6. Income taxes

Income before income taxes is comprised of the following components:

	For Years Ended December 31,
	2017		2016		2015
U.S.	$	5,130	$	3,953	$	3,218
Non-U.S.		950		977		998
Total	$	6,080	$	4,930	$	4,216

Provision for income taxes is comprised of the following components:

	For Years Ended December 31,
	2017						2016							2015
	Current		Deferred		Total		Current		Deferred			Total		Current		Deferred			Total
U.S. federal	$	2,101	$	51	$	2,152	$	1,289	$	(122	)	$	1,167	$	1,110	$	(72	)	$	1,038
Non-U.S.		173		61		234		238		(80	)		158		168		14			182
U.S. state		12		—		12		10		—			10		7		3			10
Total	$	2,286	$	112	$	2,398	$	1,537	$	(202	)	$	1,335	$	1,285	$	(55	)	$	1,230

Principal reconciling items from the U.S. statutory income tax rate to the effective tax rate (Provision for income taxes as a percentage of Income before income taxes) are as follows:

	For Years Ended December 31,
	2017			2016			2015
U.S. statutory income tax rate		35.0	%		35.0	%		35.0	%
U.S. Tax Act		12.7			—			—
U.S. excess tax benefit for stock compensation		(4.1	)		(3.0	)		—
Non-U.S. effective tax rates		(2.5	)		(3.7	)		(4.0	)
U.S. tax benefit for manufacturing		(1.6	)		(1.5	)		(1.6	)
U.S. R&D tax credit		(1.1	)		(1.2	)		(1.3	)
Impact of changes to uncertain tax positions		0.7			0.6			0.2
U.S. non-deductible expenses		0.2			0.3			0.3
Other		0.1			0.6			0.6
Effective tax rate		39.4	%		27.1	%		29.2	%

The U.S. Tax Cuts and Jobs Act (the Tax Act) was enacted on December 22, 2017. The Tax Act reduces the U.S. statutory income tax rate from 35 percent to 21 percent and requires companies to pay a tax on indefinitely reinvested earnings of certain non-U.S. subsidiaries that were previously tax deferred. We have not completed our accounting for the tax effects of enactment of the Tax Act. We have made reasonable estimates of the tax on indefinitely reinvested earnings and the effects on our existing deferred tax balances. This resulted in additional tax expense in 2017 of $773 million, an increase of 12.7 percentage points to our effective tax rate. The combined effects of the tax on indefinitely reinvested earnings and the revaluation of our deferred tax balances are included as a component of income tax expense from continuing operations.

Details on provisional amounts are as follows:

•

Indefinitely reinvested earnings – The tax on indefinitely reinvested earnings is based on our non-U.S. post-1986 earnings and profits (E&P) that we previously deferred from U.S. income taxes, and resulted in an increase in income tax expense of $714 million. We have not yet completed our calculation of the total post-1986 E&P for these non-U.S. subsidiaries. Further, the tax on indefinitely reinvested earnings is based in part on the amount of those earnings held in cash and other specified assets. This amount may change when we finalize the calculation of post-1986 non-U.S. E&P previously deferred from U.S. income taxes and finalize the amounts held in cash or other specified assets.

•

Deferred tax assets and liabilities – We remeasured deferred tax assets and liabilities based on the U.S. statutory income tax rate of 21 percent. However, we are still analyzing certain aspects of the Tax Act and refining our 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 our deferred tax balance was $59 million.

The Tax Act also included the global intangible low-taxed income (GILTI) tax for years beginning in 2018. We will account for the effects of GILTI as a component of income tax expense in the future period in which the tax arises.

The earnings represented by non-cash operating assets, such as fixed assets and certain inventory, will continue to be permanently reinvested outside the United States. The tax on indefinitely reinvested earnings eliminates any additional U.S. taxation of these earnings upon repatriation to the United States. Consequently, no U.S. tax provision has been made for the future remittance of these earnings. However, withholding taxes in certain non-U.S. jurisdictions will be incurred upon repatriation of available cash to the United States. A provision has been made for deferred taxes on these undistributed earnings to the extent that dividend payments from these subsidiaries are expected to result in a withholding tax liability. As of December 31, 2017, we have no basis differences that would result in material unrecognized deferred tax liabilities.

