INCOME TAXES

The components of income before income taxes and the provision for income taxes were as follows:



(millions)	2016			2015			2014
Income before income taxes
United States	$	830		$	551		$	502
Foreign	97			222			323
	927			773			825
Income taxes
Currently payable
Federal	173			212			301
State	26			42			36
Foreign	60			74			103
	259			328			440
Deferred
Federal	16			(136		)	(186		)
State	6			(14		)	(14		)
Foreign	(48		)	(19		)	(54		)
	(26		)	(169		)	(254		)
Total income taxes	$	233		$	159		$	186

The difference between the U.S. federal statutory tax rate and the Company’s effective income tax rate was:



	2016		2015		2014
U.S. statutory income tax rate	35.0		35.0	%	35.0	%
Foreign rates varying from 35%	(5.0	)	(9.6	)	(7.9	)
Excess tax benefits on share-based compensation	(3.7	)	—		—
State income taxes, net of federal benefit	2.4		2.3		1.7
Cost (benefit) of remitted and unremitted foreign earnings	0.1		(4.4	)	(0.1	)
U.S. deduction for qualified production activities	(2.8	)	(2.3	)	(2.8	)
Statutory rate changes, deferred tax impact	(0.1	)	(0.8	)	(0.4	)
Venezuela deconsolidation	1.8		—		—
Venezuela remeasurement	0.4		5.0		—
VIE deconsolidation	—		(2.3	)	—
Other	(2.9	)	(2.3	)	(2.9	)
Effective income tax rate	25.2	%	20.6	%	22.6	%

As presented in the preceding table, the Company’s 2016 consolidated effective tax rate was 25.2%, as compared to 20.6% in 2015 and 22.6% in 2014.

The 2016 effective income tax rate benefited from excess tax benefits from share-based compensation totaling $36 million for federal, state, and foreign income taxes. During 2016, as described in Note 16, the Company deconsolidated its Venezuelan operations resulting in a pre-tax charge of $72 million with no significant associated tax benefit. As of December 31, 2016 substantially all foreign earnings were considered permanently invested. Accumulated foreign earnings of approximately $1.9 billion, primarily in Europe, were considered indefinitely reinvested. Due to the varying tax laws around the world and fluctuation in foreign exchange rates, it is not practicable to determine the unrecognized deferred tax liability on these earnings because the actual tax liability, if any, would be dependent on circumstances existing when a repatriation, sale, or liquidation occurs.

The 2015 effective income tax rate benefited due to mark-to-market loss adjustments to the Company’s pension plans in primarily higher tax jurisdictions. This resulted in a greater percentage of total income being generated in lower tax jurisdictions and permanent tax differences in the U.S. having a higher percentage impact on the tax rate. In addition, the tax rate benefited from a reduction in tax related to current year remitted and unremitted earnings. The VIE deconsolidation, described in Note 6, included a $67 million non-cash non-taxable gain which positively impacted the tax rate. During 2015, the Company recorded pre-tax charges of $112 million in the Latin America operating segment due to the devaluation of the Venezuelan currency which had no associated tax benefit. As of January 2, 2016 substantially all foreign earnings were considered permanently invested. Accumulated foreign earnings of approximately $2.0 billion, primarily in Europe, were considered indefinitely reinvested. Due to the varying tax laws around the world and fluctuation in foreign exchange rates, it is not practicable to determine the unrecognized deferred tax liability on these earnings because the actual tax liability, if any, would be dependent on circumstances existing when a repatriation, sale, or liquidation occurs.

The 2014 effective income tax rate benefited due to mark-to-market loss adjustments to the Company’s pension plans in primarily higher tax jurisdictions. This results in a greater percentage of total income being generated in lower tax jurisdictions and permanent tax differences in the U.S. having a higher percentage impact on the tax rate. As of January 3, 2015, the Company recorded a deferred tax liability of $1 million related to $23 million of foreign earnings not considered indefinitely reinvested. Accumulated foreign earnings of approximately $2.2 billion, primarily in Europe, were considered indefinitely reinvested. Due to varying tax laws around the world

and fluctuations in foreign exchange rates, it is not practicable to determine the unrecognized deferred tax liability on these earnings because the actual tax liability, if any, would be dependent on circumstances existing when a repatriation, sale or liquidation occurs.

