INCOME TAXES

12 Months Ended

Dec. 31, 2015

Note 5. Income Taxes

Income from continuing operations before taxes

			Years Ended December 31,
			2015		2014		2013
	U.S.	$	3,361	$	3,340	$	3,002
	Non-U.S.		3,225		2,478		2,410
		$	6,586	$	5,818	$	5,412

Tax expense (benefit)
			Years Ended December 31,
			2015		2014		2013
	Tax expense (benefit) consists of
	Current:
	U.S. Federal	$	786	$	746	$	663
	U.S. State		78		39		97
	Non-U.S.		560		572		428
		$	1,424	$	1,357	$	1,188

	Deferred:
	U.S. Federal	$	196	$	114	$	160
	U.S. State		49		63		72
	Non-U.S.		70		(45)		30
			315		132		262
		$	1,739	$	1,489	$	1,450

	Years Ended December 31,
	2015		2014		2013
The U.S. federal statutory income tax rate is reconciled to our effective income tax rate as follows:
U.S. federal statutory income tax rate	35.0	%	35.0	%	35.0	%
Taxes on non-U.S. earnings below U.S. tax rate⁽¹⁾	(8.0)		(7.0)		(7.2)
U.S. state income taxes⁽¹⁾	1.2		1.2		1.8
Manufacturing incentives	(1.5)		(1.0)		(0.9)
ESOP dividend tax benefit	(0.4)		(0.4)		(0.5)
Tax credits	(1.0)		(1.0)		(1.8)
Reserves for tax contingencies	0.7		(0.2)		0.6
All other items—net	0.4		(1.0)		(0.2)
	26.4	%	25.6	%	26.8	%
(1) Net of changes in valuation allowance

The effective tax rate increased by 0.8 percentage points in 2015 compared to 2014. The increase was primarily attributable to decreased tax benefits from the resolution of tax audits, partially offset by increased tax benefits from manufacturing incentives, the impact of more income in jurisdictions with lower tax rates and fewer reserves. The Company’s non-U.S. effective tax rate for 2015 was 19.5%, a decrease of approximately 1.8 percentage points compared to 2014. The year-over-year decrease in the non-U.S. effective tax rate was primarily attributable to higher earnings in lower tax rate jurisdictions coupled with lower expense related to reserves in various jurisdictions, partially offset by an increase from the tax impact of restructuring and dispositions. The effective tax rate was lower than the U.S. federal statutory rate of 35% primarily due to overall non-U.S. earnings taxed at lower rates.

The effective tax rate decreased by 1.2 percentage points in 2014 compared to 2013. The decrease was primarily attributable to lower tax expense from the resolution of audits, partially offset by the impact of more income in jurisdictions with higher tax rates and additional reserves. The Company’s non-U.S. effective tax rate for 2014 was 21.3%, an increase of approximately 2.3 percentage points compared to 2013. The increase in the non-U.S. effective tax rate was primarily attributable to additional reserves and the impact of more income in jurisdictions with higher tax rates, partially offset by the tax impact of dispositions. The effective tax rate was lower than the U.S. federal statutory rate of 35% primarily due to overall non-U.S. earnings taxed at lower rates.

Deferred tax assets (liabilities)

The tax effects of temporary differences and tax carryforwards which give rise to future income tax benefits and payables are as follows:

	December 31,
Deferred tax assets:	2015		2014
Pension	$	500	$	573
Postretirement benefits other than pensions		292		441
Asbestos and environmental		473		477
Employee compensation and benefits		387		387
Other accruals and reserves		626		672
Net operating and capital losses		620		639
Tax credit carryforwards		198		199
Gross deferred tax assets		3,096		3,388
Valuation allowance		(589)		(560)
Total deferred tax assets	$	2,507	$	2,828

Deferred tax liabilities:
Property, plant and equipment	$	(661)	$	(612)
Intangibles		(1,797)		(1,060)
Other asset basis differences		(293)		(286)
Other		(31)		(7)
Total deferred tax liabilities		(2,782)		(1,965)
Net deferred tax (liability) asset	$	(275)	$	863

As described in Note 1 Summary of Significant Accounting Policies, the Company has presented deferred income taxes as noncurrent as of December 31, 2015.

