Income Taxes

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act made broad and complex changes to the U.S. tax code which impacted 2017 including, but not limited to, reducing the U.S. federal corporate tax rate and requiring a one-time transition tax on certain undistributed earnings of foreign subsidiaries.

The Tax Act also puts in place new tax laws that will apply prospectively, which include, but are not limited to, (1) implementing a base erosion and anti-abuse tax, (2) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries, (3) a new provision designed to tax currently in the U.S. global intangible low-taxed income ("GILTI") of foreign subsidiaries, which allows for the possibility of utilizing foreign tax credits to offset the income tax liability (subject to some limitations), and (4) a lower effective U.S. tax rate on certain revenues from sources outside the U.S.

GAAP requires the impact of tax legislation to be recorded in the period of enactment. Therefore, in connection with our initial analysis of the impact of the Tax Act, we recorded a discrete net tax expense of $76 in the period ended December 31, 2017. This amount consists of a net expense of $278 for the transition tax and a net benefit of $202 for the remeasurement of deferred taxes associated with the corporate rate reduction and our reassessment of permanently reinvested earnings. In addition, we recorded a net benefit of $152 for certain tax planning actions that were taken in the fourth quarter of 2017 in anticipation of the enactment of the Tax Act.

Other than the item noted below, we were able to make reasonable estimates of the impact of the Tax Act and have recorded provisional amounts for the transition tax, the remeasurement of deferred taxes, and our reassessment of permanently reinvested earnings, uncertain tax positions and valuation allowances. These estimates may be impacted by the need for further analysis and future clarification and guidance regarding available tax accounting methods and elections, earnings and profits computations, state tax conformity to federal tax changes and the impact of prospective tax related to the GILTI provisions.

At December 31, 2017, we were not able to reasonably estimate and, therefore, have not recorded deferred taxes for the GILTI provisions. We have not yet determined our policy election with respect to whether to record deferred taxes for basis differences expected to reverse as a result of the GILTI provisions in future years, or in the period in which that tax was incurred.

An analysis of the provision for income taxes follows:



	Year Ended December 31
	2017			2016			2015
Current income taxes
United States	$	463		$	523		$	223
State	52			53			56
Other countries	330			361			394
Total	845			937			673
Deferred income taxes
United States	(68		)	(40		)	(180		)
State	(3		)	31			(74		)
Other countries	2			(6		)	(1		)
Total	(69		)	(15		)	(255		)
Total provision for income taxes	$	776		$	922		$	418

Income before income taxes is earned in the following tax jurisdictions:



	Year Ended December 31
	2017		2016		2015
United States	$	1,995	$	2,088	$	451
Other countries	996		921		884
Total income before income taxes	$	2,991	$	3,009	$	1,335

Deferred income tax assets and liabilities are composed of the following:



	December 31
	2017			2016
Deferred tax assets
Pension and other postretirement benefits	$	312		$	499
Tax credits and loss carryforwards	470			450
Derivatives and unrealized exchange gains and losses	63			32
Share based compensation	47			86
Other	308			480
	1,200			1,547
Valuation allowances	(176		)	(225		)
Total deferred tax assets	1,024			1,322

Deferred tax liabilities
Property, plant and equipment, net	818			1,079
Investments in subsidiaries	117			190
Goodwill	83			83
Other	186			268
Total deferred tax liabilities	1,204			1,620
Net deferred tax assets (liabilities)	$	(180	)	$	(298	)

Valuation allowances at the end of 2017 primarily relate to tax credits, capital loss carryforwards, and income tax loss carryforwards of $743. If these items are not utilized against taxable income, $481 of the income tax loss carryforwards will expire from 2018 through 2037. The remaining $262 have no expiration date.

Realization of income tax loss carryforwards is dependent on generating sufficient taxable income prior to expiration of these carryforwards. Although realization is not assured, we believe it is more likely than not that all of the deferred tax assets, net of applicable valuation allowances, will be realized. The amount of the deferred tax assets considered realizable could be reduced or increased due to changes in the tax environment or if estimates of future taxable income change during the carryforward period.

