Income Taxes

Components of earnings (loss) from continuing operations before income taxes are as follows:



Years ended December 31	2016		2015		2014
United States	$	651	$	725	$	(1,355	)
Other nations	193		192		194
	$	844	$	917	$	(1,161	)

Components of income tax expense (benefit) are as follows:



Years ended December 31	2016			2015			2014
United States	$	20		$	71		$	14
Other nations	31			30			67
States (U.S.)	18			13			11
Current income tax expense	69			114			92
United States	180			154			(503		)
Other nations	36			(13		)	(11		)
States (U.S.)	(3		)	19			(43		)
Deferred income tax expense (benefit)	213			160			(557		)
Total income tax expense (benefit)	$	282		$	274		$	(465	)

Deferred tax balances that were recorded within Accumulated other comprehensive loss in the Company’s consolidated balance sheets resulted from retirement benefit adjustments, currency translation adjustments, net gains and losses on derivative instruments and fair value adjustments to available-for-sale securities. The adjustments were charges of $87 million, benefits of $62 million, and charges of $286 million for the years ended December 31, 2016, 2015, and 2014, respectively.

The Company evaluates its permanent reinvestment assertions with respect to foreign earnings at each reporting period and, except for certain earnings that the Company intends to reinvest indefinitely due to the capital requirements of the foreign subsidiaries or due to local country restrictions, accrues for the U.S. federal and foreign income tax applicable to the earnings. The Company assessed its unremitted earnings position and concluded that certain of its non-U.S. subsidiaries’ earnings continue to be permanently reinvested overseas. The Company intends to utilize the offshore earnings for working capital needs in its international operations. During 2016, the Company made no changes to its permanent reinvestment assertion. During 2015, the Company recorded a net tax benefit of $8 million related to the reversal of deferred tax liabilities due to the change in permanent reinvestment assertion. During 2014, the Company recorded a net tax benefit of $19 million related to the reversal of deferred tax liabilities related to undistributed foreign earnings due to the change in permanent reinvestment assertion.

Undistributed earnings that the Company intends to reinvest indefinitely, and for which no U.S. income taxes have been provided, aggregate to $1.6 billion at December 31, 2016. The Company currently has no plans to repatriate the foreign earnings permanently reinvested and therefore, the time and manner of repatriation is uncertain. If circumstances change and it becomes apparent that some or all of the permanently reinvested earnings will be remitted to the U.S. in the foreseeable future, an additional income tax charge may be necessary. However, given the uncertain repatriation time and manner at December 31, 2016, it is not practicable to estimate the amount of any additional income tax charge on the hypothetical distribution of permanently reinvested earnings. On a cash basis, these repatriations from the Company's non-U.S. subsidiaries could require the payment of additional taxes. The portion of earnings not reinvested indefinitely may be distributed without an additional charge given the U.S. federal and foreign income tax accrued on undistributed earnings and the utilization of available foreign tax credits.

Differences between income tax expense (benefit) computed at the U.S. federal statutory tax rate of 35% and income tax expense (benefit) as reflected in the consolidated statements of operations are as follows:



Years ended December 31	2016					2015					2014
Income tax expense (benefit) at statutory rate	$	295		35.0	%	$	321		35.0	%	$	(406	)	35.0	%
Tax on non-U.S. earnings	(25		)	(3.0	)%	(46		)	(5.0	)%	(27		)	2.3	%
State income taxes, net of federal benefit	26			3.1	%	24			2.6	%	(30		)	2.6	%
Recognition of previously unrecognized income tax benefits	(13		)	(1.6	)%	1			0.1	%	(29		)	2.5	%
Other provisions	(2		)	(0.4	)%	14			1.6	%	9			(0.7	)%
Valuation allowances	(7		)	(0.8	)%	(9		)	(1.0	)%	55			(4.7	)%
Section 199 deduction	(15		)	(1.7	)%	(19		)	(2.1	)%	(12		)	1.0	%
Tax on undistributed non-U.S. earnings	25			3.0	%	(7		)	(0.8	)%	(19		)	1.6	%
Research credits	(2		)	(0.2	)%	(5		)	(0.5	)%	(6		)	0.5	%
	$	282		33.4	%	$	274		29.9	%	$	(465	)	40.1	%

Gross deferred tax assets were $3.1 billion and $3.5 billion at December 31, 2016 and 2015, respectively. Deferred tax assets, net of valuation allowances, were $3.0 billion at December 31, 2016 and $3.4 billion at December 31, 2015, respectively. Gross deferred tax liabilities were $900 million and $1.2 billion at December 31, 2016 and 2015, respectively.

