Income Taxes

Income before provision for income taxes, classified by source of income, was as follows:



In millions	2016		2015		2014
U.S.	$	2,059.4	$	2,597.8	$	2,681.9
Outside the U.S.	4,806.6		3,957.9		4,690.1
Income before provision for income taxes	$	6,866.0	$	6,555.7	$	7,372.0

The provision for income taxes, classified by the timing and location of payment, was as follows:



In millions	2016			2015			2014
U.S. federal	$	1,046.6		$	1,072.3		$	1,124.8
U.S. state	121.3			139.5			148.4
Outside the U.S.	1,550.2			816.0			1,431.7
Current tax provision	2,718.1			2,027.8			2,704.9
U.S. federal	(122.1		)	6.8			(81.8		)
U.S. state	14.1			(3.9		)	(6.2		)
Outside the U.S.	(430.6		)	(4.3		)	(2.7		)
Deferred tax provision	(538.6		)	(1.4		)	(90.7		)
Provision for income taxes	$	2,179.5		$	2,026.4		$	2,614.2

Net deferred tax liabilities consisted of:



In millions	December 31, 2016				2015
Property and equipment		$	1,459.8		$	1,751.7
Unrealized foreign exchange gains		630.9			455.6
Intangible liabilities		445.2			464.7
Other		287.6			268.5
Total deferred tax liabilities		2,823.5			2,940.5
Property and equipment		(650.2		)	(472.7		)
Employee benefit plans		(395.0		)	(390.1		)
Intangible assets		(170.7		)	(222.6		)
Deferred foreign tax credits		(316.8		)	(289.2		)
Operating loss carryforwards		(292.7		)	(419.8		)
Other		(338.6		)	(297.0		)
Total deferred tax assets before valuation allowance		(2,164.0		)	(2,091.4		)
Valuation allowance		168.0			322.4
Net deferred tax liabilities		$	827.5		$	1,171.5
Balance sheet presentation:
Deferred income taxes		$	1,817.1		$	1,704.3
Other assets-miscellaneous		(804.0		)	(532.8		)
Liabilities of businesses held for sale		(185.6		)	—
Net deferred tax liabilities		$	827.5		$	1,171.5

At December 31, 2016, the Company had net operating loss carryforwards of $1.1 billion, of which $0.8 billion has an indefinite carryforward. The remainder will expire at various dates from 2017 to 2031.

The Company's effective income tax rate is typically lower than the U.S. statutory tax rate primarily because non-U.S. income is generally subject to local statutory country tax rates that are below the 35% U.S. statutory tax rate and reflect the impact of global transfer pricing.

The statutory U.S. federal income tax rate reconciles to the effective income tax rates as follows:



	2016		2015		2014
Statutory U.S. federal income tax rate	35.0	%	35.0	%	35.0	%
State income taxes, net of related federal income tax benefit	1.5		1.6		1.6
Foreign income taxed at different rates	(6.5	)	(4.9	)	(4.8	)
Taxes related to unfavorable lower tax court ruling and audit progression in foreign tax jurisdictions	1.2		—		4.1
Cash repatriation	—		(2.3	)	(1.2	)
Other, net	0.5		1.5		0.8
Effective income tax rates	31.7	%	30.9	%	35.5	%

As of December 31, 2016 and 2015, the Company’s gross unrecognized tax benefits totaled $924.1 million and $781.2 million, respectively. After considering the deferred tax accounting impact, it is expected that about $630 million of the total as of December 31, 2016 would favorably affect the effective tax rate if resolved in the Company’s favor.

The following table presents a reconciliation of the beginning and ending amounts of unrecognized tax benefits:



In millions	2016			2015
Balance at January 1	$	781.2		$	988.1
Decreases for positions taken in prior years	(37.1		)	(49.9		)
Increases for positions taken in prior years	150.1			30.5
Increases for positions related to the current year	116.6			83.7
Settlements with taxing authorities	(17.7		)	(258.0		)
Lapsing of statutes of limitations	(69.0		)	(13.2		)
Balance at December 31⁽¹⁾	$	924.1		$	781.2


(1)	Of this amount, $890.0 million and $704.0 million are included in Other long-term liabilities for 2016 and 2015, respectively, and $9.0 million and $21.9 million are included in Current liabilities - income taxes for 2016 and 2015, respectively, on the consolidated balance sheet. The remainder is included in Deferred income taxes on the consolidated balance sheet.

In 2015, the Company filed a protest with the Internal Revenue Service ("IRS") Appeals Office related to certain disagreed transfer pricing matters related to the Company's U.S. federal income tax return audits for 2009 and 2010. As of December 31, 2016, the Company has not yet received a response to this protest from the IRS. In addition, the Company's 2011 and 2012 U.S. federal income tax returns are currently under examination. The Company is also under audit in multiple foreign tax jurisdictions for matters primarily related to transfer pricing, and the Company is under audit in multiple state tax jurisdictions. It is reasonably possible that the total amount of unrecognized tax benefits could decrease up to $250 million within the next 12 months, of which up to $10 million could favorably affect the effective tax rate. This would be due to the possible settlement of the 2009 and 2010 IRS protest, receipt of the 2011 and 2012 Revenue Agent Report, completion of the aforementioned foreign and state tax audits and the expiration of the statute of limitations in multiple tax jurisdictions.

In addition, it is reasonably possible that, as a result of audit progression in both the U.S. and foreign tax audits within the next 12 months, there may be new information that causes the Company to reassess the total amount of unrecognized tax benefits recorded. While the Company cannot estimate the impact that new information may have on our unrecognized tax benefit balance, we believe that the liabilities recorded are appropriate and adequate as determined under ASC 740.

The Company operates within multiple tax jurisdictions and is subject to audit in these jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations for years before 2009.

The Company had $117.0 million and $83.6 million accrued for interest and penalties at December 31, 2016 and 2015, respectively. The Company recognized interest and penalties related to tax matters of $41.7 million in 2016, $21.1 million in 2015, and $87.9 million in 2014, which are included in the provision for income taxes.

Deferred U.S. income taxes have not been recorded for temporary differences related to investments in certain foreign subsidiaries and corporate joint ventures. These temporary differences were approximately $16.0 billion at December 31, 2016 and consisted primarily of undistributed earnings considered permanently invested in operations outside the U.S. Determination of the deferred income tax liability on these unremitted earnings is not practicable because such liability, if any, is dependent on circumstances existing if and when remittance occurs.