Income Taxes

The components of Income before Income Taxes follow:



(In millions)	2017		2016		2015
U.S.	$	394	$	595	$	284
Foreign	484		612		324
	$	878	$	1,207	$	608

A reconciliation of income taxes at the U.S. statutory rate to United States and Foreign Tax (Benefit) Expense follows:



(In millions)	2017			2016			2015
U.S. Federal income tax expense at the statutory rate of 35%	$	307		$	422		$	213
Deferred tax impact of enacted tax rate and law changes	389			(2		)	(2		)
Provision for undistributed foreign earnings, net	(162		)	—			—
Transition tax (repatriation)	77			—			—
Adjustment for foreign income taxed at different rates	(55		)	(51		)	(39		)
U.S. credits (R&D, foreign tax credits) and benefits offset to OCI	(23		)	(163		)	(72		)
Domestic production activities deduction	(16		)	(3		)	—
State income taxes, net of U.S. Federal benefit	9			16			10
Net foreign losses (income) with no tax due to valuation allowances	(7		)	8			(19		)
Net establishment (resolution) of uncertain tax positions	(6		)	3			(13		)
Net establishment (release) of U.S. valuation allowance	5			39			(8		)
Net establishment (release) of foreign valuation allowances	1			(354		)	4
Deconsolidation of Venezuelan subsidiary	—			—			157
Other	(6		)	8			1
United States and Foreign Tax (Benefit) Expense	$	513		$	(77	)	$	232

The components of United States and Foreign Tax (Benefit) Expense by taxing jurisdiction, follow:



(In millions)	2017			2016			2015
Current:
Federal	$	(22	)	$	(25	)	$	—
Foreign	147			175			154
State	3			2			(1		)
	128			152			153
Deferred:
Federal	408			77			74
Foreign	(8		)	(328		)	5
State	(15		)	22			—
	385			(229		)	79
United States and Foreign Tax (Benefit) Expense	$	513		$	(77	)	$	232

In 2017, income tax expense of $513 million was unfavorably impacted by net discrete adjustments of $294 million, due to a net non-cash charge of $299 million related to the enactment of the Tax Cuts and Jobs Act (the "Tax Act") in the United States, and $5 million, net benefit, of other miscellaneous discrete tax items.

Effective January 1, 2018, the Tax Act establishes a corporate income tax rate of 21%, replacing the current 35% rate, and creates a territorial tax system rather than a worldwide system, which generally eliminates the U.S. federal income tax on dividends from foreign subsidiaries. The transition to the territorial system includes a one-time transition tax on certain of our foreign earnings previously untaxed in the United States. Certain impacts of the new legislation would generally require accounting to be completed in the period of enactment, however, in response to the complexities of this new legislation, the Securities and Exchange Commission (“SEC”) issued guidance to provide companies with relief. Specifically, when the initial accounting for items under the new legislation is incomplete, the guidance allows us to include provisional amounts when reasonable estimates can be made. The SEC has provided up to a one-year measurement period for companies to finalize the accounting for the impacts of this new legislation and we anticipate finalizing our accounting over the coming quarters. While our accounting for the Tax Act is not complete, we have made reasonable estimates for certain provisions and we have recorded a non-cash net charge to tax expense of $299 million related to its enactment. This net charge includes a deferred tax charge of $384 million primarily from revaluing our net U.S. deferred tax assets to reflect the new U.S. corporate tax rate. We believe this calculation is complete except for changes in estimates that can result from finalizing the filing of our 2017 U.S. income tax return, which are not anticipated to be material, and changes that may be a direct impact of other provisional amounts recorded due to the enactment of the Tax Act. The net charge also includes a provisional deferred tax benefit of $162 million to reverse reserves maintained for the taxation of undistributed foreign earnings under prior law net of reserves established for foreign withholding taxes consistent with our revised indefinite reinvestment assertion, and a provisional deferred tax charge of $77 million related to the one-time transition tax. In general, the one-time transition tax imposed by the Tax Act results in the taxation of our accumulated foreign earnings and profits (“E&P”) at a 15.5% rate on liquid assets and 8% on the remaining unremitted foreign E&P, both net of foreign tax credits. At this time, we have not yet gathered, prepared and analyzed the necessary information with respect to 2017 in sufficient detail to complete the complex calculations necessary to finalize the amount of our transition tax. We also anticipate that further guidance may become available in this and other areas. We believe that our preliminary calculations result in a reasonable estimate of the transition tax and related foreign tax credit and, as such, have included those amounts in our year-end income tax provision. As the analysis of accumulated foreign E&P and related foreign taxes paid are completed on an entity by entity basis and we finalize the amount held in cash or other specified assets, we will update our provisional estimate of the transition tax and related foreign tax credit.