Significant components of deferred tax assets (liabilities) are as follows:



December 31	2016			2015
Inventory	$	29		$	30
Accrued liabilities and allowances	136			136
Employee benefits	693			612
Capitalized items	169			357
Tax basis differences on investments	7			14
Depreciation tax basis differences on fixed assets	74			19
Undistributed non-U.S. earnings	(27		)	(19		)
Tax carryforwards	927			1,028
Business reorganization	36			20
Warranty and customer liabilities	21			20
Deferred revenue and costs	122			146
Valuation allowances	(118		)	(129		)
Deferred charges	37			41
Other	(8		)	3
	$	2,098		$	2,278

At December 31, 2016 and 2015, the Company had valuation allowances of $118 million and $129 million, respectively, against its deferred tax assets, including $85 million and $98 million, respectively, relating to deferred tax assets for non-U.S. subsidiaries. The Company’s valuation allowances for its non-U.S. subsidiaries had a net decrease of $13 million during 2016 and a net decrease of $97 million during 2015. The decrease in the valuation allowance relating to deferred tax assets of non-U.S. subsidiaries during 2016 relates to the expiration of net operating losses and the change in the value of net deferreds related to the Company's defined benefit plan in the United Kingdom. The decrease in the valuation allowance relating to deferred tax assets of non-U.S. subsidiaries during 2015 relates to the expiration of net operating losses, the release of a Singapore valuation allowance, and the change in the value of net deferreds related to the Company's defined benefit plan in the United Kingdom.

The Company’s U.S. valuation allowance increased $2 million during 2016 while it did not change during 2015. The U.S. valuation allowance of $33 million as of December 31, 2016 primarily relates to state tax carryforwards. The Company believes that the remaining deferred tax assets are more-likely-than-not to be realizable based on estimates of future taxable income and the implementation of tax planning strategies.

Tax carryforwards are as follows:



December 31, 2016	Gross Tax Loss		Tax Effected		Expiration Period
United States:
U.S. tax losses	$	51	$	18	2022-2033
Foreign tax credits	—		510		2018-2023
General business credits	—		115		2026-2036
Minimum tax credits	—		101		Unlimited
State tax losses	1,174		34		2017-2029
State tax credits	—		26		2018-2030
Non-U.S. Subsidiaries:
Japan tax losses	98		30		2017-2021
Germany tax losses	53		15		Unlimited
United Kingdom tax losses	84		14		Unlimited
Singapore tax losses	40		7		Unlimited
Other subsidiaries tax losses	—		26		Various
Spain tax credits	—		23		Various
Other subsidiaries tax credits	—		8		Various
			$	927

The Company had unrecognized tax benefits of $68 million and $88 million at December 31, 2016 and December 31, 2015, respectively, of which approximately $50 million, if recognized, would affect the effective tax rate for both 2016 and 2015, net of resulting changes to valuation allowances.

A roll-forward of unrecognized tax benefits is as follows:



	2016			2015
Balance at January 1	$	88		$	96
Additions based on tax positions related to current year	—			2
Additions for tax positions of prior years	2			4
Reductions for tax positions of prior years	(15		)	(9		)
Settlements and agreements	(3		)	(3		)
Lapse of statute of limitations	(4		)	(2		)
Balance at December 31	$	68		$	88

The IRS has completed its examination of the Company's 2012 and 2013 tax years. The Company also has several state and non-U.S. audits pending. A summary of open tax years by major jurisdiction is presented below:



Jurisdiction	Tax Years
United States	2008-2016
China	2002-2016
France	2010-2016
Germany	2011-2016
India	1997-2016
Israel	2012-2016
Japan	2011-2016
Malaysia	2010-2016
Singapore	2015-2016
United Kingdom	2015-2016

Although the final resolution of the Company’s global tax disputes is uncertain, based on current information, in the opinion of the Company’s management, the ultimate disposition of these matters will not have a material adverse effect on the Company’s consolidated financial position, liquidity or results of operations. However, an unfavorable resolution of the Company’s global tax disputes could have a material adverse effect on the Company’s consolidated financial position, liquidity, or results of operations in the periods, and as of the dates, on which the matters are ultimately resolved.

Based on the potential outcome of the Company’s global tax examinations, the expiration of the statute of limitations for specific jurisdictions, or the continued ability to satisfy tax incentive obligations, it is reasonably possible that the unrecognized tax benefits will change within the next twelve months. The associated net tax impact on the effective tax rate, exclusive of valuation allowance changes, is estimated to be in the range of a $50 million tax charge to a $30 million tax benefit, with cash payments not to exceed $30 million.

At December 31, 2016, the Company had $26 million accrued for interest and $18 million accrued for penalties on unrecognized tax benefits. At December 31, 2015, the Company had $29 million and $24 million accrued for interest and penalties, respectively, on unrecognized tax benefits.