The components of International Paper’s earnings from continuing operations before income taxes and equity earnings by taxing jurisdiction were as follows:



In millions	2018		2017		2016
Earnings (loss)
U.S.	$	1,450	$	297	$	411
Non-U.S.	331		551		384
Earnings (loss) from continuing operations before income taxes and equity earnings	$	1,781	$	848	$	795

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the Tax Act). The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to, (1) reducing the U.S. federal corporate tax rate from 35% to 21%; (2) requiring companies to pay a one-time deemed repatriation transition tax (the Transition Tax) on certain earnings of

foreign subsidiaries; (3) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries; (4) requiring a current inclusion in U.S. federal taxable income of certain earnings of controlled foreign corporations; (5) eliminating the corporate alternative minimum tax (AMT) and changing how AMT

credits can be realized; (6) capital expensing; (7) eliminating the deduction on U.S. manufacturing activities; and (8) creating new limitations on deductible interest expense and executive compensation.

The Securities Exchange Commission staff issued Staff Accounting Bulletin (SAB) 118 which provided guidance on accounting for the tax effects of the Tax Act. SAB 118 provided a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company had to reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act was incomplete but it was able to determine a reasonable estimate, it was required to record a provisional estimate in the financial statements. The Company has completed its analysis of the one-time impacts of the Tax Act within the one year measurement period.

In connection with our initial analysis of the impact of the Tax Act, we recorded a provisional net tax benefit of $1.22 billion in the period ending December 31, 2017. The net tax benefit primarily consisted of a net tax benefit for the re-measurement of U.S. deferred taxes of $1.454 billion and an expense for the Transition Tax of $231 million. During the SAB 118 measurement period in the year ended December 31, 2018, we recorded an additional net tax benefit of $36 million associated with the one-time effects of the Tax Act.

Reduction of U.S. federal corporate tax rate: The Tax Act reduced the corporate tax rate to 21%, effective January 1, 2018. For certain of our deferred tax assets and liabilities, we recorded a provisional net decrease of $1.451 billion with a corresponding adjustment to deferred income tax benefit in the same amount for the year ended December 31, 2017. After the completion of the federal income tax return during the third quarter and state tax returns in the fourth quarter, we recognized an adjustment of $11 million from the remeasurement of certain temporary differences. The tax benefit of the measurement-period adjustment on the 2018 effective tax rate was approximately 0.6%. A total decrease of the deferred tax liabilities by $1.462 billion has been recorded to date with a corresponding adjustment of $1.462 billion to income tax benefit.

Deemed Repatriation Transition Tax: This is a tax on previously untaxed accumulated and current earnings and profits (E&P) of foreign subsidiaries. To determine the amount of the transition tax, we must determine, in addition to other factors, the amount of post-1986 E&P of the relevant subsidiaries, as well as the amount of non-U.S. income taxes paid on such earnings. We were able to make a reasonable estimate of the Transition Tax and recorded a provisional Transition Tax obligation of $231 million in the period ended December 31, 2017. On the basis of revised E&P computations that were calculated during the SAB 118 measurement period, as well as the impacts of guidance received from the IRS pertaining to the Transition Tax computation, we recognized an adjustment of $25 million related to the Transition Tax obligation. The tax benefit of the measurement-period adjustment on the 2018 effective tax rate was approximately 1.4%. A total Transition Tax obligation of $206 million has been recorded.

Valuation Allowances: The Company has assessed whether its U.S. state and local income tax valuation allowance analysis is affected by various aspects of the

Tax Act (e.g. deemed repatriation of foreign income, acceleration of cost recovery). For certain of our state deferred tax assets, we recorded a net $3 million provisional decrease in the recorded valuation allowance with a corresponding adjustment to deferred income tax benefit in the same amount for the year ended December 31, 2017. The Company has determined at the conclusion of the SAB 118 measurement period that the Tax Act had no additional direct impact on the state and local income tax valuation allowance. Therefore the accounting for this item is complete and no change was recorded in the year ended December 31, 2018.

Global Intangible Low-Taxed Income (GILTI): The Tax Act subjects a U.S. shareholder to current tax on GILTI earned by certain foreign subsidiaries. The FASB Staff Q&A, Topic 740 No. 5, "Accounting for Global Intangible Low-Taxed Income," states that an entity can make an accounting policy election to either recognize deferred taxes for temporary differences expected to reverse as GILTI in future years, or provide for the tax expense related to GILTI in the year the tax is incurred. We have elected to recognize the tax on GILTI as a period expense in the period the tax is incurred.

