10. Income Taxes

The provision for income taxes was calculated based on the following components of earnings (loss) before income taxes:


Continuing operations	2017		2016		2015
U.S.	$	(43)	$	(27)	$	—
Non-U.S.		318		383		268
	$	275	$	356	$	268


Discontinued operations	2017		2016		2015
U.S.	$	—	$	—	$	—
Non-U.S.		(3)		(7)		(4)
	$	(3)	$	(7)	$	(4)

The provision (benefit) for income taxes consists of the following:


	2017		2016		2015
Current:
U.S.	$	(5)	$	—	$	9
Non-U.S.		87		123		85
		82		123		94
Deferred:
U.S.		6		3		10
Non-U.S.		(18)		(7)		2
		(12)		(4)		12
Total:
U.S.		1		3		19
Non-U.S.		69		116		87
Total for continuing operations		70		119		106
Total for discontinued operations		—		—		—
	$	70	$	119	$	106

A reconciliation of the provision for income taxes based on the statutory U.S. Federal tax rate of 35% to the provision for income taxes is as follows:


	2017		2016		2015
Tax provision on pretax earnings from continuing operations at statutory U.S. Federal tax rate	$	96	$	124	$	94
Increase (decrease) in provision for income taxes due to:
Non-U.S. tax rates		(29)		(22)		(12)
U.S. Tax Cut and Jobs Act: transition tax, net of foreign tax credits		2
Tax law changes		152		(3)		(3)
Change in valuation allowance: U.S. tax law change		(162)
Change in valuation allowance: other		(283)		3		1
Tax attribute expiration		330
Withholding tax, net		8		7		10
Non-deductible acquisition costs						6
Non-deductible expenses		9		20		7
U.S. tax on intercompany dividends and interest		2		3		16
Tax exempt income		(3)		(2)		(3)
Intraperiod tax allocation				(8)
Tax credit		(37)		(19)		(14)
Changes in tax reserves		(18)		8		5
Mexico inflationary adjustments		13		6		3
Equity earnings		(13)		(9)		(7)
Intercompany financing		(4)		(5)		1
Other taxes based on income		10		11		3
Other items		(3)		5		(1)
Provision for income taxes	$	70	$	119	$	106

Deferred income taxes reflect: (1) the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes; and (2) carryovers and credits for income tax purposes.

Significant components of the Company’s deferred tax assets and liabilities at December 31, 2017 and 2016 are as follows:


	2017		2016
Deferred tax assets:
Accrued postretirement benefits	$	44	$	53
Asbestos-related liabilities		122		242
Foreign tax credit carryovers		124		413
Operating and capital loss carryovers		342		389
Other credit carryovers		17		34
Accrued liabilities		69		95
Pension liabilities		77		138
Other		43		74
Total deferred tax assets		838		1,438
Deferred tax liabilities:
Property, plant and equipment		101		131
Intangibles and deferred software		97		119
Other		2		9
Total deferred tax liabilities		200		259
Valuation allowance		(543)		(1,094)
Net deferred taxes	$	95	$	85

Deferred taxes are included in the Consolidated Balance Sheets at December 31, 2017 and 2016 as follows:


	2017		2016
Other assets	$	194	$	185
Deferred taxes		(99)		(100)
Net deferred taxes	$	95	$	85

The deferred tax benefit associated with the reduction in the valuation allowance of $551 million was primarily allocated $445 million to income from continuing operations due to the primacy of continuing operations, the change in tax law and expiration of certain tax attribute carryovers, and $79 million to other comprehensive income.

Deferred tax assets and liabilities are determined separately for each tax jurisdiction on a separate or on a consolidated tax filing basis, as applicable, in which the Company conducts its operations or otherwise incurs taxable income or losses. A valuation allowance is recorded when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The realization of deferred tax assets depends on the ability to generate sufficient taxable income of the appropriate character within the carryback or carryforward periods provided for in the tax law for each applicable tax jurisdiction. The Company considers the following possible sources of taxable income when assessing the realization of deferred tax assets:

taxable income in prior carryback years;

future reversals of existing taxable temporary differences;

future taxable income exclusive of reversing temporary differences and carryforwards; and

prudent and feasible tax planning strategies that the Company would be willing to undertake to prevent a deferred tax asset from otherwise expiring.