In 2016, the income tax benefit of $77 million was favorably impacted by net discrete adjustments of $458 million, due primarily to a tax benefit of $331 million from the December 31, 2016 release of the valuation allowance on certain subsidiaries in England, France, Luxembourg and New Zealand. As of December 31, 2016, these subsidiaries on which we have maintained a full valuation allowance have achieved earnings of a duration and magnitude that they were in a position of cumulative profits for the most recent three-year period. As a consequence of this profitability in recent periods and our future business plans forecasting sustainable profitability, we concluded that it was more likely than not that our deferred tax assets in these entities will be realized. The 2016 income tax benefit also included a $163 million tax benefit resulting from changing our election for our 2009, 2010 and 2012 U.S. tax years from deducting foreign taxes to crediting foreign taxes, a $39 million tax charge related to establishing a valuation allowance in the United States on deferred tax assets related to receivables from our deconsolidated Venezuelan operations which were contributed to its capital, and a $7 million tax benefit related to the release of a valuation allowance in Brazil due to the collection of a receivable that had previously been written off as uncollectible.

In 2015, income tax expense of $232 million included net discrete tax benefits of $18 million unrelated to current year income, due primarily to a $9 million benefit from the conclusion of non-U.S. tax claims and an $8 million benefit from the release of a valuation allowance related to certain state deferred tax assets. Our tax expense for 2015 also included a U.S. tax benefit of $69 million related to the pre-tax loss of $646 million on the deconsolidation of our Venezuelan subsidiary (refer to Note 1), and a current year benefit of $10 million related to recently enacted U.S. legislation extending the research and development credit.

Temporary differences and carryforwards giving rise to deferred tax assets and liabilities at December 31 follow:



(In millions)	2017			2016
Tax loss carryforwards and credits	$	1,515		$	1,503
Capitalized research and development expenditures	402			666
Accrued expenses deductible as paid	297			456
Postretirement benefits and pensions	223			294
Rationalizations and other provisions	36			36
Vacation and sick pay	24			37
Investment and receivables related to Venezuelan deconsolidation	80			134
Alternative minimum tax credit carryforwards	—			43
Other	85			106
	2,662			3,275
Valuation allowance	(318		)	(326		)
Total deferred tax assets	2,344			2,949
Property basis differences	(414		)	(482		)
Tax on undistributed earnings of subsidiaries	(22		)	(138		)
Total net deferred tax assets	$	1,908		$	2,329

At December 31, 2017, we had $605 million of tax assets for net operating loss, capital loss and tax credit carryforwards related to certain foreign subsidiaries. These carryforwards are primarily from countries with unlimited carryforward periods, but include $53 million of tax credits in various European countries that are subject to expiration from 2018 to 2027. A valuation allowance totaling $230 million has been recorded against these and other deferred tax assets where recovery of the asset or carryforward is uncertain. In addition, we had $816 million of Federal and $94 million of state tax assets for net operating loss and tax credit carryforwards. The Federal carryforwards consist of $749 million of foreign tax credits that are subject to expiration from 2018 to 2025 and $67 million of tax assets related to research and development credits and other Federal credits that are subject to expiration from 2030 to 2037. The state carryforwards are subject to expiration from 2018 to 2035. A valuation allowance of $88 million has been recorded against Federal and state deferred tax assets where recovery is uncertain.

At December 31, 2017, we had unrecognized tax benefits of $52 million that if recognized, would have a favorable impact on our tax expense of $37 million. We had accrued interest of $2 million as of December 31, 2017. If not favorably settled, $5 million of the unrecognized tax benefits and all of the accrued interest would require the use of our cash. We do not expect changes during 2018 to our unrecognized tax benefits to have a significant impact on our financial position or results of operations.



Reconciliation of Unrecognized Tax Benefits
(In millions)	2017			2016			2015
Balance at January 1	$	63		$	54		$	81
Increases related to prior year tax positions	2			19			10
Decreases related to prior year tax positions	(2		)	(8		)	(10		)
Settlements	(8		)	(8		)	(14		)
Foreign currency impact	—			6			(15		)
Increases related to current year tax positions	—			1			2
Lapse of statute of limitations	(3		)	(1		)	—
Balance at December 31	$	52		$	63		$	54

We are open to examination in the United States for 2017 and in Germany from 2013 onward. Generally, for our remaining tax jurisdictions, years from 2012 onward are still open to examination.

Prior to the enactment of the Tax Act, our assertion regarding the potential U.S. Federal taxation of certain undistributed earnings of certain foreign subsidiaries required a reserve of $181 million which was established to account for potential strategies which may have been implemented to utilize certain U.S. tax attributes. With the enactment of the Tax Act, including a transition to the territorial system and a one-time transition tax on our foreign earnings previously untaxed in the United States, the reserve for the U.S. tax related to our prior assertion was no longer required and therefore released. As of December 31, 2017, we have changed our assertion and have established a reserve of $19 million related to foreign withholding taxes (net of foreign tax credits) that we would incur should we repatriate certain earnings.

We have undistributed earnings of foreign subsidiaries of approximately $1 billion where no provision for foreign withholding tax is required because such earnings have been or will be reinvested in property, plant and equipment and working capital. A withholding tax charge of approximately $74 million (net of foreign tax credits) would be required if these earnings were to be distributed.

Net cash payments for income taxes were $144 million, $153 million and $113 million in 2017, 2016 and 2015, respectively.