Income Taxes

The following table sets forth the geographic split of earnings before income taxes:



	Year Ended
(In millions)	December 31
	2016		2015		2014

United States	$	1,215	$	1,155	$	2,224
Foreign	607		1,129		906
	$	1,822	$	2,284	$	3,130

Significant components of income taxes are as follows:



	Year Ended
(In millions)	December 31
	2016		2015			2014

Current
Federal	$	327	$	270		$	641
State	5		17			57
Foreign	146		158			235
Deferred
Federal	18		17			(29		)
State	28		9			28
Foreign	10		(33		)	(55		)
	$	534	$	438		$	877

Significant components of deferred tax liabilities and assets are as follows:



	December 31, 2016			December 31, 2015
	(In millions)
Deferred tax liabilities
Property, plant, and equipment	$	1,612		$	1,651
Equity in earnings of affiliates	361			306
Debt exchange	132			133
Inventories	41			18
Other	105			109
	$	2,251		$	2,217
Deferred tax assets
Pension and postretirement benefits	$	307		$	374
Stock compensation	81			70
Foreign tax credit carryforwards	95			90
Foreign tax loss carryforwards	278			301
Capital loss carryforwards	57			22
State tax attributes	62			62
Unrealized foreign currency losses	58			71
Reserves and other accruals	—			26
Other	18			125
Gross deferred tax assets	956			1,141
Valuation allowances	(216		)	(302		)
Net deferred tax assets	$	740		$	839

Net deferred tax liabilities	$	1,511		$	1,378

The net deferred tax liabilities are classified as follows:
Noncurrent assets (foreign)	$	158		$	185
Noncurrent liabilities	(1,472		)	(1,394		)
Noncurrent liabilities (foreign)	(197		)	(169		)
	$	(1,511	)	$	(1,378	)

Reconciliation of the statutory federal income tax rate to the Company’s effective income tax rate on earnings is as follows:



	Year Ended
	December 31
	2016		2015		2014

Statutory rate	35.0	%	35.0	%	35.0	%
State income taxes, net of federal tax benefit	1.4		0.8		2.1
Foreign earnings taxed at rates other than the U.S. statutory rate	(4.4	)	(9.9	)	(4.8	)
Foreign currency effects/remeasurement	2.2		(1.8	)	0.1
Income tax adjustment to filed returns	0.8		1.9		(2.5	)
Tax benefit on U.S. biodiesel credits	(3.3	)	(1.6	)	(1.1	)
Tax benefit on U.S. qualified production activity deduction	(1.4	)	(1.8	)	(1.8	)
Valuation allowances	0.6		(3.1	)	—
Other	(1.6	)	(0.3	)	1.0
Effective income tax rate	29.3	%	19.2	%	28.0	%

The reduction from the federal statutory rate related to foreign earnings taxed at lower rates resulted mostly from the Company’s foreign operations in Switzerland, Asia, and the Caribbean. The Company’s foreign earnings, which were taxed at rates lower than the U.S. rate and were generated from these jurisdictions, were 47%, 51%, and 47% of its foreign earnings before taxes in fiscal years 2016, 2015, and 2014, respectively.

The Company had $278 million and $301 million of tax assets related to net operating loss carry-forwards of certain international subsidiaries at December 31, 2016 and 2015, respectively. As of December 31, 2016, approximately $200 million of these assets have no expiration date, and the remaining $78 million expire at various times through fiscal 2035. The annual usage of certain of these assets is limited to a percentage of taxable income of the respective foreign subsidiary for the year. The Company has recorded a valuation allowance of $126 million and $127 million against these tax assets at December 31, 2016 and 2015, respectively, due to the uncertainty of their realization.

The Company had $57 million and $22 million of tax assets related to foreign and domestic capital loss carryforwards at December 31, 2016 and 2015, respectively. The Company has recorded a valuation allowance of $41 million and $22 million against these tax assets at December 31, 2016 and 2015, respectively.

The Company had $95 million and $90 million of tax assets related to excess foreign tax credits at December 31, 2016 and 2015, respectively, which begin to expire in 2017. Due to the uncertainty of realization, the Company recorded a valuation allowance of $8 million against these assets at December 31, 2015. There was no valuation allowance recorded against these assets at December 31, 2016. The Company had $62 million of tax assets related to state income tax attributes (incentive credits and net operating loss carryforwards), net of federal tax benefit, at December 31, 2016 and 2015, which will expire at various times through fiscal 2036. Due to the uncertainty of realization, the Company recorded a valuation allowance of $49 million and $47 million related to state income tax assets net of federal tax benefit as of December 31, 2016 and 2015, respectively.

The Company remains subject to federal examination in the U.S. for the calendar tax years 2014, 2015 and 2016.

Undistributed earnings of the Company’s foreign subsidiaries and the Company’s share of the undistributed earnings of affiliated corporate joint venture companies accounted for on the equity method aggregating to approximately $9.3 billion at December 31, 2016, are considered to be permanently reinvested, and accordingly, no provision for U.S. income taxes has been provided thereon. It is not practicable to determine the deferred tax liability for temporary differences related to these undistributed earnings.

The following table sets forth a rollforward of activity of unrecognized tax benefits for the year ended December 31, 2016 and 2015 as follows:



	Unrecognized Tax Benefits
	December 31, 2016			December 31, 2015
	(In millions)
Beginning balance	$	49		$	72
Additions related to current year’s tax positions	1			1
Additions related to prior years’ tax positions	16			17
Additions related to acquisitions	—			7
Reductions related to prior years’ tax positions	—			(19		)
Reductions related to lapse of statute of limitations	(1		)	(6		)
Settlements with tax authorities	(10		)	(23		)
Ending balance	$	55		$	49

The additions and reductions in unrecognized tax benefits shown in the table include effects related to net income and shareholders’ equity. The changes in unrecognized tax benefits did not have a material effect on the Company’s net income or cash flow.