Presented below is a reconciliation of the income tax provision computed at the U.S. federal statutory tax rate to the actual effective tax rate:



	Year Ended December 31
	2017		2016		2015
U.S. statutory rate applied to income before income taxes	35.0	%	35.0	%	35.0	%
Rate of state income taxes, net of federal tax benefit	1.1		1.8		(0.9	)
Statutory rates other than U.S. statutory rate	(3.1	)	(2.7	)	(6.9	)
Venezuela deconsolidation, balance sheet remeasurement and inflationary impacts	—		(0.1	)	4.5
Uncertain tax positions adjustment^(a)	—		—		3.7
Routine tax incentives	(2.7	)	(4.0	)	(7.4	)
Net tax (benefit) cost on foreign income	(0.7	)	0.1		5.1
Net impact of the Tax Act	(2.5	)	—		—
Other - net^(b)	(1.2	)	0.5		(1.8	)
Effective income tax rate	25.9	%	30.6	%	31.3	%


(a)	In 2015, we updated our assessment of uncertain tax positions for certain international operations and as a result we recorded an immaterial income tax charge of $49 related to prior years.


(b)	Other - net is composed of numerous items, none of which is greater than 1.75 percent of income before income taxes.

Prior to the Tax Act, we considered essentially all historical earnings in our non-U.S. subsidiaries to be indefinitely reinvested, except related to certain equity investments, and, accordingly, recorded insignificant deferred income taxes. Prior to the transition tax, we had an excess of the amount for financial reporting over the tax basis in our foreign subsidiaries. While the transition tax resulted in the reduction of the excess of the amount for financial reporting over the tax basis in our foreign subsidiaries, an actual repatriation from our non-U.S. subsidiaries could be subject to additional foreign and U.S. state income taxes.

Deferred taxes have been recorded for foreign and U.S. state income taxes on $1.0 billion of earnings of foreign consolidated subsidiaries expected to be repatriated. We do not intend to distribute $4.5 billion of earnings of foreign consolidated subsidiaries taxed as part of the transition tax and have not recorded any deferred taxes related to such amounts for foreign and U.S. state income taxes. We consider any excess of the amount for financial reporting over the tax basis of our investment in our foreign subsidiaries to be indefinitely reinvested. At this time, the determination of deferred tax liabilities on this amount is not practicable.

Presented below is a reconciliation of the beginning and ending amounts of unrecognized income tax benefits:



	2017			2016			2015
Balance at January 1	$	321		$	406		$	416
Gross increases for tax positions of prior years	50			20			80
Gross decreases for tax positions of prior years	(23		)	(104		)	(61		)
Gross increases for tax positions of the current year	37			39			59
Settlements	(19		)	(29		)	(63		)
Other	(12		)	(11		)	(25		)
Balance at December 31	$	354		$	321		$	406

Of the amounts recorded as unrecognized tax benefits at December 31, 2017, $297 would reduce our effective tax rate if recognized.

We recognize accrued interest and penalties related to unrecognized tax benefits in income tax expense. During each of the three years ended December 31, 2017, the net impact in interest and penalties was not significant. Total accrued penalties and net accrued interest was $35 and $47 at December 31, 2017 and 2016, respectively.

It is reasonably possible that a number of uncertainties could be resolved within the next 12 months. The aggregate resolution of the uncertainties could be up to $220, while none of the uncertainties is individually significant. Resolution of these matters is not expected to have a material effect on our financial condition, results of operations or liquidity.

As of December 31, 2017, the following tax years remain subject to examination for the major jurisdictions where we conduct business:



Jurisdiction	Years
United States	2014 to 2017
United Kingdom	2012 to 2017
Brazil	2012 to 2017
South Korea	2014 to 2017
China	2008 to 2017

Our U.S. federal income tax returns have been audited through 2013. We have various federal income tax return positions in administrative appeals for 2004, 2005, 2007 and 2010 through 2013.

State income tax returns are generally subject to examination for a period of 3 to 5 years after filing of the respective return. The state effect of any changes to filed federal positions remains subject to examination by various states for a period of up to two years after formal notification to the states. We have various state income tax return positions in the process of examination, administrative appeals or litigation.