INCOME TAXES

Our effective tax rate was 50.6%, 14.3% and 17.1% for 2017, 2016 and 2015. The effective income tax rate for 2017 reflects the impact of complying with the Tax Cuts and Jobs Act of 2017, signed into law in December 2017, partially offset by the benefits from the adoption of ASU 2016-09 Compensation-Stock Compensation: Improvements to Employee Share-Based Payment Accounting on January 1, 2017 and continued lower effective income tax rates as a result of the European headquarters. The establishment of the European regional headquarters contributed to the lower effective income tax rates in 2016 and 2015.



Effective Income Tax Rate Reconciliation
	2017		2016		2015
United States federal statutory rate	35.0	%	35.0	%	35.0	%
United States state and local income taxes, less federal deduction	1.2		1.7		2.1
Foreign income tax at rates other than 35%	(21.0	)	(22.2	)	(17.6	)
Tax Cuts and Jobs Act of 2017 transition tax	38.0		—		—
Tax Cuts and Jobs Act of 2017 deferred tax changes	2.3		—		—
Tax related to repatriation of foreign earnings	—		(0.3	)	(3.9	)
Other	(4.9	)	0.1		1.5
Effective income tax rate	50.6	%	14.3	%	17.1	%

In December 2017 the Tax Cuts and Jobs Act of 2017 (the Act) was signed into law in the United States. The law includes significant changes to the United States corporate income tax system, including a federal corporate rate reduction, limitations on the deductibility of certain expenses, and the transition of United States international taxation from a worldwide tax system to a territorial tax system. As part of the transition to a territorial tax system, the Act requires taxpayers to calculate a one-time transition tax based on undistributed earnings of foreign subsidiaries. We recorded the transition tax in our current year results which significantly impacted our effective tax rate. Additionally, we recorded additional tax expense to adjust certain deferred tax accounts to the new corporate tax rate.

These amounts are our best estimate based on the current information and guidance available at this time and represent provisional estimates of the transition tax related charge and change in deferred tax accounts charge associated with the Act and will be finalized in 2018.



Earnings Before Income Taxes
	2017		2016		2015
United States	$	499	$	542	$	475
International	1,564		1,379		1,260
Total	$	2,063	$	1,921	$	1,735



Components of Income Tax Expense
Current income tax expense:	2017			2016			2015
United States federal	$	836		$	94		$	78
United States state and local	38			50			23
International	133			176			108
Total current income tax expense	$	1,007		$	320		$	209
Deferred income tax expense (benefit):
United States federal	$	84		$	(17	)	$	2
United States state and local	(9		)	(12		)	8
International	(39		)	(17		)	77
Total deferred income tax expense (benefit)	$	36		$	(46	)	$	87
Total income tax expense	$	1,043		$	274		$	296

Interest and penalties included in other income (expense), net were expense of ($28), ($1) and ($4) in 2017, 2016 and 2015. The United States federal deferred income tax expense (benefit) includes the utilization of net operating loss carryforwards of $32, $28 and $79 in 2017, 2016 and 2015.



Deferred Income Tax Assets and Liabilities
Deferred income tax assets:	2017			2016
Inventories	$	480		$	583
Product-related liabilities	34			115
Other accrued expenses	204			248
State income taxes	46			52
Share-based compensation	46			80
Net operating loss carryforwards	52			74
Other	105			117
Total deferred income tax assets	$	967		$	1,269
Less valuation allowances	(49		)	(51		)
Net deferred income tax assets	$	918		$	1,218
Deferred income tax liabilities:
Depreciation and amortization	$	(598	)	$	(871	)
Undistributed earnings	(81		)	(50		)
Other	(3		)	(50		)
Total deferred income tax liabilities	$	(682	)	$	(971	)
Net deferred income tax assets	$	236		$	247
Reported as:
Noncurrent assets—Other	$	283		$	302
Noncurrent liabilities—Other liabilities	(47		)	(55		)
Total	$	236		$	247

Accrued interest and penalties were $60 and $34 on December 31, 2017 and 2016, which were reported in current and non-current accrued expenses and other liabilities.

Net operating loss carryforwards totaling $219 on December 31, 2017 are available to reduce future taxable earnings of certain domestic and foreign subsidiaries. United States loss carryforwards of $106 expire through 2028. International loss carryforwards of $113 began to expire in 2017; however, some have no expiration. Of these carryforwards, $36 are subject to a full valuation allowance. We also have a tax credit carryforward of $43 with $40 being subject to a full valuation allowance. The credits with a full valuation allowance have no expiration; however, we do not anticipate generating income tax in excess of the credits in the foreseeable future.

We recorded a transition tax on undistributed foreign earnings as required by the Act. No other provision was made for income taxes that may result from future remittances of the undistributed earnings of foreign subsidiaries that are determined to be indefinitely reinvested, which were $8,484 on December 31, 2017. Determination of the total amount of unrecognized deferred income tax on undistributed earnings of foreign subsidiaries is not practicable.



Uncertain Income Tax Positions
	2017			2016
Beginning uncertain tax positions	$	287		$	313
Increases related to current year income tax positions	123			47
Increases related to prior year income tax positions	131			22
Decreases related to prior year income tax positions:
Settlements and resolutions of income tax audits	(9		)	(82		)
Statute of limitations expirations	(4		)	(9		)
Foreign currency translation	12			(4		)
Ending uncertain tax positions	$	540		$	287
Reported as:
Noncurrent liabilities—Income taxes	540			287
Total	$	540		$	287

Our income tax expense would have been reduced by $232 and $209 on December 31, 2017 and 2016 had these uncertain income tax positions been favorably resolved. It is reasonably possible that the amount of unrecognized tax benefits will significantly change due to one or more of the following events in the next twelve months: expiring statutes, audit activity, tax payments, competent authority proceedings related to transfer pricing or final decisions in matters that are the subject of controversy in various taxing jurisdictions in which we operate, including inventory transfer pricing, cost sharing, product royalty and foreign branch arrangements. We are not able to reasonably estimate the amount or the future periods in which changes in unrecognized tax benefits may be resolved. Interest and penalties incurred associated with uncertain tax positions are included in other income (expense), net.

In the normal course of business, income tax authorities in various income tax jurisdictions both within the United States and internationally conduct routine audits of our income tax returns filed in prior years. These audits are generally designed to determine if individual income tax authorities are in agreement with our interpretations of complex income tax regulations regarding the allocation of income to the various income tax jurisdictions. Income tax years are open from 2012 through the current year for the United States federal jurisdiction. Income tax years open for our other major jurisdictions range from 2005 through the current year.