Undistributed Earnings of Subsidiaries: The Company provides for foreign withholding taxes and any applicable U.S. state income taxes on earnings intended to be repatriated from non-U.S. subsidiaries, which we believe will be limited in the future to each year's current earnings. No provision for these taxes on approximately $1.7 billion of undistributed earnings of non-U.S. subsidiaries as of December 31, 2018 has been made, as these earnings are considered indefinitely invested. Determination of the amount of taxes that might be paid on these undistributed earnings if eventually remitted in a taxable manner is not practicable.

If management decided to monetize the Company’s foreign investments, we would recognize the tax cost related to the excess of the book value over the tax basis of those investments. This would include foreign withholding taxes and any applicable U.S. Federal and state income taxes. Determination of the tax cost that that would be incurred upon monetization of the Company’s foreign investments is not practicable; however, we do not believe it would be material.

The provision (benefit) for income taxes from continuing operations (excluding noncontrolling interests) by taxing jurisdiction was as follows:



In millions	2018			2017			2016
Current tax provision (benefit)
U.S. federal	$	227		$	(73	)	$	(7	)
U.S. state and local	37			(23		)	(12		)
Non-U.S.	165			112			76
	$	429		$	16		$	57
Deferred tax provision (benefit)
U.S. federal	$	12		$	(1,150	)	$	134
U.S. state and local	50			9			27
Non-U.S.	(46		)	40			(25		)
	$	16		$	(1,101	)	$	136
Income tax provision (benefit)	$	445		$	(1,085	)	$	193

The Company’s deferred income tax provision (benefit) includes a $13 million benefit, a $1.459 billion benefit and a $18 million provision for 2018, 2017 and 2016, respectively, for the effect of various changes in non-U.S. and U.S. federal and state tax rates.

International Paper made income tax payments, net of refunds, of $388 million, $7 million and $90 million in 2018, 2017 and 2016, respectively.

A reconciliation of income tax expense using the statutory U.S. income tax rate compared with the actual income tax provision follows:



In millions	2018			2017			2016
Earnings (loss) from continuing operations before income taxes and equity earnings	$	1,781		$	848		$	795
Statutory U.S. income tax rate	21		%	35		%	35		%
Tax expense (benefit) using statutory U.S. income tax rate	374			297			278
State and local income taxes	72			(7		)	8
Impact of rate differential on non-U.S. permanent differences and earnings	35			(36		)	(26		)
Tax expense (benefit) on manufacturing activities	(1		)	23			(10		)
Non-deductible business expenses	27			7			9
Sale of non-strategic assets	—			—			12
Tax audits	28			—			(14		)
Subsidiary liquidation	—			—			(63		)
Deemed repatriation, net of foreign tax credits	(25		)	231			—
U.S. federal tax rate change	(13		)	(1,451		)	—
Foreign derived intangible income deduction	(25		)	—			—
US tax on non-U.S. earnings (GILTI and Subpart F)	19			44			21
Foreign tax credits	(15		)	(96		)	(11		)
General business and other tax credits	(26		)	(86		)	(15		)
Other, net	(5		)	(11		)	4
Income tax provision (benefit)	$	445		$	(1,085	)	$	193
Effective income tax rate	25		%	(128		)%	24		%

The tax effects of significant temporary differences, representing deferred income tax assets and liabilities at December 31, 2018 and 2017, were as follows:



In millions	2018			2017
Deferred income tax assets:
Postretirement benefit accruals	$	89		$	102
Pension obligations	465			516
Alternative minimum and other tax credits	291			416
Net operating and capital loss carryforwards	594			665
Compensation reserves	191			174
Other	164			139
Gross deferred income tax assets	1,794			2,012
Less: valuation allowance (a)	(441		)	(429		)
Net deferred income tax asset	$	1,353		$	1,583
Deferred income tax liabilities:
Intangibles	$	(152	)	$	(139	)
Investments	(255		)	—
Plants, properties and equipment	(1,826		)	(2,000		)
Forestlands, related installment sales, and investment in subsidiary	(1,453		)	(1,454		)
Gross deferred income tax liabilities	$	(3,686	)	$	(3,593	)
Net deferred income tax liability	$	(2,333	)	$	(2,010	)

(a) The net change in the total valuation allowance for the years ended December 31, 2018 and 2017 was an increase of $12 million and an increase of $26 million, respectively.

