Income Taxes

On December 22, 2017, the Tax Act was signed into U.S. law. The Tax Act reduces the statutory corporate income tax rate from 35% to 21%, effective January 1, 2018. In accordance with the Internal Revenue Code, we have utilized a blended rate of 23.3% for our fiscal 2018 tax year by applying a prorated percentage of the number of days prior to and subsequent to the January 1, 2018 effective date. This rate reduction requires us to remeasure our deferred taxes as of the date the Tax Act was enacted. Our U.S. deferred tax assets, net of deferred tax liabilities, were remeasured and reduced by $983 million, entirely offset by a valuation allowance reduction. As a result, the remeasurement of our deferred tax assets, net of deferred tax liabilities, including the valuation allowance, did not impact our income tax expense or net income.

The Tax Act includes a mandatory deemed repatriation of earnings of the Company’s foreign subsidiaries. We have provisionally calculated and included $147 million of foreign earnings in taxable income due to this deemed repatriation. The income tax effect of the deemed repatriation will be offset with existing deferred tax assets. The deferred tax impact has a valuation allowance offset, resulting in no impact on our income tax expense or net income.

The Tax Act also adds many new provisions, including changes to limits on the deductions for executive compensation and interest expense, a tax on global intangible low‐taxed income (“GILTI”), the base erosion anti‐abuse tax (“BEAT”) and a deduction for foreign derived intangible income (“FDII”). We are still evaluating the impact of these provisions of the Tax Act, which do not apply until our taxable year beginning November 1, 2018. Companies can either account for taxes on GILTI as incurred or recognize deferred taxes when basis differences exist that are expected to affect the amount of the GILTI inclusion upon reversal. The Company is electing to account for taxes on GILTI as incurred.

We have not completed our accounting for the income tax effects of the Tax Act. However, we have computed estimates or “provisional” amounts as permitted by the SEC’s Staff Accounting Bulletin No. 118 (“SAB”) issued on December 22, 2017. Under the SAB, companies are allowed a measurement period of up to one year from the date of enactment to complete the accounting for the effects of the Tax Act. We will continue to evaluate the Tax Act’s impact, which may change as a result of additional Treasury guidance, federal or state legislative actions, or changes in accounting standards or related interpretations. The Company’s analyses performed to date are sufficient to calculate a reasonable estimate of the impacts of the Tax Act.

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



	For the Years Ended October 31,
(in millions)	2018		2017			2016
Domestic	$	246	$	(74	)	$	(95	)
Foreign	174		138			63
Income (loss) from continuing operations before income taxes	$	420	$	64		$	(32	)

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



	For the Years Ended October 31,
(in millions)	2018			2017			2016
Current:
Federal	$	—		$	4		$	(1	)
State and local	(1		)	10			(4		)
Foreign	(47		)	(30		)	(36		)
Total current expense	$	(48	)	$	(16	)	$	(41	)
Deferred:
Federal	$	2		$	19		$	13
State and local	(1		)	4			(1		)
Foreign	(5		)	(17		)	(4		)
Total deferred benefit (expense)	$	(4	)	$	6		$	8
Total income tax expense	$	(52	)	$	(10	)	$	(33	)

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)	2018			2017			2016
Federal income tax benefit (expense)^(A)	$	(98	)	$	(22	)	$	11
State income taxes, net of federal benefit	(3		)	(3		)	(3		)
Credits and incentives	(50		)	8			3
Adjustments to valuation allowances	1,120			(57		)	(132		)
Foreign operations	(2		)	4			53
Unremitted foreign earnings	—			—			37
Adjustments to uncertain tax positions	(1		)	15			(10		)
Intraperiod tax allocation offset to equity components	—			28			—
Non-controlling interest adjustment	6			9			11
Tax Act Mandatory Repatriation	(34		)	—			—
Tax Act US Deferred Remeasurement	(983		)	—			—
Other	(7		)	8			(3		)
Recorded income tax expense	$	(52	)	$	(10	)	$	(33	)

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(A)	Federal income tax benefit (expense) was taxed at a rate of 23.3% for the year ended 2018, and 35% for the years ended 2017 and 2016.

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, a 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 of income. During 2017, we recorded a $28 million intraperiod allocation benefit in domestic continuing operations associated with certain post retirement plan remeasurement gains.

Not including the effect of the federal income tax rate change, we recognized an income tax benefit of $137 million and income tax expense of $57 million, for the change in the valuation allowance for the years ended October 31, 2018 and 2017, respectively.

At October 31, 2018, undistributed earnings of foreign subsidiaries were $308 million. Except for the tax effect of the Tax Act deemed repatriation, income taxes have not been provided on foreign undistributed earnings because they are either considered to be permanently invested in foreign subsidiaries or are expected to be repatriated without significant incremental U.S. federal, state or foreign withholding taxes. It is impracticable to determine the exact amount of unrecognized deferred tax liabilities.

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



	As of October 31,
(in millions)	2018			2017
Deferred tax assets attributable to:
Employee benefits liabilities	$	615		$	1,073
Net operating loss ("NOL") carryforwards	979			1,383
Product liability and warranty accruals	172			290
Research and development	114			209
Tax credit carryforwards	212			262
Other	238			277
Gross deferred tax assets	2,330			3,494
Less: Valuation allowances	2,182			3,326
Net deferred tax assets	$	148		$	168
Deferred tax liabilities attributable to:
Other	$	(27	)	$	(39	)
Total deferred tax liabilities	$	(27	)	$	(39	)

At October 31, 2018, deferred tax assets attributable to NOL carryforwards include $560 million attributable to U.S. federal NOL carryforwards, $178 million attributable to state NOL carryforwards, and $241 million attributable to foreign NOL carryforwards. If not used to reduce future taxable income, U.S. federal NOLs are scheduled to expire beginning in 2032. State NOLs can be carried forward for initial periods of 5 to 20 years, and are scheduled to expire in 2019 to 2038. Approximately one fourth of our foreign net operating losses will expire, beginning in 2029, while the majority of the remaining balance has no expiration date. The majority of our tax credits can be carried forward for initial periods of 20 years and are scheduled to expire between 2019 and 2038.

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, 2018, 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 earned domestic income from continuing operations for the year ended October 31, 2018 and incurred domestic losses from continuing operations for the years ended October 31, 2017 and 2016. The positive evidence of domestic income from the year ended October 31, 2018 does not outweigh the negative evidence of cumulative losses from prior years. 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, 2018.

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 continue to maintain a valuation allowances on the majority of our U.S. deferred tax assets as well as certain 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 $2.2 billion and $3.3 billion at October 31, 2018 and 2017, 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, 2018, the amount of liability for uncertain tax positions was $27 million. The liability at October 31, 2018 has a recorded offsetting tax benefit associated with various issues that total $9 million. If the unrecognized tax benefits are recognized, all would impact our effective tax rate, except for positions for which we maintain a full valuation allowance against certain deferred tax assets. In this case, 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:



	For the years ended October 31,
(in millions)	2018			2017
Liability for uncertain tax positions at November 1	$	34		$	50
Additions as a result of positions taken in prior periods	2			—
Decrease as a result of positions taken in prior periods	(7		)	(15		)
Settlements	(2		)	(1		)
Liability for uncertain tax positions at October 31	$	27		$	34

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 income tax benefits of $1 million and $6 million and income tax expense of less than $1 million for the years ended October 31, 2018, 2017, and 2016, respectively. The total interest and penalties accrued were $3 million and $4 million for the years ended October 31, 2018 and 2017, respectively. We released $14 million of uncertain tax positions based on administrative practice and precedents of relevant tax authorities in 2017.

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.