Income Taxes

The provision for income taxes by taxing jurisdiction and by significant components consisted of the following:



($ in millions)		2016			2015			2014
Current income tax expense
	U.S. federal	$	(232	)	$	130		$	105
	U.S. state and local	(19		)	20			25
	Foreign	337			275			194
	Total current income tax	$	86		$	425		$	324
Deferred income tax expense
	U.S. federal	$	153		$	28		$	(76	)
	U.S. state and local	10			6			(1		)
	Foreign	(8		)	(35		)	(10		)
	Total deferred income tax	155			(1		)	(87		)
	Total	$	241		$	424		$	237

A reconciliation of the statutory U.S. corporate federal income tax rate to the Company’s effective tax rate follows:



		2016		2015		2014
U.S. federal income tax rate		35.0	%	35.0	%	35.0	%
Changes in rate due to:
	U.S. state and local taxes	(2.2	)	1.0		1.0
	U.S. tax cost (benefit) on foreign dividends	0.4		(1.0	)	(4.0	)
	U.S. tax incentives	(5.4	)	(2.1	)	(2.3	)
	U.S. deferred tax on foreign income	(3.0	)	(4.0	)	—
	U.S./foreign tax differential	(14.8	)	(7.0	)	(13.0	)
	Asbestos charge	18.2		—		—
	Other	0.9		1.9		0.9
	Effective income tax rate	29.1	%	23.8	%	17.6	%

The total tax expense for 2016 includes a deferred tax benefit of $364 million related to the $1,015 million of pre-tax pension settlement charges discussed in Note 12, “Pensions and Other Postretirement Benefits.” During 2016, the Company recorded a $151 million net tax charge associated with the funding of the Pittsburgh Corning (“PC”) asbestos settlement trust (the “Trust”) described in Note 13, "Commitments and Contingent Liabilities." Further, in conjunction with the funding of the Trust, PPG provided taxes on the earnings of certain foreign subsidiaries and recorded one-time book tax benefits for its contribution of the Company's ownership interest in PC's European subsidiary to the Trust and for a change in the measurement of certain deferred tax liabilities.

In 2016, U.S. tax incentives include a benefit for dividends paid on PPG stock held in the Company Employee Stock Ownership Plan, a benefit for research and development activities and a benefit for income related to domestic production activities. The increase in the U.S. tax incentive benefit from 2015 to 2016 is primarily due to a larger deduction for domestic production activities.

In 2016 and 2015, U.S. deferred tax on foreign earnings includes the remeasurement of a U.S. deferred tax liability to repatriate foreign earning on which PPG has not asserted permanent reinvestment in the foreign jurisdiction.

(Loss) Income before income taxes of the Company’s U.S. operations for 2016, 2015 and 2014 was $(163) million, $740 million and $320 million, respectively. Income before income taxes of the Company’s foreign operations for 2016, 2015 and 2014 was $990 million, $1,043 million and $1,026 million, respectively.

Deferred income taxes

Deferred income taxes are provided for the effect of temporary differences that arise because there are certain items treated differently for financial accounting than for income tax reporting purposes. The deferred tax assets and liabilities are determined by applying the enacted tax rate in the year in which the temporary difference is expected to reverse. Net deferred income tax assets and liabilities as of December 31 were, as follows:



($ in millions)		2016			2015
Deferred income tax assets related to
	Employee benefits	$	604		$	730
	Contingent and accrued liabilities	263			604
	Operating loss and other carry-forwards	197			361
	Inventories	17			20
	Property	49			47
	Other	100			98
	Valuation allowance	(119		)	(139		)
	Total	$	1,111		$	1,721
Deferred income tax liabilities related to
	Property	$	382		$	580
	Intangibles	647			439
	Employee benefits	4			67
	Derivatives	6			4
	Undistributed foreign earnings	189			158
	Other	146			222
	Total	$	1,374		$	1,470
	Deferred income tax (liabilities) assets – net	$	(263	)	$	251

As of December 31, 2016 and 2015, subsidiaries of the Company had available net operating loss carryforwards and available income tax credit carryforwards as follows:



($ in millions)		2016		2015		Expiration
Available net operating loss carryforwards:
	Indefinite expiration	$	376	$	390	NA
	Definite expiration	118		165		2017 - 2029
Total		$	494	$	555	NA
Net operating loss carryforwards, tax effected		$	140	$	156	NA
Income tax credit carryforwards		$	57	$	205	2017 - 2026

A valuation allowance of $119 million and $139 million has been established for carry-forwards at December 31, 2016 and 2015, when the ability to utilize them is not likely.

The Company had $5.3 billion and $5.0 billion of undistributed earnings of non-U.S. subsidiaries as of December 31, 2016 and 2015, respectively. These amounts relate to approximately 250 subsidiaries in approximately 75 taxable jurisdictions. Over the past several years, PPG has established deferred tax liabilities on certain undistributed earnings, namely in connection with divestitures and the funding of the Trust. At December 31, 2016 and 2015, the expected future tax cost to repatriate these foreign earnings which are not permanently reinvested totaled $189 million and $158 million, respectively. No significant deferred U.S. income taxes have been provided on the remaining $3.5 billion and $4.2 billion of PPG’s undistributed earnings as they are considered to be reinvested for an indefinite period of time or will be repatriated when it is tax effective to do so. The Company estimates repatriation of undistributed earnings of non-U.S. subsidiaries as of December 31, 2016 and 2015 would have resulted in a U.S. tax cost of approximately $350 million and $375 million, respectively.

Unrecognized tax benefits

The Company files federal, state and local income tax returns in numerous domestic and foreign jurisdictions. In most tax jurisdictions, returns are subject to examination by the relevant tax authorities for a number of years after the returns have been filed. The Company is no longer subject to examinations by tax authorities in any major tax jurisdiction for years before 2006. Additionally, the Internal Revenue Service has completed its examination of the Company’s U.S. federal income tax returns filed for years through 2011. The examinations of the Company’s U.S. federal income tax returns for 2012 through 2013 are currently underway.

A reconciliation of the total amounts of unrecognized tax benefits (excluding interest and penalties) as of December 31 follows:



($ in millions)	2016			2015			2014
January 1	$	82		$	71		$	85
Current year tax positions - additions	25			14			12
Prior year tax positions - additions	8			5			3
Pre-acquisition unrecognized tax benefits	—			4			—
Prior year tax positions - reductions	(11		)	(3		)	(15		)
Statute of limitations expirations	(8		)	(1		)	(2		)
Settlements	—			(3		)	(6		)
Foreign currency translation	(2		)	(5		)	(6		)
December 31	$	94		$	82		$	71

The Company expects that any reasonably possible change in the amount of unrecognized tax benefits in the next 12 months would not be significant.

The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was $89 million as of December 31, 2016.

Interest and penalties



	December 31,
($ in millions)	2016		2015		2014
Accrued interest and penalties related to unrecognized tax benefits	$	9	$	8	$	7
Loss/(income) recognized in income tax expense related to interest and penalties	$	1	$	2	$	(2	)

The Company recognizes accrued interest and penalties related to unrecognized tax benefits in income tax expense.