The assessment regarding whether a valuation allowance is required or whether a change in judgment regarding the valuation allowance has occurred also considers all available positive and negative evidence, including but not limited to:

nature, frequency, and severity of cumulative losses in recent years;

duration of statutory carryforward and carryback periods;

statutory limitations against utilization of tax attribute carryforwards against taxable income;

historical experience with tax attributes expiring unused; and

near‑ and medium‑term financial outlook.

The weight given to the positive and negative evidence is commensurate with the extent to which the evidence may be objectively verified. Accordingly, it is generally difficult to conclude a valuation allowance is not required when there is significant objective and verifiable negative evidence, such as cumulative losses in recent years. The Company uses the actual results for the last two years and current year results as the primary measure of cumulative losses in recent years.

The evaluation of deferred tax assets requires judgment in assessing the likely future tax consequences of events recognized in the financial statements or tax returns and future profitability. The recognition of deferred tax assets represents the Company’s best estimate of those future events. Changes in the current estimates, due to unanticipated events or otherwise, could have a material effect on the Company’s results of operations and financial condition.

In certain tax jurisdictions, the Company’s analysis indicates that it has cumulative losses in recent years. This is considered significant negative evidence which is objective and verifiable and, therefore, difficult to overcome. However, the cumulative loss position is not solely determinative and, accordingly, the Company considers all other available positive and negative evidence in its analysis. Based on its analysis, the Company has recorded a valuation allowance for the portion of deferred tax assets where based on the weight of available evidence it is unlikely to realize those deferred tax assets.

Based on the evidence available including a lack of sustainable earnings, the Company in its judgment previously recorded a valuation allowance against substantially all of its net deferred tax assets in the United States. If a change in judgment regarding this valuation allowance were to occur in the future, the Company will record a potentially material deferred tax benefit, which could result in a favorable impact on the effective tax rate in that period.

The U.S. Tax Cuts and Jobs Act (“Act”) was enacted on December 22, 2017. The Act reduces the U.S. federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings. Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cut and Jobs Act, allows filers to use prior year methodologies or estimates of the anticipated current impact of the Act in the preparation of their 2017 financial statements. At December 31, 2017, the Company had not completed its accounting for the tax effects of enactment of the Act; however, in certain cases, as described below, it has made a reasonable estimate of the effects on its existing deferred tax balances and the one-time transition tax. In all cases, the Company will continue to make and refine its calculations as additional data is gathered and further analysis is completed. In addition, the Company’s estimates may also be affected as it gains a more thorough understanding of the tax law and certain aspects of the Act are clarified by the taxing authorities. Any adjustments to these provisional amounts will be reported as a component of tax expense (benefit) in the reporting period in which any such adjustments are determined, which will be no later than the fourth quarter of 2018.

The Company remeasured certain U.S. deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%. However, the Company is still analyzing certain aspects of the Act and refining its calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. The provisional amount recorded related to the remeasurement of net deferred tax assets was a net tax charge of $162 million, which was fully offset by an adjustment to valuation allowance. Additionally, the Company recorded a deferred tax benefit of $11 million for the reduction of a deferred tax liability related to an indefinite lived intangible asset. The Act did not change the Company’s judgment regarding the realizability of these net deferred tax assets.

