15. Taxes on Income

The amount of earnings (loss) before income taxes is:


	Years Ended December 31,
($ in millions)	2016		2015		2014

U.S.	$	(381)	$	47	$	280
Foreign		506		299		366
	$	125	$	346	$	646

The provision (benefit) for income tax expense is:


	Years Ended December 31,
($ in millions)	2016		2015		2014

Current
U.S.	$	(3)	$	26	$	51
State and local		27		7		18
Foreign		143		76		69
Total current		167		109		138

Deferred
U.S.		(67)		(38)		9
State and local		(17)		(4)		(1)
Foreign		(209)		(20)		4
Total deferred		(293)		(62)		12
Tax provision (benefit)	$	(126)	$	47	$	150

The income tax provision recorded within the consolidated statements of earnings differs from the provision determined by applying the U.S. statutory tax rate to pretax earnings as a result of the following:


	Years Ended December 31,
($ in millions)	2016			2015			2014

Statutory U.S. federal income tax	$	44		$	121		$	226
Increase (decrease) due to:
Foreign tax rate differences including tax holidays		(71)			(51)			(57)
Permanent differences on business dispositions		(62)			—			—
Foreign subsidiaries restructuring		(145)			—			—
Non-deductible transaction costs		52			—			—
U.S. state and local taxes, net		6			2			7
U.S. taxes on foreign earnings, net of tax deductions and credits		21			2			12
U.S. manufacturing deduction		—			(4)			(7)
U.S. research and development tax credits		(9)			(15)			(9)
Uncertain tax positions, including interest		3			(4)			(8)
Company and trust-owned life insurance		(6)			(2)			(5)
Change in valuation allowances		46			—			—
Benefit from foreign equity compensation		(5)			—			—
Other, net		—			(2)			(9)
Provision (benefit) for taxes	$	(126)		$	47		$	150
Effective tax rate expressed as a percentage of pretax earnings		(100.8)	%		13.6	%		23.2	%

The 2016 full year effective income tax rate was negative 100.8 percent compared to 13.6 percent for 2015. The lower tax rate in 2016 compared to 2015 was primarily due to the tax benefit recorded for tax deductible goodwill created as a result of a current year legal entity restructuring in Brazil. The 2016 tax rate was also reduced for increased benefits from foreign tax rate differences related to current year acquisitions and by permanent differences on current year business dispositions. These amounts were partially offset by the tax impact of non-deductible transaction costs related to current year acquisitions and current year increases in valuation allowances, primarily for losses in the U.K. where no tax benefit is expected.

The 2015 full year effective income tax rate was 13.6 percent compared to 2014 of 23.2 percent. The lower tax rate in 2015 compared to 2014 was primarily due to business consolidation and other activities incurred in the U.S., lower U.S. taxes on foreign earnings, and increased research and development tax credits, partially offset by decreased favorable nonrecurring discrete tax items in the 2015 effective tax rate.

Ball’s Serbian subsidiary was granted an income tax holiday that applies to only a portion of earnings and expired at the end of 2015. In addition, the Serbian subsidiary was granted tax relief equal to 80 percent of additional local investment over a ten-year period that will expire in 2022. The tax relief may be used to offset tax on earnings not covered by the initial tax holiday and has $13 million remaining as of December 31, 2016. In 2011 and 2012, one of Ball’s Brazilian subsidiaries was granted two tax holidays expiring in 2021 and 2022. Under the terms of the holidays, a certain portion of Brazil earnings receive up to a 19 percent tax exemption. The exemption did not reduce income tax in 2016 but reduced income tax by $16 million in both 2015 and 2014. Ball’s newly acquired Brazilian subsidiaries also benefit from similar holidays with expiration dates from 2016 (extension to 2026 currently pending) to 2022. This exemption reduced income tax by $20 million in 2016. One of Ball’s Polish subsidiaries was granted a tax holiday in 2014 based on new capital investment. The holiday provides up to $34 million of tax relief over a ten-year period of which $32 million remained as of December 31, 2016.

Due to the U.S. tax status of certain Ball subsidiaries in Canada and the PRC, the company annually provides U.S. taxes on foreign earnings in those subsidiaries, net of any estimated foreign tax credits or deductions for foreign taxes. Current taxes are also provided on certain other undistributed earnings that are currently taxable in the U.S. In 2016, the tax amount increased due to expected current U.S. tax related to gains on the sale of certain European subsidiaries. Net U.S. taxes provided in 2016, 2015 and 2014 were $21 million, $2 million and $12 million, respectively. Management’s intention is to indefinitely reinvest the undistributed earnings of Ball’s other foreign subsidiaries. The indefinite reinvestment assertion is supported by both long-term and short-term forecasts and U.S. financial requirements, including, but not limited to, operating cash flows, capital expenditures, debt maturities and dividends. As a result, the company has not provided deferred taxes on earnings in certain non-U.S. subsidiaries because such earnings are intended to be indefinitely reinvested in its international operations. Retained earnings in non-U.S. subsidiaries totaled $2.6 billion as of December 31, 2016. It is not practical to estimate the additional taxes that may become payable upon the eventual remittance of these foreign earnings to the U.S.; however, repatriation of these earnings could result in a material increase in the company’s effective tax rate.

Net income tax payments were $68 million, $58 million and $163 million in 2016, 2015 and 2014, respectively.

