INCOME TAXES

The components of Profit before income taxes for the years ended December 31, were as follows:



(Millions of dollars)
	2016		2015		2014
U.S.	$	249	$	230	$	207
Non-U.S.	312		389		546
Total	$	561	$	619	$	753

Profit before income taxes, as shown above, is based on the location of the entity to which such earnings are attributable. Where an entity’s earnings are subject to taxation, however, may not correlate solely to where an entity is located. For example, the profit before income tax reported in the U.S. may be subject to tax by non-U.S. jurisdictions and profit before income tax outside the U.S. may be subject to tax in the U.S. Thus, the income tax provision shown below as U.S. or non-U.S. may not correspond to the earnings shown above.

The components of the Provision for income taxes were as follows for the years ended December 31:



(Millions of dollars)
	2016			2015			2014
Current income tax provision (benefit):
U.S.	$	(18	)	$	(21	)	$	14
Non-U.S.	111			109			138
State (U.S.)	—			2			(1		)
	93			90			151

Deferred income tax provision (benefit):
U.S.	90			45			44
Non-U.S.	(15		)	21			13
State (U.S.)	3			2			1
	78			68			58

Total Provision for income taxes	$	171		$	158		$	209

Current income tax provision is the amount of income taxes reported or expected to be reported on our income tax returns. We join Caterpillar in the filing of a consolidated U.S. Federal income tax return and certain state income tax returns. In accordance with our tax sharing agreement with Caterpillar, we generally pay to or receive from Caterpillar our allocated share of income taxes or credits reflected in these consolidated filings. This amount is calculated on a separate return basis by taking taxable income times the applicable statutory tax rate and includes payment for certain tax attributes earned during the year.

The actual Provision for income taxes differs from the Provision for income taxes that would result from applying the U.S. statutory rate to Profit before income taxes for the years ended December 31, for the reasons set forth in the following reconciliation:



(Millions of dollars)
	2016					2015					2014
Taxes computed at U.S. statutory rates	$	196		35.0	%	$	217		35.0	%	$	264		35.0	%
(Decreases) increases in taxes resulting from:
State Income Tax, net of Federal Tax	2			0.4	%	3			0.5	%	—			—	%
Subsidiaries' results subject to tax rates other than U.S. statutory rates	(36		)	(6.5	)%	(25		)	(4.0	)%	(55		)	(7.2	)%
Income from non-U.S. subsidiaries taxed at U.S. statutory rates, net of foreign tax credits	2			0.3	%	(39		)	(6.3	)%	—			—	%
Foreign currency translation taxed at non-U.S. subsidiaries	13			2.3	%	6			0.9	%	2			0.2	%
Other, net	(6		)	(1.1	)%	(4		)	(0.6	)%	(2		)	(0.2	)%
Provision for income taxes	$	171		30.4	%	$	158		25.5	%	$	209		27.8	%

We have recorded income tax expense at U.S. tax rates on all profits, except for undistributed profits of non-U.S. subsidiaries of approximately $2 billion, which are considered indefinitely reinvested. Upon distribution of these profits in the form of dividends or otherwise, we would be subject to both U.S. income taxes (subject to an adjustment for foreign tax credits) and in some instances withholding taxes payable to the various non-U.S. jurisdictions. Determination of the amount of unrecognized deferred income tax liability related to indefinitely reinvested profits is not feasible primarily due to the complexity of the legal entity structure and U.S. and local tax laws. If U.S. tax law changes in the future, there may be a significant negative impact on the provision for income taxes to record an incremental tax liability in the period the change occurs. At December 31, 2016, cash held by non-U.S. subsidiaries was approximately $150 million.

Accounting for income taxes under generally accepted accounting principles in the United States of America requires individual tax-paying entities of the Company to offset deferred income tax assets and liabilities within each particular tax jurisdiction and present them as a single amount in the Consolidated Statements of Financial Position. Amounts in different tax jurisdictions cannot be offset against each other. The amounts of deferred income taxes at December 31, included in the following lines in our Consolidated Statements of Financial Position were:



(Millions of dollars)
	2016			2015
Assets:
Deferred and refundable income taxes	$	89		$	75
Liabilities:
Deferred income taxes and other liabilities	(939		)	(812		)
Deferred income taxes, net	$	(850	)	$	(737	)

Differences between accounting rules and income tax laws cause differences between the bases of certain assets and liabilities for financial reporting and income tax purposes. The income tax effects of these differences, to the extent they are temporary, are recorded as deferred income tax assets and liabilities netted by tax jurisdiction and taxpayer.