Deferred income tax assets and liabilities are recorded in the accompanying consolidated balance sheet under the captions Deferred charges and other assets and Deferred income taxes. There was a decrease in deferred income tax assets principally relating to the utilization of U.S. Federal alternative minimum tax credits as permitted under Tax Reform. Deferred tax liabilities increased primarily due to the tax deferral of the book gain recognized on the transfer of the North American Consumer Packaging business to a subsidiary of Graphic Packaging Holding Company. Of the $1.5 billion of deferred tax liabilities for forestlands, related installment sales, and investment in subsidiary, $884 million is attributable to an investment in subsidiary and relates to a 2006 International Paper installment sale of forestlands and $538 million is attributable to a 2007 Temple-Inland installment sale of forestlands (see Note 14).

A reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended December 31, 2018, 2017 and 2016 is as follows:



In millions	2018			2017			2016
Balance at January 1	$	(188	)	$	(98	)	$	(150	)
(Additions) reductions based on tax positions related to current year	(7		)	(54		)	(4		)
(Additions) for tax positions of prior years	(37		)	(40		)	(3		)
Reductions for tax positions of prior years	5			4			33
Settlements	2			6			19
Expiration of statutes of limitations	2			1			5
Currency translation adjustment	3			(7		)	2
Balance at December 31	$	(220	)	$	(188	)	$	(98	)

If the Company were to prevail on the unrecognized tax benefits recorded, substantially all of the balances at December 31, 2018, 2017 and 2016 would benefit the effective tax rate.

The Company accrues interest on unrecognized tax benefits as a component of interest expense. Penalties, if incurred, are recognized as a component of income

tax expense. The Company had approximately $21 million and $17 million accrued for the payment of

estimated interest and penalties associated with unrecognized tax benefits at December 31, 2018 and 2017, respectively.

The major jurisdictions where the Company files income tax returns are the United States, Brazil, France, Poland and Russia. Generally, tax years 2006 through 2017 remain open and subject to examination by the relevant tax authorities. The Company frequently faces challenges regarding the amount of taxes due. These challenges include positions taken by the Company related to the timing, nature, and amount of deductions and the allocation of income among various tax jurisdictions. Pending audit settlements and the expiration of statute of limitations could reduce the uncertain tax positions by $30 million during the next twelve months.

The Brazilian Federal Revenue Service has challenged the deductibility of goodwill amortization generated in a 2007 acquisition by International Paper do Brasil Ltda., a wholly-owned subsidiary of the Company. The Company received assessments for the tax years 2007-2015 totaling approximately $150 million in tax, and $380 million in interest and penalties as of December 31, 2018 (adjusted for variation in currency exchange rates). After a previous favorable ruling challenging the basis for these assessments, we received an unfavorable decision in October 2018 from the Brazilian Administrative Council of Tax Appeals. The Company intends to further appeal the matter in the Brazilian federal courts in 2019; however, this tax litigation matter may take many years to resolve. The Company believes that it has appropriately evaluated the transaction underlying these assessments, and has concluded based on Brazilian tax law, that its tax position would be sustained. The Company intends to vigorously defend its position against the current assessments and any similar assessments that may be issued for tax years subsequent to 2015.

International Paper uses the flow-through method to account for investment tax credits earned on eligible open-loop biomass facilities and combined heat and power system expenditures. Under this method, the investment tax credits are recognized as a reduction to income tax expense in the year they are earned rather than a reduction in the asset basis. The Company recorded a tax benefit of $6 million during 2018 and recorded a tax benefit of $68 million during 2017 related to Investment Tax Credits earned in tax years 2013-2017.

The following details the scheduled expiration dates of the Company’s net operating loss and income tax credit carryforwards:



In millions	2019 Through 2028			2029 Through 2038			Indefinite			Total
U.S. federal and non-U.S. NOLs	$	53		$	—		$	417		$	470
State taxing jurisdiction NOLs (a)	80			42			—			122
U.S. federal, non- U.S. and state tax credit carryforwards (a)	162			11			118			291
U.S. federal and state capital loss carryforwards (a)	2			—			—			2
Total	$	297		$	53		$	535		$	885
Less: valuation allowance (a)	(192		)	(8		)	(198		)	(398		)
Total, net	$	105		$	45		$	337		$	487

(a) State amounts are presented net of federal benefit.