The change in deferred tax balance was primarily attributable to deferred tax liabilities for intangible assets that were recorded in connection with the acquisition of Elster. Our gross deferred tax asset includes $1,049 million related to non-U.S. operations comprised principally of deductible temporary differences and net operating loss, capital loss and tax credit carryforwards (mainly in Canada, France, Luxembourg and the United Kingdom). We maintain a valuation allowance of $587 million against a portion of the non-U.S. gross deferred tax assets. The change in the valuation allowance resulted in an increase of $114 million, decrease of $10 million and increase of $49 million to income tax expense in 2015, 2014 and 2013. In the event we determine that we will not be able to realize our net deferred tax assets in the future, we will reduce such amounts through an increase to income tax expense in the period such determination is made. Conversely, if we determine that we will be able to realize net deferred tax assets in excess of the carrying amounts, we will decrease the recorded valuation allowance through a reduction to income tax expense in the period that such determination is made.

As of December 31, 2015, our net operating loss, capital loss and tax credit carryforwards were as follows:

			Net Operating
	Expiration		and Capital Loss		Tax Credit
Jurisdiction	Period		Carryforwards		Carryforwards
U.S. Federal	2032	$	2	$	45
U.S. State	2034		1,315		25
Non-U.S.	2035		517		131
Non-U.S.	Indefinite		2,339		-
		$	4,173	$	201

Many jurisdictions impose limitations on the timing and utilization of net operating loss and tax credit carryforwards. In those instances whereby there is an expected permanent limitation on the utilization of the net operating loss or tax credit carryforward the deferred tax asset and amount of the carryforward have been reduced.

U.S. federal income taxes have not been provided on undistributed earnings of the vast majority of our international subsidiaries as it is our intention to reinvest these earnings into the respective subsidiaries. At December 31, 2015 Honeywell has not provided for U.S. federal income and non-U.S. withholding taxes on approximately $16.6 billion of such earnings of our non-U.S. operations. It is not practicable to estimate the amount of tax that might be payable if some or all of such earnings were to be repatriated, and the amount of foreign tax credits that would be available to reduce or eliminate the resulting U.S. income tax liability.

	2015		2014		2013
Change in unrecognized tax benefits:
Balance at beginning of year	$	659	$	729	$	722
Gross increases related to current period tax positions		56		65		41
Gross increases related to prior periods tax positions		175		204		118
Gross decreases related to prior periods tax positions		(72)		(277)		(21)
Decrease related to resolutions of audits with tax authorities		(11)		(32)		(92)
Expiration of the statute of limitations for the assessment of taxes		(13)		(10)		(30)
Foreign currency translation		(29)		(20)		(9)
Balance at end of year	$	765	$	659	$	729

As of December 31, 2015, 2014, and 2013 there were $765 million, $659 million and $729 million of unrecognized tax benefits that if recognized would be recorded as a component of income tax expense.

Generally, our unrecognized tax benefits are related to tax years that remain subject to examination by the relevant tax authorities. The following table summarizes these open tax years by major jurisdiction as of December 31, 2015:

	Open Tax Years
	Based on Originally Filed Returns
Jurisdiction	Examination in	Examination not yet
Jurisdiction	progress	initiated
U.S. Federal	2010 - 2012	2013 - 2015
U.S. State	2008 - 2014	2011 - 2015
United Kingdom	N/A	2013 - 2015
Canada⁽¹⁾	2010 - 2013	2014 - 2015
Germany⁽¹⁾	2008 - 2012	2013 - 2015
France	2012 - 2014	2005 - 2011, 2015
Netherlands	2009	2011 - 2015
Australia	N/A	2010 - 2015
China	2003 - 2014	2015
India	1999 - 2013	2014 - 2015
Italy	2008 - 2012	2014 - 2015

(1) Includes provincial or similar local jurisdictions, as applicable.

Based on the outcome of these examinations, or as a result of the expiration of statute of limitations for specific jurisdictions, it is reasonably possible that certain unrecognized tax benefits for tax positions taken on previously filed tax returns will materially change from those recorded as liabilities in our financial statements. In addition, the outcome of these examinations may impact the valuation of certain deferred tax assets (such as net operating losses) in future periods.

Unrecognized tax benefits for examinations in progress were $349 million, $403 million and $431 million, as of December 31, 2015, 2014, and 2013. Estimated interest and penalties related to the underpayment of income taxes are classified as a component of Tax Expense in the Consolidated Statement of Operations and totaled $11 million, $24 million and $17 million for the years ended December 31, 2015, 2014, and 2013. Accrued interest and penalties were $336 million, $325 million and $301 million, as of December 31, 2015, 2014, and 2013.