Income Taxes

The components of Income before Income Taxes follow:



(In millions)	2018		2017		2016
U.S.	$	439	$	394	$	595
Foreign	572		484		612
	$	1,011	$	878	$	1,207

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



(In millions)	2018			2017			2016
U.S. federal income tax expense at the statutory rate of 21% (35% for 2017 and 2016)	$	212		$	307		$	422
Adjustment for foreign income taxed at different rates	30			(55		)	(51		)
Net establishment of U.S. valuation allowance	25			5			39
U.S. charges (benefits) related to foreign tax credits and R&D	20			(23		)	(163		)
Net establishment (resolution) of uncertain tax positions	18			(6		)	3
Provision for undistributed foreign earnings, net	(9		)	(162		)	—
Transition tax	8			77			—
Net foreign losses (income) with no tax due to valuation allowances	7			(7		)	8
Net establishment (release) of foreign valuation allowances	(5		)	1			(354		)
State income taxes, net of U.S. federal benefit	(1		)	9			16
Domestic production activities deduction	(1		)	(16		)	(3		)
Other	(1		)	(6		)	8
Deferred tax impact of enacted tax rate and law changes	—			389			(2		)
United States and Foreign Tax Expense (Benefit)	$	303		$	513		$	(77	)

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



(In millions)	2018			2017			2016
Current:
Federal	$	(15	)	$	(22	)	$	(25	)
Foreign	188			166			175
State	(1		)	3			2
	172			147			152
Deferred:
Federal	120			389			77
Foreign	6			(8		)	(328		)
State	5			(15		)	22
	131			366			(229		)
United States and Foreign Tax Expense (Benefit)	$	303		$	513		$	(77	)

In 2018, income tax expense of $303 million was unfavorably impacted by net discrete adjustments of $65 million. Discrete adjustments were primarily due to charges totaling $135 million related to deferred tax assets for foreign tax credits, partially offset by a tax benefit of $88 million related to a worthless stock deduction created by permanently ceasing operations of our Venezuelan subsidiary during the fourth quarter of 2018. Income tax expense in 2018 also included net charges of $18 million for various other discrete tax adjustments, including those related to finalizing our accounting for certain provisional items related to the Tax Cuts and Jobs Act that was enacted on December 22, 2017 (the "Tax Act") as discussed below.

During the fourth quarter of 2018, we wrote off $37 million in deferred tax assets for foreign tax credits that expired during the year and established a valuation allowance of $98 million against foreign tax credits expiring primarily in 2021, as we have now concluded that it is not more likely than not that we will be able to utilize these credits prior to their expiration. These charges reflect the recognition of the $88 million discrete tax benefit related to our Venezuelan subsidiary that reduced taxable income that otherwise would have utilized foreign tax credits. We also considered our forecasts of future profitability in assessing our ability to realize our foreign tax credits. These forecasts were prepared in connection with our annual budgeting process and include the impact of recent trends, including various macroeconomic factors such as rising raw material prices, on our profitability, as well as the impact of tax planning strategies. Macroeconomic factors, including raw material prices, possess a high degree of volatility and can significantly impact our profitability. As such, there is a risk that future foreign source income will not be sufficient to fully utilize these foreign tax credits. However, we believe our forecasts of future profitability along with three significant sources of foreign income provide us sufficient positive evidence to conclude that it is more likely than not that the remaining foreign tax credits of $637 million will be fully utilized, despite the negative evidence of their limited carryforward periods.

The Tax Act established a corporate income tax rate of 21%, replacing the former 35% rate, and created a territorial tax system rather than a worldwide system, which generally eliminated the U.S. federal income tax on dividends from foreign subsidiaries. The transition to the territorial system included a one-time transition tax on certain of our foreign earnings previously untaxed in the United States (the "transition tax"). The Securities and Exchange Commission provided up to a one-year measurement period for companies to finalize the accounting for the impacts of this new legislation. As required, we finalized our accounting for items previously considered provisional during 2018. At December 31, 2017, we recorded an initial non-cash net charge to tax expense of $299 million related to the enactment of the Tax Act. Our final accounting has adjusted this non-cash net charge to $298 million. 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. No measurement period adjustment was necessary and this calculation is complete. The net charge also originally included 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. In the fourth quarter of 2018, we finalized our accounting and increased the provisional amount by $9 million to $171 million to reflect U.S. tax guidance issued during the year and to reflect our final indefinite reinvestment assertion. We were able to reasonably estimate the transition tax and recorded an initial provisional tax obligation of $77 million at December 31, 2017. In general, the 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. Adjusted for U.S. tax guidance issued during 2018 and the impact of changes to E&P of our subsidiaries resulting from the filing of our 2017 corporate income tax return during the fourth quarter of 2018, we have now finalized our accounting and recognized an additional measurement period adjustment of $8 million, resulting in a total transition tax obligation of $85 million.