Management monitors the Company’s ability to utilize certain future tax deductions, operating losses and tax credit carryforwards, prior to expiration. Changes resulting from management’s assessment will result in impacts to deferred tax assets and the corresponding impacts on the effective income tax rate. Valuation allowances were recorded to reduce deferred tax assets to an amount that will, more likely than not, be realized in the future. The total tax benefit of carryforwards at year-end 2016 and 2015 were $119 million and $55 million, respectively, with related valuation allowances at year-end 2016 and 2015 of $113 million and $45 million, respectively. Of the total carryforwards at year-end 2016, substantially all will expire after 2020.

The following table provides an analysis of the Company’s deferred tax assets and liabilities as of year-end 2016 and 2015. Deferred tax assets on employee benefits increased in 2016 due to lower asset returns and discount rate decreases associated with the Company’s pension and postretirement plans.



	Deferred tax assets						Deferred tax liabilities
(millions)	2016			2015			2016		2015
U.S. state income taxes	$	—		$	13		$	34	$	43
Advertising and promotion-related	17			15			—		—
Wages and payroll taxes	42			21			—		—
Inventory valuation	28			31			—		—
Employee benefits	403			366			—		—
Operating loss and credit carryforwards	119			55			—		—
Hedging transactions	—			43			—		—
Depreciation and asset disposals	—			—			318		345
Trademarks and other intangibles	—			—			602		576
Deferred compensation	38			35			—		—
Stock options	41			42			—		—
Other	42			86			—		—
	730			707			954		964
Less valuation allowance	(131		)	(63		)	—		—
Total deferred taxes	$	599		$	644		$	954	$	964
Net deferred tax asset (liability)	$	(355	)	$	(320	)
Classified in balance sheet as:
Other current assets	$	—		$	227
Other current liabilities	—			(9		)
Other assets	170			147
Other liabilities	(525		)	(685		)
Net deferred tax asset (liability)	$	(355	)	$	(320	)

The change in valuation allowance reducing deferred tax assets was:



(millions)	2016			2015			2014
Balance at beginning of year	$	63		$	51		$	61
Additions charged to income tax expense (a)	70			23			9
Reductions credited to income tax expense	(4		)	(7		)	(3		)
Currency translation adjustments	2			(4		)	(16		)
Balance at end of year	$	131		$	63		$	51

(a) During 2016, the Company increased its deferred tax assets by $34 million relating to a revision of 2014 foreign loss carryforwards. The entire adjustment of $34 million was offset by a corresponding adjustment in the valuation allowance because it is not expected to be used in the future. These adjustments are not considered material to the previously issued or current year financial statements. Also during 2016, the Company increased its deferred tax assets by $26 million related to a foreign loss carryforward. The entire amount was offset by a corresponding valuation allowance because it is not expected to be used in the future.

Uncertain tax positions

The Company is subject to federal income taxes in the U.S. as well as various state, local, and foreign jurisdictions. The Company’s 2016 provision for U.S. federal income taxes represents approximately 80% of the Company’s consolidated income tax provision. The Company was chosen to participate in the Internal Revenue Service (IRS) Compliance Assurance Program (CAP) beginning with the 2008 tax year. As a result, with limited exceptions, the Company is no longer subject to U.S. federal examinations by the IRS for years prior to 2016. The Company is under examination for income and non-income tax filings in various state and foreign jurisdictions.

As of December 31, 2016, the Company has classified $16 million of unrecognized tax benefits as a current liability. Management’s estimate of reasonably possible changes in unrecognized tax benefits during the next twelve months is comprised of the current liability balance expected to be settled within one year, offset by approximately $6 million of projected additions related primarily to ongoing intercompany transfer pricing activity. Management is currently unaware of any issues under review that could result in significant additional payments, accruals, or other material deviation in this estimate.

Following is a reconciliation of the Company’s total gross unrecognized tax benefits as of the years ended December 31, 2016, January 2, 2016 and January 3, 2015. For the 2016 year, approximately $42 million represents the amount that, if recognized, would affect the Company’s effective income tax rate in future periods.



(millions)	2016			2015			2014
Balance at beginning of year	$	73		$	78		$	79
Tax positions related to current year:
Additions	6			8			7
Tax positions related to prior years:
Additions	1			9			10
Reductions	(14		)	(12		)	(12		)
Settlements	1			(10		)	(2		)
Lapses in statutes of limitation	(4		)	—			(4		)
Balance at end of year	$	63		$	73		$	78

For the year ended December 31, 2016, the Company recognized $2 million of tax-related interest resulting in an accrual balance of $19 million at year-end. For the year ended January 2, 2016, the Company paid tax-related interest totaling $3 million reducing the accrual balance to $17 million at year end. For the year ended January 3, 2015, the Company recognized of $3 million of tax-related interest resulting in an accrual balance of $20 million at January 3, 2015.