Income Taxes

The following table presents the domestic and foreign components of Loss from continuing operations before income taxes in our Consolidated Statements of Operations:



	For the Years Ended October 31,
(in millions)	2016			2015			2014
Domestic	$	(95	)	$	(215	)	$	(398	)
Foreign	63			112			(158		)
Loss from continuing operations before income taxes	$	(32	)	$	(103	)	$	(556	)

The following table presents the components of Income tax expense in our Consolidated Statements of Operations:



	For the Years Ended October 31,
(in millions)	2016			2015			2014
Current:
Federal	$	(1	)	$	(2	)	$	—
State and local	(4		)	(1		)	7
Foreign	(36		)	(64		)	(48		)
Total current expense	$	(41	)	$	(67	)	$	(41	)
Deferred:
Federal	13			2			13
State and local	(1		)	—			—
Foreign	(4		)	14			2
Total deferred benefit	$	8		$	16		$	15
Total income tax expense	$	(33	)	$	(51	)	$	(26	)

The following table presents a reconciliation of statutory federal income tax benefit (expense) recorded in Income tax expense in our Consolidated Statements of Operations:



	For the Years Ended October 31,
(in millions)	2016			2015			2014
Federal income tax benefit at the statutory rate of 35%	$	11		$	36		$	195
State income taxes, net of federal benefit	(3		)	—			(4		)
Credits and incentives	3			4			(5		)
Adjustments to valuation allowances	(132		)	(41		)	(234		)
Foreign operations	53			(48		)	(31		)
Unremitted foreign earnings	37			(31		)	(6		)
Adjustments to uncertain tax positions	(10		)	(1		)	15
Income tax related to equity components	—			—			13
Non-controlling interest adjustment	11			11			14
Other	(3		)	19			17
Recorded income tax expense	$	(33	)	$	(51	)	$	(26	)

The tax effect of pretax income or loss from continuing operations generally should be determined by a computation that does not consider the tax effects of items that are not included in continuing operations. An exception to that incremental approach is applied when there is a loss from continuing operations and income in another category of earnings (for example, discontinued operations, other comprehensive income, additional paid in capital, etc.).

In that situation, the tax provision is first allocated to the other categories of earnings. A related tax benefit is then recorded in continuing operations. This exception to the general rule applies even when a valuation allowance is in place at the beginning and end of the year. While intraperiod tax allocations do not change the overall tax provision, it may result in a gross-up of the individual components, thereby changing the amount of tax provision included in each category.

In the second quarter of 2014, in accordance with the intraperiod tax allocation rules, we recorded an income tax benefit of $13 million in Income tax expense related to continuing operations, and an offsetting reduction in Additional paid in capital, which resulted from the issuance and repurchase of convertible notes. For more information, see Note 9, Debt.

For the year ended October 31, 2016 and 2015, we incurred additional losses in the U.S. and certain foreign jurisdictions and recognized income tax expense of $132 million and $41 million, respectively, for the increase in the valuation allowance on our deferred tax assets generated during the period. During the second quarter of 2014, we recorded an income tax expense of $29 million to establish the valuation allowance for Brazil deferred tax assets. In the fourth quarter of 2014, we recorded an offsetting benefit of $16 million to reflect a tax law change in Brazil that allowed utilization of a portion of the net operating loss carryforwards to satisfy other taxes.

At October 31, 2016, undistributed earnings of foreign subsidiaries were $551 million. At October 31, 2016 and 2015 we had recorded deferred tax liabilities of less than $1 million and $37 million, respectively, for unremitted earnings from certain Mexico subsidiaries. Domestic income taxes have not been provided on the remaining undistributed earnings because they are either considered to be permanently invested in foreign subsidiaries or are expected to be repatriated without incremental U.S. tax. It is not practicable to estimate the amount of unrecognized deferred tax liabilities, if any, for foreign earnings deemed to be permanently reinvested.

In the first quarter of 2016, we reviewed the impact of recently enacted U.S. tax legislation, the most significant of which is the Protecting Americans from Tax Hikes Act of 2015 ("PATH Act of 2015"), which extended the rules allowing us to forego bonus depreciation in exchange for refunds of previously paid Alternative Minimum Tax ("AMT"). This change resulted in the likely realization of our deferred AMT credits, on a more likely than not basis, which supports the release of the associated valuation allowance. In addition, the PATH Act of 2015 extended the "look-through rule," under subpart F of the U.S. Internal Revenue Code, which had expired for us on September 30, 2015. The "look-through rule" had provided an exception to the U.S. taxation of certain income generated by foreign subsidiaries. The rule was extended in December 2015 with retroactive effect to the beginning of our 2016 fiscal year, and the rule will remain in place through our 2020 fiscal year. This rule extension allowed us to reverse recently recognized deferred tax liabilities associated with earnings in foreign jurisdictions. However, since the reversal of this deferred tax liability also had an associated and completely offsetting valuation allowance effect, there was no impact to total deferred taxes due to this change.

Also in the first quarter of 2016, we elected to early adopt the provisions of ASU 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes.” This ASU requires the offset of all deferred tax assets and liabilities, including valuation allowances, for each tax-paying jurisdiction within each tax-paying component. The net deferred tax must be presented as a single noncurrent amount for each jurisdiction. In accordance with the adoption provisions of ASU 2015-17, we have chosen to apply this change prospectively, and as a result, prior year amounts are maintained as originally filed.