At December 31, 2016 and 2015, the Company had accrued interest and penalties on unrecognized tax benefits of $26 million and $20 million, respectively.

The Company is subject to income taxation in many jurisdictions around the world. Resolution of the related tax positions, through negotiations with relevant tax authorities or through litigation, may take years to complete. Therefore, it is difficult to predict the timing for resolution of tax positions. However, the Company does not anticipate that the total amount of unrecognized tax benefits will increase or decrease significantly in the next twelve months. Given the long periods of time involved in resolving tax positions, the Company does not expect that the recognition of unrecognized tax benefits will have a material impact on the Company’s effective income tax rate in any given period. If the total amount of unrecognized tax benefits were recognized by the Company at one time, there would be a reduction of $51 million on the tax expense for that period.

The Company is subject to routine examination by domestic and foreign tax authorities and 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. Resolution of the related tax positions, through negotiation with relevant tax authorities or through litigation, may take years to complete. Therefore, it is difficult to predict the timing for resolution of tax positions. In its routine evaluations of the exposure associated with various tax filing positions, the Company recognizes a liability, when necessary, for estimated potential additional tax owed by the Company in accordance with the applicable accounting standard. However, the Company cannot predict or provide assurance as to the ultimate outcome of these ongoing or future examinations.

The Company’s wholly-owned subsidiary, ADM do Brasil Ltda. (ADM do Brasil), has received three separate tax assessments from the Brazilian Federal Revenue Service (BFRS) challenging the tax deductibility of commodity hedging losses and related expenses for the tax years 2004, 2006 and 2007. As of December 31, 2016, these assessments, updated for estimated penalties, interest, and variation in currency exchange rates, totaled approximately $463 million. The statute of limitations for 2005 and 2008 to 2011 has expired. The Company does not expect to receive any additional tax assessments.

ADM do Brasil enters into commodity hedging transactions that can result in gains, which are included in ADM do Brasil’s calculation of taxable income in Brazil, and losses, which ADM do Brasil deducts from its taxable income in Brazil. The Company has evaluated its tax position regarding these hedging transactions and concluded, based upon advice from Brazilian legal counsel, that it was appropriate to recognize both gains and losses resulting from hedging transactions when determining its Brazilian income tax expense. Therefore, the Company has continued to recognize the tax benefit from hedging losses in its financial statements and has not recorded any tax liability for the amounts assessed by the BFRS.

ADM do Brasil filed an administrative appeal for each of the assessments. The appeal panel found in favor of the BFRS on these assessments and ADM do Brasil filed a second level administrative appeal. The second administrative appeal panel continues to conduct customary procedural activities, including ongoing dialogue with the BFRS auditor. If ADM do Brasil continues to be unsuccessful in the administrative appellate process, the Company intends to file appeals in the Brazilian federal courts. While the Company believes its consolidated financial statements properly reflect the tax deductibility of these hedging losses, the ultimate resolution of this matter could result in the future recognition of additional payments of, and expense for, income tax and the associated interest and penalties.

The Company intends to vigorously defend its position against the current assessments and any similar assessments that may be issued for years subsequent to 2011.

The Company’s subsidiaries in Argentina have received tax assessments challenging transfer prices used to price grain exports totaling $126 million (inclusive of interest and adjusted for variation in currency exchange rates) for the tax years 2004 through 2010. The Argentine tax authorities have been conducting a review of income and other taxes paid by large exporters and processors of cereals and other agricultural commodities resulting in allegations of income tax evasion. While the Company believes that it has complied with all Argentine tax laws, it cannot rule out receiving additional assessments challenging transfer prices used to price grain exports for years subsequent to 2010, and estimates that these potential assessments would be approximately $204 million (as of December 31, 2016 and subject to variation in currency exchange rates). The Company believes that it has appropriately evaluated the transactions underlying these assessments, and has concluded, based on Argentine tax law, that its tax position would be sustained, and accordingly, has not recorded a tax liability for these assessments. The Company intends to vigorously defend its position against the current assessments and any similar assessments that may be issued for years subsequent to 2010.

In accordance with the accounting requirements for uncertain tax positions, the Company has not recorded an uncertain tax liability for these assessments because it has concluded that it is more likely than not to prevail on the Brazil and Argentina matters based upon their technical merits and because the taxing jurisdictions’ processes do not provide a mechanism for settling at less than the full amount of the assessment. The Company’s consideration of these tax assessments requires judgments about the application of income tax regulations to specific facts and circumstances. The final outcome of these matters cannot reliably be predicted, may take many years to resolve, and could result in financial impacts of up to the entire amount of these assessments.

The Company’s wholly-owned subsidiary in the Netherlands, ADM Europe B.V., has received a tax assessment totaling $95 million from the Netherlands tax authority challenging the transfer pricing aspects of a 2009 business reorganization which involved two of its subsidiary companies in the Netherlands. The Company has appealed the assessment and carefully evaluated the underlying transactions and has concluded that the amount of the gain recognized on the reorganization for tax purposes was appropriate. While the Company plans to vigorously defend its position against the assessment, it has accrued an amount it believes would be the likely outcome of the litigation. The Company’s defense of the judicial appeal may take an extended period of time, and could result in additional financial impacts of up to the entire amount of this assessment.