1,297
Other	51			50
Total gross deferred tax assets	2,921			1,995
Less: Valuation allowance	(68		)	(81		)
Total net deferred tax assets	2,853			1,914
Deferred tax liabilities
Leasing transactions	4,017			3,126
Finance receivables	523			639
Other foreign	391			524
Other	61			4
Total deferred tax liabilities	4,992			4,293
Net deferred tax liability	$	2,139		$	2,379

At December 31, 2018, we have a valuation allowance of $81 million for deferred tax assets primarily related to our Mexico operations.

In accordance with our intercompany tax sharing agreement with Ford, United States income tax liabilities or credits are allocated to us, generally on a separate return basis. In this regard, the deferred tax assets related to foreign tax credits and net operating loss carryforwards represent amounts primarily due from Ford. We reflect a deferred asset for foreign tax credits within our balance sheet due to our tax sharing agreement with Ford which provides for full reimbursement for the use of these credits. We reflect a deferred asset for net operating loss carryforwards due to our profit history and expected reversal of our deferred tax liability. Under our tax sharing agreement with Ford, we are generally paid for these assets at the earlier of our use on a separate return basis or their expiration.

Operating loss carryforwards for tax purposes were $1.1 billion at December 31, 2018, resulting in a deferred tax asset of $339 million. These losses begin to expire in 2019 with a substantial portion expiring in 2038. Tax benefits of net operating loss carryforwards and tax credit carryforwards are evaluated on an ongoing basis, including a review of historical and projected future operating results, the eligible carryforward period, and other circumstances.

NOTE 12. INCOME TAXES (Continued)

In accordance with our intercompany tax sharing agreement with Ford, we earn interest on net tax assets and pay interest on certain tax liabilities. Interest earned is included in Other income, net while interest expense is included in Interest expense and the amounts were immaterial in 2017 and 2018.

The changes in the unrecognized tax benefits for the years ended December 31 were as follows (in millions):



	2017			2018
Beginning balance	$	80		$	90
Increase - tax positions in prior periods	18			28
Increase - tax positions in current period	1			7
Decrease - tax positions in prior periods	(2		)	(6		)
Settlements	(7		)	(1		)
Lapse of statute of limitations	(7		)	—
Foreign currency translation adjustments	7			(3		)
Ending balance	$	90		$	115

The amount of unrecognized tax benefits at December 31, 2017 and 2018 that would impact the effective tax rate if recognized was $85 million and $111 million, respectively. We do not believe it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase or decrease during the next twelve months.

Examinations by tax authorities have been completed through 2008 in Germany, 2011 in the United States, 2013 in Canada, and 2015 in the United Kingdom. We have settled our U.S. federal income tax matters related to tax years prior to 2012 in accordance with our intercompany tax sharing agreement with Ford.

We recognize income tax-related penalties in Provision for / (Benefit from) income taxes on our income statement. We recognize accrued interest expense related to unrecognized tax benefits in jurisdictions where we file tax returns separate from Ford in Other income, net on our income statement. For the years ended December 31, 2016, 2017, and 2018, we recorded net tax related interest income of $8 million, $5 million, and net tax related interest expense of $7 million, respectively, in our income statement. At December 31, 2017 and 2018, we recorded a net payable of $5 million and $7 million, respectively, for tax related interest in Other liabilities and deferred income.

We paid income taxes of $107 million, $220 million, and $188 million in 2016, 2017, and 2018, respectively.