The following table presents the components of the deferred tax asset (liability):



	As of October 31,
(in millions)	2016			2015
Deferred tax assets attributable to:
Employee benefits liabilities	$	1,274		$	1,253
Net operating loss ("NOL") carryforwards	1,324			1,161
Product liability and warranty accruals	362			419
Research and development	172			135
Tax credit carryforwards	262			266
Other	232			239
Gross deferred tax assets	3,626			3,473
Less: Valuation allowances	3,434			3,260
Net deferred tax assets	$	192		$	213
Deferred tax liabilities attributable to:
Unremitted foreign earnings	$	—		$	(37	)
Other	(31		)	(26		)
Total deferred tax liabilities	$	(31	)	$	(63	)

At October 31, 2016, deferred tax assets attributable to NOL carryforwards include $945 million attributable to U.S. federal NOL carryforwards, $150 million attributable to state NOL carryforwards, and $229 million attributable to foreign NOL carryforwards. If not used to reduce future taxable income, U.S. federal NOLs are scheduled to expire beginning in 2025. State NOLs can be carried forward for initial periods of 5 to 20 years, and are scheduled to expire in 2017 to 2036. Approximately one third of our foreign net operating losses will expire, beginning in 2028, while the majority of the remaining balance has no expiration date.

There are $63 million of NOL carryforwards relating to stock option tax benefits which are deferred until utilization of our net operating losses. These tax benefits will be allocated to Additional paid-in capital when recognized. The majority of our tax credits can be carried forward for initial periods of 20 years, and are scheduled to expire in 2019 to 2036. AMT credits can be carried forward indefinitely.

A valuation allowance is required to be established or maintained when, based on currently available information, it is more likely than not that all or a portion of a deferred tax asset will not be realized. The guidance on accounting for income taxes provides important factors in determining whether a deferred tax asset will be realized, including whether there has been sufficient taxable income in recent years and whether sufficient income can reasonably be expected in future years in order to utilize the deferred tax asset.

For the year ended October 31, 2016, we have evaluated the need to maintain a valuation allowance for deferred tax assets based on our assessment of whether it is more likely than not that deferred tax benefits will be realized through the generation of future taxable income. Appropriate consideration is given to all available evidence, both positive and negative, in assessing the need for a valuation allowance. We have concluded that the valuation allowance on our U.S. deferred AMT credits is no longer necessary due to the enactment of the PATH Act of 2015. This partial valuation allowance release resulted in an income tax benefit of $13 million which was recorded in the first quarter of 2016. We incurred additional domestic losses from continuing operations for the years ended October 31, 2016, 2015, and 2014, resulting in objective negative evidence of cumulative losses that outweighs the subjective positive evidence. The qualitative and quantitative analysis of current and expected domestic earnings, industry volumes, tax planning strategies, and general business risks resulted in a more likely than not conclusion of not being able to realize a significant portion of our deferred tax assets as of October 31, 2016.

We continue to maintain valuation allowances on certain other foreign deferred tax assets that we believe, on a more-likely-than-not basis, will not be realized based on current forecasted results. For all remaining deferred tax assets, while we believe that it is more likely than not that they will be realized, we believe that it is reasonably possible that additional deferred tax asset valuation allowances could be required in the next twelve months.

The total deferred tax asset valuation allowances were $3.4 billion and $3.3 billion at October 31, 2016 and 2015, respectively. In the event we released all of our valuation allowances, almost all would impact income taxes as a benefit in our Consolidated Statements of Operations.

We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. As of October 31, 2016, the amount of liability for uncertain tax positions was $50 million. The liability at October 31, 2016 has a recorded offsetting tax benefit associated with various issues that total $12 million. If the unrecognized tax benefits are recognized, all would impact our effective tax rate. However, to the extent we continue to maintain a full valuation allowance against certain deferred tax assets, the effect may be in the form of an increase in the deferred tax asset related to our net operating loss carryforward, which would be offset by a full valuation allowance.

Changes in the liability for uncertain tax positions are summarized as follows:



(in millions)	For the Year Ended October 31, 2016
Liability for uncertain tax positions at November 1	$	41
Increase as a result of positions taken in prior periods	9
Decrease as a result of foreign currency translation adjustments	—
Settlements	—
Liability for uncertain tax positions at October 31	$	50

We recognize interest and penalties related to uncertain tax positions as part of Income tax expense. Total interest and penalties related to our uncertain tax positions resulted in an income tax expense of less than $1 million and $1 million for the years ended October 31, 2016 and 2015, respectively, and an income tax benefit of $4 million for the year ended October 31, 2014. The total interest and penalties accrued were $8 million for both of the years ended October 31, 2016 and 2015.

We have open tax years back to 2001 with various significant taxing jurisdictions including the U.S., Canada, Mexico, and Brazil. In connection with the examination of tax returns, contingencies may arise that generally result from differing interpretations of applicable tax laws and regulations as they relate to the amount, timing, or inclusion of revenues or expenses in taxable income, or the sustainability of tax credits to reduce income taxes payable. We believe we have sufficient accruals for our contingent tax liabilities. Annual tax provisions include amounts considered sufficient to pay assessments that may result from examinations of prior year tax returns, although actual results may differ. While it is probable that the liability for unrecognized tax benefits may increase or decrease during the next twelve months, we do not expect any such change would have a material effect on our financial condition, results of operations, or cash flows.