Our consolidated deferred income taxes consisted of the following components as of December 31:



(Millions of dollars)
	2016			2015
Deferred income tax assets:
Allowance for credit losses	$	148		$	142
Tax carryforwards	73			48
	221			190

Deferred income tax liabilities (primarily lease basis differences)	(693		)	(574		)

Valuation allowance for deferred income tax assets	(10		)	(10		)

Deferred income tax on translation adjustment	(368		)	(343		)

Deferred income taxes, net	$	(850	)	$	(737	)

As of December 31, 2016, amounts and expiration dates of net operating loss (NOL) carryforwards in various U.S. state taxing jurisdictions were:



(Millions of dollars)
2017		2018		2019		2020		2021-2031		Total
$	2	$	6	$	4	$	1	$	162	$	175

The gross deferred income tax asset associated with these NOL carryforwards is $13 million as of December 31, 2016, partially offset by a valuation allowance of $1 million.

In some U.S. state income tax jurisdictions, we join with other Caterpillar entities in filing combined income tax returns. In other U.S. state income tax jurisdictions, we file on a separate, stand-alone basis.

As of December 31, 2016, amounts and expiration dates of NOL carryforwards in various non-U.S. taxing jurisdictions were:



(Millions of dollars)
2017		2018		2019		2020		2021-2031		Unlimited		Total
$	—	$	—	$	—	$	7	$	29	$	44	$	80

Valuation allowances totaling $9 million have been recorded at certain non-U.S. subsidiaries that have not yet demonstrated consistent and/or sustainable profitability to support the recognition of net deferred income tax assets.

As of December 31, 2016, approximately $41 million of U.S. foreign tax credits were available for carryforward. These credits expire in 2025, 2026 and 2027.

A reconciliation of the beginning and ending amounts of gross unrecognized income tax benefits for uncertain income tax positions, including positions impacting only the timing of income tax benefits was as follows:



(Millions of dollars)
	2016		2015
Reconciliation of unrecognized income tax benefits⁽¹⁾:
Balance at beginning of year	$	—	$	—
Additions for income tax positions related to current year	1		—
Additions for income tax positions related to prior year	3		2
Reductions for income tax positions related to settlements⁽²⁾	—		(2		)
Balance at end of year	$	4	$	—

Amount that, if recognized, would impact the effective tax rate	$	—	$	—

⁽¹⁾Foreign currency translation amounts are included within each line as applicable.

⁽²⁾Includes cash payment or other reduction of assets to settle liability.

We classify interest and penalties on income taxes as a component of the Provision for income taxes. During the years ended December 31, 2016, 2015 and 2014, we recognized a benefit of less than $1 million, an expense of less than $1 million and a benefit of less than $1 million in interest and penalties, respectively. As of December 31, 2016 and 2015, the total amount of accrued interest and penalties was $2 million and less than $1 million, respectively.

In December 2016, Treasury and the Internal Revenue Service (IRS) issued regulations under IRS Section 987 ("the Regulations"). These Regulations address the taxation of foreign currency translation gains or losses arising from qualified business units that operate in a currency other than the United States Dollar. The new guidance is effective January 1, 2018. Due to exceptions provided in the Regulations, we determined the new guidance is not applicable to us, and we do not expect the Regulations to have a material impact on our financial statements.

On January 30, 2015, Caterpillar received a Revenue Agent's Report (RAR) from the IRS indicating the end of field examination of our U.S. tax returns for 2007 to 2009. In the opinion of management, the ultimate disposition of the matters raised in this report will not have a material adverse effect on our consolidated financial position, liquidity or results of operations. The IRS field examination of our U.S. tax returns for 2010 to 2012 began in 2015 and is expected to be completed in 2017. Tax years prior to 2007 are generally no longer subject to U.S. tax assessment. In our major non-U.S. jurisdictions, tax years are typically subject to examination for three to six years. Due to the uncertainty related to the timing and potential outcome of audits, we cannot estimate the range of reasonably possible change in unrecognized tax benefits in the next 12 months.