

(In millions)	2019			2018			2017
U.S. federal income tax expense at the statutory rate of 21% (35% for 2017)	$	37		$	212		$	307
Federal and state tax on accelerated royalty income transaction	334			—			—
Net establishment (release) of foreign valuation allowances	140			(5		)	1
Net establishment (release) of U.S. valuation allowances	(98		)	25			5
Net foreign losses (income) with no tax due to valuation allowances	48			7			(7		)
U.S. charges (benefits) related to foreign tax credits, R&D and foreign derived intangible deduction	(17		)	20			(23		)
Adjustment for foreign income taxed at different rates	16			30			(55		)
Net establishment (resolution) of uncertain tax positions	7			18			(6		)
Deferred tax impact of enacted tax rate and law changes	3			—			389
State income taxes, net of U.S. federal benefit	(1		)	(1		)	9
Provision for undistributed foreign earnings, net	—			(9		)	(162		)
Transition tax	—			8			77
Domestic production activities deduction	—			(1		)	(16		)
Other	5			(1		)	(6		)
United States and Foreign Tax Expense	$	474		$	303		$	513



(In millions)	2019		2018			2017
Current:
Federal	$	—	$	(15	)	$	(22	)
Foreign	134		188			166
State	17		(1		)	3
	151		172			147
Deferred:
Federal	133		120			389
Foreign	153		6			(8		)
State	37		5			(15		)
	323		131			366
United States and Foreign Tax Expense	$	474	$	303		$	513

Income tax expense in 2019 was $474 million on income before income taxes of $177 million. In 2019, income tax expense was unfavorably impacted by net discrete adjustments totaling $386 million. Discrete adjustments were due to non-cash charges of $334 million related to an acceleration of royalty income in the U.S. from the sale of certain European royalty payments to Luxembourg and $150 million related to an increase in our valuation allowance on tax losses in Luxembourg, which were partially offset by a non-cash tax benefit of $98 million related to a reduction of our U.S. valuation allowance for foreign tax credits.

We consider both positive and negative evidence when measuring the need for a valuation allowance. The weight given to the evidence is commensurate with the extent to which it may be objectively verified. Current and cumulative financial reporting results are a source of objectively verifiable evidence. We give operating results during the most recent three-year period a significant weight in our analysis. We typically only consider forecasts of future profitability when positive cumulative operating results exist in the most recent three-year period. We perform scheduling exercises to determine if sufficient taxable income of the appropriate character exists in the periods required in order to realize our deferred tax assets with limited lives (such as tax loss carryforwards and tax credits) prior to their expiration. We consider tax planning strategies available to accelerate taxable amounts if required to utilize expiring deferred tax assets. A valuation allowance is not required to the extent that, in our judgment, positive evidence exists with a magnitude and duration sufficient to result in a conclusion that it is more likely than not that our deferred tax assets will be realized.

At December 31, 2019, our net deferred tax assets include approximately $403 million of foreign tax credits, net of a valuation allowance of $3 million, as compared to $637 million, net of a valuation allowance of $103 million, at December 31, 2018. If not utilized, these foreign tax credits will expire from 2022 to 2028. These credits were generated primarily from the receipt of foreign dividends. Our earnings and forecasts of future profitability along with three significant sources of foreign income provide us sufficient positive evidence to utilize these credits, despite the negative evidence of their limited carryforward periods. Those sources of foreign income are (1) 100% of our domestic profitability can be re-characterized as foreign source income under current U.S. tax law to the extent domestic losses have offset foreign source income in prior years, (2) annual net foreign source income, exclusive of dividends, primarily from royalties, and (3) tax planning strategies, including capitalizing research and development costs, accelerating income on cross border sales of inventory or raw materials to our subsidiaries and reducing U.S. interest expense by, for example, reducing intercompany loans through repatriating current year earnings of foreign subsidiaries, all of which would increase our domestic profitability.

Foreign source taxable income for the fourth quarter of 2019 includes accelerated royalty income in the U.S. of $2.1 billion received from Luxembourg as payment for the purchase of the right to receive technology royalties from our European operations for a period of 12 years. External specialists assisted management with this transaction. The royalty sale transaction resulted in a U.S. tax charge of $334 million and a deferred tax asset and offsetting valuation allowance of $576 million in Luxembourg.