The significant components of deferred tax assets and liabilities were:


	December 31,
($ in millions)	2016		2015

Deferred tax assets:
Deferred compensation	$	110	$	110
Accrued employee benefits		188		113
Deferred revenue		34		—
Accrued pensions		228		177
Inventory and other reserves		87		21
Net operating losses, foreign tax credits and other tax attributes		425		105
Unrealized losses on currency exchange and derivative transactions		59		57
Goodwill and other intangible assets		100		—
Transaction costs		—		34
Other		64		35
Total deferred tax assets		1,295		652
Valuation allowance		(183)		(90)
Net deferred tax assets		1,112		562
Deferred tax liabilities:
Property, plant and equipment		(428)		(267)
Goodwill and other intangible assets		(590)		(155)
Other		(90)		(17)
Total deferred tax liabilities		(1,108)		(439)
Net deferred tax asset (liability)	$	4	$	123

The net deferred tax asset was included in the consolidated balance sheets as follows:


	December 31,
($ in millions)	2016		2015

Other current assets	$	—	$	96
Other assets		443		60
Other current liabilities		—		(3)
Deferred taxes and other liabilities		(439)		(30)
Net deferred tax asset	$	4	$	123

At December 31, 2016, Ball’s European subsidiaries had capital and net operating loss carryforwards, primarily with no expiration date, of $437 million with a related tax benefit of $95 million. Ball’s Canadian subsidiaries had net operating loss carryforwards, expiring between 2027 and 2035, of $88 million with a related tax benefit of $23 million. Ball’s Asian subsidiaries had net operating loss carryforwards, expiring between 2019 and 2021, of $49 million with a related tax benefit of $13 million. One of Ball’s Mexican subsidiaries had net operating loss carryforwards, expiring between 2021 and 2025, of $19 million with a related tax benefit of $6 million. Ball’s South American subsidiaries had net operating loss carryforwards, with no expiration date, of $149 million with a related tax benefit of $51 million. Ball’s U.S. subsidiaries had federal net operating losses expiring between 2029 and 2034 of $316 million with a related tax benefit of $111 million. The U.S. Subsidiaries also had state net operating loss carryforwards with a tax benefit of $50 million that expire between 2017 and 2035. At December 31, 2016, the company had foreign tax credit carryforwards of $46 million expiring between 2018 and 2024; research and development tax credit carryforwards of $27 million expiring between 2028 and 2035 and alternative minimum tax credits of $6 million that do not expire.

Due to the uncertainty of ultimate realization, the European, Asian, Canadian and the U.S. state loss carryforwards have been offset by either full or partial valuation allowances while the U.S. federal net operating losses, the Mexican net operating losses, the South American net operating losses and the U.S. research and development and alternative minimum tax credits are expected to be fully utilized. The benefits of the foreign tax credit carryforwards have been fully offset by valuation allowances.

In 2016, the company’s overall valuation allowances increased by $93 million. The net increase was primarily due to valuation allowances recorded on net operating and capital losses of acquired Rexam subsidiaries in the U.K., France, and for U.S. state tax purposes, as well as for current year U.S. state net operating losses at Ball’s U.S. subsidiaries, partially offset by the release of valuation allowances on net operating losses for Ball’s Canadian subsidiaries, and by a release of valuation allowances on net operating losses due to dispositions of certain European subsidiaries.

A rollforward of the unrecognized tax benefits related to uncertain income tax positions at December 31 follows:


($ in millions)	2016		2015		2014

Balance at January 1	$	51	$	66	$	78
Additions related to acquisitions		55		—		—
Additions based on tax positions related to the current year		18		1		1
Additions for tax positions of prior years		6		2		8
Reductions related to Divestment Business		(30)		—		—
Reductions for tax positions from prior years		(5)		—		—
Reductions for settlements		—		(8)		—
Reductions due to lapse of statute of limitations		(16)		(6)		(16)
Effect of foreign currency exchange rates		(2)		(4)		(5)
Balance at December 31	$	77	$	51	$	66

The annual provisions for income taxes included tax expense related to uncertain tax positions, including interest and penalties of $3 million in 2016, and tax benefits of $4 million and $8 million in 2015 and 2014, respectively.

At December 31, 2016, the amounts of unrecognized tax benefits that, if recognized, would reduce tax expense were $95 million. Within the next 12 months, the company does not expect unrecognized tax benefits to decrease as a result of settlements with various taxing jurisdictions. The company and its subsidiaries file various income tax returns in the U.S. federal, various state, local and foreign jurisdictions. The U.S. federal statute of limitations is closed for years prior to 2013. With a few exceptions, the company is no longer subject to examination by state and local tax authorities for years prior to 2009. The company’s significant non-U.S. filings are in Germany, France, the U.K., Spain, the Netherlands, Poland, Serbia, Switzerland, Sweden, Russia, Turkey, Egypt, Saudi Arabia, the PRC, Canada, Brazil, the Czech Republic, Mexico, Chile and Argentina. At December 31, 2016, the company is either under examination or has been notified of a pending examination by tax authorities in Germany, the U.K., Hong Kong, Canada and various U.S. states.

As part of the sale of the Divestment Business to Ardagh on June 30, 2016, the company provided an indemnification for the related portion of the uncertain tax positions of the Divested Business. The indemnification is accounted for as a guarantee and the company has recognized a liability equal to the fair value of the indemnity of $36 million.

The company recognizes the accrual of interest and penalties related to unrecognized tax benefits in income tax expense. Ball recognized $3 million of tax expense, $2 million of tax benefit and $1 million of tax expense in 2016, 2015 and 2014, respectively, for potential interest on these items. At December 31, 2016, 2015 and 2014, the accrual for uncertain tax positions included potential interest expense of $10 million, $9 million and $11 million, respectively. The company has accrued penalties of $10 million in 2016. No penalties were accrued in 2015 or 2014.