Income Taxes

The components of Income before Income Taxes follow:



(In millions)	2016		2015		2014
U.S.	$	595	$	284	$	400
Foreign	612		324		287
	$	1,207	$	608	$	687

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



(In millions)	2016			2015			2014
U.S. Federal income tax expense at the statutory rate of 35%	$	422		$	213		$	240
Net establishment (release) of foreign valuation allowances	(354		)	4			51
U.S. credits (R&D, foreign tax credits) and benefits offset to OCI	(163		)	(72		)	—
Adjustment for foreign income taxed at different rates	(51		)	(39		)	(37		)
Net establishment (release) of U.S. valuation allowance	39			(8		)	(2,318		)
State income taxes, net of U.S. Federal benefit	16			10			12
Net foreign losses (income) with no tax due to valuation allowances	8			(19		)	49
Net establishment (resolution) of uncertain tax positions	3			(13		)	3
Deferred tax impact of enacted tax rate and law changes	(2		)	(2		)	33
Deconsolidation of Venezuelan subsidiary	—			157			—
Provision for undistributed foreign earnings	—			—			131
Other	5			1			2
United States and Foreign Tax (Benefit) Expense	$	(77	)	$	232		$	(1,834	)

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



(In millions)	2016			2015			2014
Current:
Federal	$	(25	)	$	—		$	—
Foreign	175			154			135
State	2			(1		)	1
	152			153			136
Deferred:
Federal	77			74			(2,103		)
Foreign	(328		)	5			84
State	22			—			49
	(229		)	79			(1,970		)
United States and Foreign Tax (Benefit) Expense	$	(77	)	$	232		$	(1,834	)

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 are now in a position of cumulative profits for the most recent three-year period. As a consequence of this profitability in recent periods and our business plans for 2017 and beyond forecasting sustainable profitability, we now conclude that it is 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.

At December 31, 2014, our U.S. operations were in a position of cumulative profits for the most recent three-year period. We concluded that as a consequence of our three-year cumulative profits, achieving full year profitability in 2013 and 2014, our successful completion of labor negotiations with the United Steelworkers in 2013, our full funding of our U.S. pension plans during 2013 and 2014, and our business plan for 2015 and beyond showing continued profitability, that it was more likely than not that a significant portion of our U.S. deferred tax assets would be realized. In 2014, the income tax benefit of $1,834 million was favorably impacted by net discrete tax adjustments of $1,980 million, due primarily to a net tax benefit of $2,179 million from the December 31, 2014 release of substantially all of the valuation allowance on our net U.S. deferred tax assets and a charge of $131 million to establish a provision for potential U.S. Federal taxation of certain undistributed earnings of certain foreign subsidiaries. The 2014 income tax benefit also included charges of $37 million to establish valuation allowances on the net deferred tax assets of our Venezuelan and Brazilian subsidiaries, due to continuing operating losses and currency devaluations in Venezuela, a charge of $9 million to establish a valuation allowance on the net deferred tax assets of a Luxembourg subsidiary and a charge of $11 million due to an enacted law change in Chile.

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



(In millions)	2016			2015
Tax loss carryforwards and credits	$	1,503		$	1,415
Capitalized research and development expenditures	666			655
Accrued expenses deductible as paid	456			501
Postretirement benefits and pensions	294			288
Investment and receivables related to Venezuelan deconsolidation	134			157
Alternative minimum tax credit carryforwards⁽¹⁾	43			78
Vacation and sick pay	37			37
Rationalizations and other provisions	36			22
Other	106			121
	3,275			3,274
Valuation allowance	(326		)	(621		)
Total deferred tax assets	2,949			2,653
Property basis differences	(482		)	(459		)
Tax on undistributed earnings of subsidiaries	(138		)	(144		)
Total net deferred tax assets	$	2,329		$	2,050


(1)	Unlimited carryforward period.

At December 31, 2016, we had $507 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 $11 million of special enterprise zone tax credits subject to expiration in 2026. A valuation allowance totaling $187 million has been recorded against these and other deferred tax assets where recovery of the asset or carryforward is uncertain. In addition, we had $907 million of Federal and $89 million of state tax assets for net operating loss and tax credit carryforwards. The Federal carryforwards consist of $849 million of foreign tax credits that are subject to expiration from 2018 to 2025 and $58 million of tax assets related to research and development credits that are subject to expiration from 2030 to 2036. During 2016 we have elected early adoption of the FASB update on employee share-based payment accounting which has been applied using a modified retrospective approach. The December 31, 2015 amount of deferred tax assets reflected in the table above has been reduced by $56 million related to unrealized stock option deductions. The state carryforwards are subject to expiration from 2017 to 2034. A valuation allowance of $139 million has been recorded against Federal and state deferred tax assets where recovery is uncertain.

At December 31, 2016, we had unrecognized tax benefits of $63 million that if recognized, would have a favorable impact on our tax expense of $47 million. We had accrued interest of $4 million as of December 31, 2016. If not favorably settled, $12 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 2017 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)	2016			2015			2014
Balance at January 1	$	54		$	81		$	88
Increases related to prior year tax positions	19			10			15
Decreases related to prior year tax positions	(8		)	(10		)	(12		)
Settlements	(8		)	(14		)	(6		)
Foreign currency impact	6			(15		)	(4		)
Increases related to current year tax positions	1			2			—
Lapse of statute of limitations	(1		)	—			—
Balance at December 31	$	63		$	54		$	81

Generally, years from 2011 onward are still open to examination by foreign taxing authorities. We are open to examination in Germany from 2011 onward and in the United States from 2015.

We have undistributed earnings of foreign subsidiaries of approximately $1.8 billion for which deferred taxes have not been provided, including a portion of which that has already been subject to U.S. Federal income taxation. No provision for Federal income or foreign withholding tax on any of these undistributed earnings is required because such earnings have been or will be reinvested in property, plant and equipment and working capital. Quantification of the deferred tax liability net of applicable foreign tax credits, if any, associated with these undistributed earnings is not practicable. We have not recorded deferred tax assets for the excess of tax basis over book basis in our foreign subsidiaries as it is not expected to reverse in the foreseeable future.

Net cash payments for income taxes were $153 million, $113 million and $127 million in 2016, 2015 and 2014, respectively.