Foreign source taxable income for the fourth quarter of 2019 also includes $320 million of accelerated cross-border sales of inventory from the U.S. to Canada, resulting in a U.S. tax charge of approximately $70 million that was offset by the establishment of a deferred tax asset.

The federal portion of the tax charges related to both the royalty acceleration and Canadian prepayment transactions was fully offset by the utilization of foreign tax credits of approximately $310 million. In addition, as a result of these transactions, we released an existing U.S. valuation allowance on foreign tax credits of $98 million.

We considered our current forecasts of future profitability in assessing our ability to realize our remaining net foreign tax credits. These forecasts include the impact of recent trends, including various macroeconomic factors such as 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 the three significant sources of foreign income described above provide us sufficient positive evidence to conclude that it is more likely than not that our foreign tax credits, net of remaining valuation allowances, will be fully utilized prior to their various expiration dates.

Our losses in various foreign taxing jurisdictions in recent periods represented sufficient negative evidence to require us to maintain a full valuation allowance against certain of our net deferred tax assets. In Luxembourg, we maintained a valuation allowance on all deferred tax assets with limited lives. As a result of recent negative evidence, including cumulative losses in the most recent three-year period and a forecast of continued losses for 2020, we increased our valuation allowance on our net deferred tax assets in Luxembourg to now include losses with unlimited lives, resulting in a non-cash tax charge of $150 million. Each reporting period we assess available positive and negative evidence and estimate if sufficient future taxable income will be generated to utilize these existing deferred tax assets. We do not believe that sufficient positive evidence required to release valuation allowances having a significant impact on our financial position or results of operations will exist within the next twelve months.

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, including the establishment of a valuation allowance on foreign tax credits of $98 million, 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

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 millions)	2019			2018
Tax loss carryforwards and credits	$	1,159		$	1,473
Prepaid royalty income	576			—
Capitalized research and development expenditures	416			404
Accrued expenses deductible as paid	347			261
Postretirement benefits and pensions	221			207
Rationalizations and other provisions	38			26
Vacation and sick pay	23			23
Deferred interest deductions	—			40
Other	106			111
	2,886			2,545
Valuation allowance	(982		)	(317		)
Total deferred tax assets	1,904			2,228
Property basis differences	(466		)	(475		)
Tax on undistributed earnings of subsidiaries	(1		)	(1		)
Total net deferred tax assets	$	1,437		$	1,752

At December 31, 2019, we had $611 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 $63 million of tax credit carryforwards in various European countries that are subject to expiration from 2020 to 2029. On December 31, 2019, deferred taxes included $576 million for the prepaid royalty income in Luxembourg, as further described above. A valuation allowance totaling $969 million has been recorded against these and other deferred tax assets where recovery of the asset or carryforward is uncertain. In addition, we had $489 million of federal and $59 million of state tax assets for net operating loss and tax credit carryforwards. The federal carryforwards consist of $406 million of foreign tax credits that are subject to expiration from 2022 to 2028 and $83 million of tax assets related to research and development credits and other federal credits that are subject to expiration from 2030 to 2039. The state carryforwards are subject to expiration from 2020 to 2034. A valuation allowance of $13 million has been recorded against federal and state deferred tax assets where recovery is uncertain.

At December 31, 2019, we had unrecognized tax benefits of $82 million that if recognized, would have a favorable impact on our tax expense of $56 million. We had accrued interest of $1 million as of December 31, 2019. 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 2020 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)	2019			2018			2017
Balance at January 1	$	71		$	52		$	63
Increases related to prior year tax positions	24			9			2
Decreases related to prior year tax positions	—			(1		)	(2		)
Settlements	(11		)	(2		)	(8		)
Foreign currency impact	(2		)	(5		)	—
Increases related to current year tax positions	—			21			—
Lapse of statute of limitations	—			(3		)	(3		)
Balance at December 31	$	82		$	71		$	52

We have undistributed earnings and profits of our foreign subsidiaries totaling approximately $2.4 billion at December 31, 2019. We have 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 $80 million (net of foreign tax credits) would be required if these earnings and profits were to be distributed to the United States.