Our effective tax rate is affected by U.S. tax benefits and tax rates applicable to our operations in many of the jurisdictions in which we operate, most of which were lower than the U.S. statutory income tax rate prior to enactment of the Tax Act. These non-U.S. tax rates are generally statutory in nature and without expiration.

The primary components of deferred tax assets and liabilities are as follows:

	December 31,
	2017			2016
Deferred tax assets:
Deferred loss and tax credit carryforwards	$	256		$	214
Accrued expenses		119			219
Stock compensation		107			220
Inventories and related reserves		93			145
Retirement costs for defined benefit and retiree health care		38			82
Other		9			81
Total deferred tax assets, before valuation allowance		622			961
Valuation allowance		(165	)		(128	)
Total deferred tax assets, after valuation allowance		457			833
Deferred tax liabilities:
Acquisition-related intangibles and fair-value adjustments		(207	)		(460	)
International earnings		(64	)		(32	)
Total deferred tax liabilities		(271	)		(492	)
Net deferred tax asset	$	186		$	341

The deferred tax assets and liabilities based on tax jurisdictions are presented on our Consolidated Balance Sheets as follows:

	December 31,
	2017			2016
Deferred tax assets	$	264		$	374
Deferred tax liabilities		(78	)		(33	)
Net deferred tax asset	$	186		$	341

We make an ongoing assessment regarding the realization of U.S. and non-U.S. deferred tax assets. This assessment is based on our evaluation of relevant criteria, including the existence of deferred tax liabilities that can be used to absorb deferred tax assets, taxable income in prior carryback years and expectations for future taxable income. Valuation allowances increased by $37 million in 2017 and decreased by $58 million in 2016. These changes had no impact to Net income in 2017 and had a $63 million benefit to Net income in 2016.

We have U.S. and non-U.S. tax loss carryforwards of approximately $6 million, none of which will expire before the year 2027.

Cash payments made for income taxes, net of refunds, were $1.80 billion, $1.15 billion and $1.17 billion in 2017, 2016 and 2015, respectively.

Uncertain tax positions

We operate in a number of tax jurisdictions, and our income tax returns are subject to examination by tax authorities in those jurisdictions who may challenge any item on these tax returns. Because the matters challenged by authorities are typically complex, their ultimate outcome is uncertain. Before any benefit can be recorded in our financial statements, we must determine that it is “more likely than not” that a tax position will be sustained by the appropriate tax authorities. We recognize accrued interest related to uncertain tax positions and penalties as components of OI&E.

The changes in the total amounts of uncertain tax positions are as follows:

	2017			2016			2015
Balance, January 1	$	243		$	84		$	108
Additions based on tax positions related to the current year		17			4			11
Additions for tax positions of prior years		42			189			3
Reductions for tax positions of prior years		(1	)		(2	)		(21	)
Settlements with tax authorities		(1	)		(32	)		(17	)
Balance, December 31	$	300		$	243		$	84

Interest income (expense) recognized in the year ended December 31	$	(19	)	$	4		$	8

Interest receivable (payable) as of December 31	$	(38	)	$	13		$	9

The liability for uncertain tax positions is a component of Other long-term liabilities on our Consolidated Balance Sheets.

All of the $300 million and the $243 million liabilities for uncertain tax positions as of December 31, 2017 and 2016, respectively, are comprised of positions that, if recognized, would lower the effective tax rate. If these liabilities are ultimately realized, $13 million and $12 million of existing deferred tax assets in 2017 and 2016, respectively, would also be realized. These deferred tax assets are related to refunds from counterparty jurisdictions resulting from procedures for relief from double taxation.

As of December 31, 2017, the statute of limitations remains open for U.S. federal tax returns for 2010 and following years. Audit activities related to our U.S. federal tax returns through 2012 have been completed except for certain pending tax treaty procedures for relief from double taxation. The procedures for relief from double taxation pertain to U.S. federal tax returns for the years 2006 through 2011. The audit of the U.S. federal tax returns for 2013 through 2015 is underway.

In non-U.S. jurisdictions, the years open to audit represent the years still open under the statute of limitations. With respect to major jurisdictions outside the United States, our subsidiaries are no longer subject to income tax audits for years before 2007.