On January 15, 2019, the IRS finalized regulations that govern the transition tax. We are in the process of analyzing these regulations. We do not expect any material impact to our financial statements as a consequence of the final regulations.

The Tax Act subjects a U.S. parent to current tax on its "global intangible low-taxed income" ("GILTI"). We do not anticipate incurring a GILTI liability, however, to the extent that we incur expense under the GILTI provisions we will treat it as a component of income tax expense in the period incurred.

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 Act and a net benefit of $5 million for other miscellaneous discrete tax items.

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 had maintained a full valuation allowance 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 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 would 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 subsidiary 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.

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



(In millions)	2018			2017
Tax loss carryforwards and credits	$	1,473		$	1,515
Capitalized research and development expenditures	404			402
Accrued expenses deductible as paid	261			297
Postretirement benefits and pensions	207			223
Deferred interest deductions	40			—
Rationalizations and other provisions	26			36
Vacation and sick pay	23			24
Investment and receivables related to Venezuelan deconsolidation	—			80
Other	111			85
	2,545			2,662
Valuation allowance	(317		)	(318		)
Total deferred tax assets	2,228			2,344
Property basis differences	(475		)	(414		)
Tax on undistributed earnings of subsidiaries	(1		)	(22		)
Total net deferred tax assets	$	1,752		$	1,908

At December 31, 2018, we had $562 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 $60 million of tax credits in various European countries that are subject to expiration from 2019 to 2028. A valuation allowance totaling $204 million has been recorded against these and other deferred tax assets where recovery of the asset or carryforward is uncertain. In addition, we had $815 million of federal and $96 million of state tax assets for net operating loss and tax credit carryforwards. The federal carryforwards consist of $740 million of foreign tax credits that are subject to expiration from 2019 to 2028 and $75 million of tax assets related to research and development credits and other federal credits that are subject to expiration from 2030 to 2038. The state carryforwards are subject to expiration from 2019 to 2034. A valuation allowance of $113 million has been recorded against federal and state deferred tax assets, primarily federal carryforwards for foreign tax credits, where recovery is uncertain.

At December 31, 2018, we had unrecognized tax benefits of $71 million that if recognized, would have a favorable impact on our tax expense of $71 million. We had accrued interest of $2 million as of December 31, 2018. If not favorably settled, $6 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 2019 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)	2018			2017			2016
Balance at January 1	$	52		$	63		$	54
Increases related to prior year tax positions	9			2			19
Decreases related to prior year tax positions	(1		)	(2		)	(8		)
Settlements	(2		)	(8		)	(8		)
Foreign currency impact	(5		)	—			6
Increases related to current year tax positions	21			—			1
Lapse of statute of limitations	(3		)	(3		)	(1		)
Balance at December 31	$	71		$	52		$	63

We are open to examination in the United States for 2018 and in Germany from 2013 onward. Generally, for our remaining tax jurisdictions, years from 2013 onward are still open to examination.

We have undistributed earnings and profits of our foreign subsidiaries totaling approximately $2.2 billion at December 31, 2018 as compared to approximately $2.8 billion at December 31, 2017. During 2018, we repatriated approximately $900 million of undistributed earnings to the United States primarily representing dividends and return of capital from subsidiaries in Singapore, Luxembourg and Japan. As required, we finalized our indefinite reinvestment assertion under the Tax Act during the fourth quarter of 2018 and, as a consequence, concluded that no provision for tax in the United States is required because substantially all of the remaining undistributed earnings and profits have been or will be reinvested in property, plant and equipment and working capital outside of the United States. A foreign withholding tax charge of approximately $77 million (net of foreign tax credits) would be required if these earnings and profits were to be distributed to the United States.

Net cash payments for income taxes were $178 million, $144 million and $153 million in 2018, 2017 and 2016, respectively.