The one-time transition tax is based on the Company’s total post-1986 earnings and profits (“E&P”) that were previously deferred from U.S. income taxes and for which no deferred taxes were recorded since the Company previously claimed the indefinite reinvestment assertion exception on these earnings. At the date of enactment, the Company’s equity in the undistributed earnings of foreign subsidiaries for which income taxes had not been provided approximated $2.3 billion on a U.S. taxable E&P basis. The Act had the effect of subjecting approximately $1.8 billion of these undistributed earnings to the one-time transition tax. This tax, amounting to a provisional amount of $331 million, is expected to be substantially offset by available foreign tax credits resulting in a provisional net tax expense of $2 million primarily attributable to state taxes. The Company has not yet completed its calculation of the total post-1986 E&P and associated foreign tax credits for these foreign subsidiaries. Further, the transition tax is based in part on the amount of those earnings held in cash and other specified assets. This amount may change when the Company finalizes the calculation of post-1986 foreign E&P previously deferred from U.S. federal taxation and finalizes the amounts held in cash or other specified assets. The Company anticipates that additional guidance and clarification regarding the implementation of the transition tax will be issued by federal and state taxing authorities and this estimate is, therefore, subject to future refinement.

The Company has elected to treat Global Intangible Low Taxed Income (GILTI) which is effective in 2018 for the Company as a period cost.

At December 31, 2017, before valuation allowance, the Company had unused foreign tax credits of $124 million expiring in 2020 through 2027 and research tax credits of $16 million expiring from 2019 to 2036. Approximately $160 million of the deferred tax assets related to operating and capital loss carryforwards can be carried over indefinitely, with the remaining $182 million expiring between 2018 and 2037.

The Company maintains its assertion on a provisional basis that it intends to continue to indefinitely reinvest the gross book-tax basis differences in its non-US consolidated subsidiaries. However, the Company records deferred foreign taxes on gross book-tax basis differences to the extent of foreign distributable reserves for certain foreign subsidiaries. Determining the amount of unrecognized deferred tax liability related to any remaining undistributed foreign earnings not subject to the transition tax and additional outside basis difference in these entities (i.e., basis difference in excess of that subject to the one-time transition tax) is not practicable.

The Company records a liability for unrecognized tax benefits related to uncertain tax positions. The Company accrues interest and penalties associated with unrecognized tax benefits as a component of its income tax expense.

The following is a reconciliation of the Company’s total gross unrecognized tax benefits for the years ended December 31, 2017, 2016, and 2015:


	2017		2016		2015
Balance at January 1	$	74	$	74	$	77
Additions and reductions for tax positions of prior years		1				1
Additions based on tax positions related to the current year		17		15		10
Reductions due to the lapse of the applicable statute of limitations		(7)		(3)		(5)
Reductions due to settlements		(9)		(12)		(1)
Foreign currency translation		3				(8)
Balance at December 31	$	79	$	74	$	74
Unrecognized tax benefits, which if recognized, would impact the Company’s effective income tax rate	$	72	$	66	$	67
Accrued interest and penalties at December 31	$	8	$	23	$	25
Interest and penalties included in tax expense for the years ended December 31	$	(14)	$	(2)	$	(1)

Based upon the outcome of tax examinations, judicial proceedings, or expiration of statute of limitations, it is reasonably possible that the ultimate resolution of these unrecognized tax benefits may result in a payment that is materially different from the current estimate of the tax liabilities. The Company believes that it is reasonably possible that the estimated liability could decrease up to $7 million within the next 12 months. This is primarily the result of anticipated audit settlements or statute expirations in several taxing jurisdictions.

The Company is currently under income tax examination in various tax jurisdictions in which it operates, including Bolivia, Brazil, Canada, China, Colombia, France, Germany, and Indonesia. The years under examination range from 2004 through 2015. The Company has received tax assessments in excess of established reserves. The Company is contesting these tax assessments, and will continue to do so, including pursuing all available remedies such as appeals and litigation, if necessary.

The Company believes that adequate provisions for all income tax uncertainties have been made. However, if tax assessments are settled against the Company at amounts in excess of established reserves, it could have a material impact to the Company’s results of operations, financial position or cash flows. During 2017, the Company concluded income tax audits in several jurisdictions, including Canada, Ecuador, France, and Italy.