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Income Taxes | 12 Months Ended
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Dec. 31, 2015
Income Tax Disclosure [Abstract] |
INCOME TAXES | INCOME TAXES Eaton Corporation plc is domiciled in Ireland. Income (loss) before income taxes and income tax (benefit) expense are summarized below based on the geographic location of the operation to which such earnings and income taxes are attributable. Certain Eaton operations which are located outside the United States are subject to income tax in both the United States as well as the country in which the operations are located. As a result, income before tax by location and the components of income tax expense by taxing jurisdiction are not directly related. For purposes of this note, Puerto Rico is classified in Foreign - other since Puerto Rico is not part of the United States corporate tax system.
| Income (loss) before income taxes
| 2015 |  | 2014 |  | 2013
Ireland | $ | (608 | ) |  | $ | (332 | ) |  | $ | 184 |
Foreign | 2,753 |  |  | 2,093 |  |  | 1,700 |
Total income before income taxes | $ | 2,145 |  |  | $ | 1,761 |  |  | $ | 1,884 |
| Income tax expense (benefit)
| 2015 |  | 2014 |  | 2013
Current |  |  |  |  |
Ireland | $ | 8 |  |  | $ | (13 | ) |  | $ | 17 |
United States |  |  |  |  |
Federal | 88 |  |  | 87 |  |  | 89 |
State and local | 22 |  |  | 41 |  |  | 7 |
Foreign - other | 240 |  |  | 239 |  |  | 244 |
Total current income tax expense | 358 |  |  | 354 |  |  | 357 |
Deferred |  |  |  |  |
Ireland | 1 |  |  | 2 |  |  | — |
United States |  |  |  |  |
Federal | (65 | ) |  | (224 | ) |  | (295 | )
State and local | (6 | ) |  | (49 | ) |  | (23 | )
Foreign - other | (124 | ) |  | (125 | ) |  | (28 | )
Total deferred income tax benefit | (194 | ) |  | (396 | ) |  | (346 | )
Total income tax expense (benefit) | $ | 164 |  |  | $ | (42 | ) |  | $ | 11 |
Reconciliations of income taxes from the Ireland national statutory rate of 25% to the consolidated effective income tax rate follow:
| 2015 |  | 2014 |  | 2013
Income taxes at the applicable statutory rate | 25.0 | % |  | 25.0 | % |  | 25.0 | %
Ireland operations |  |  |  |  |
Ireland tax on trading income | (0.4 | )% |  | (0.1 | )% |  | (1.4 | )%
Nondeductible interest expense | 7.9 | % |  | 4.8 | % |  | — | %
United States operations |  |  |  |  |
United States (loss) income | (0.4 | )% |  | (2.8 | )% |  | (2.8 | )%
Nondeductible goodwill - Aerospace divestitures | — | % |  | 1.4 | % |  | — | %
Credit for research activities | (0.8 | )% |  | (1.0 | )% |  | (2.0 | )%
Other - net | 5.4 | % |  | 1.5 | % |  | 1.3 | %
Other foreign operations |  |  |  |  |
United States foreign tax credit | (0.8 | )% |  | (1.1 | )% |  | (1.8 | )%
Other foreign operations (earnings taxed at other than the applicable statutory tax rate) | (25.1 | )% |  | (24.8 | )% |  | (17.6 | )%
Other foreign operations - other items | (0.5 | )% |  | (1.0 | )% |  | 0.2 | %
Worldwide operations |  |  |  |  |
Adjustments to tax liabilities | (1.4 | )% |  | (1.7 | )% |  | (1.1 | )%
Adjustments to valuation allowances | (1.2 | )% |  | (2.6 | )% |  | 0.8 | %
Effective income tax expense (benefit) rate | 7.7 | % |  | (2.4 | )% |  | 0.6 | %
During 2015, income tax expense of $164 was recognized (an effective tax expense rate of 7.7%) compared to income tax benefit of $42 for 2014 (an effective tax benefit rate of 2.4%) and income tax expense of $11 for 2013 (an effective tax expense rate of 0.6%). Excluding the net tax benefit of 7.6% for the Meritor and Triumph litigation settlements and related legal costs and the gain on the sale of the Aerospace businesses, all of which occurred in the second quarter of 2014, the income tax rate was 5.2% for 2014. The 2015 income tax rate increased from 2014 primarily due to greater levels of income earned in higher tax jurisdictions and net increases in worldwide tax liabilities. Excluding the previously mentioned litigation settlements and gain on the sale of businesses, the 2014 income tax rate increased from 2013 due to greater levels of income earned in higher tax jurisdictions and net increases in worldwide tax liabilities, partially offset by additional foreign tax credit recognition in the United States and recognition of deferred tax assets in foreign jurisdictions. See Note 8 and Note 2 for additional information about litigation settlements and sales of businesses, respectively. No provision has been made for income taxes on undistributed earnings of foreign subsidiaries of approximately $15.1 billion at December 31, 2015, since it is the Company's intention to indefinitely reinvest undistributed earnings of its foreign subsidiaries. It is not practicable to estimate the additional income taxes and applicable withholding taxes that would be payable on the remittance of such undistributed earnings. The Company expects to deploy capital to those markets which offer particularly attractive growth opportunities. Given expected population growth and economic growth rates, most of the particularly attractive markets are outside of the United States. The cash that is permanently reinvested is typically used to expand these operations either organically or through acquisitions. Beginning in December 2012, Eaton Corporation became owned by an Irish parent company which has provided enhanced cash flow flexibility without incurring significant incremental tax. In addition, the Company expects that minimal to no Irish tax would apply to dividends paid to the Irish parent due to the impact of the Irish foreign tax credit system. The Company's public dividends and share repurchases are funded primarily from Non-U.S. operations. Worldwide income tax payments follow:
2015 | $ | 302 |
2014 | 258 |
2013 | 272 |
Deferred Income Tax Assets and Liabilities Components of current and noncurrent deferred income taxes follow:
|  | 2015 |  | 2014
|  | Noncurrent assets and liabilities |  | Current assets and liabilities |  | Noncurrent assets and liabilities
Accruals and other adjustments |  |  |  |  |  |
Employee benefits |  | $ | 808 |  |  | $ | 148 |  |  | $ | 773 |
Depreciation and amortization |  | (1,824 | ) |  | — |  |  | (2,010 | )
Other accruals and adjustments |  | 717 |  |  | 476 |  |  | 282 |
United States federal income tax loss carryforwards |  | 20 |  |  | — |  |  | 58 |
United States federal income tax credit carryforwards |  | 183 |  |  | — |  |  | 150 |
United States state and local tax loss carryforwards and tax credit carryforwards |  | 63 |  |  | — |  |  | 76 |
Other foreign tax loss carryforwards |  | 2,265 |  |  | — |  |  | 2,112 |
Other foreign income tax credit carryforwards |  | 70 |  |  | — |  |  | 49 |
Valuation allowance for income tax loss and income tax credit carryforwards |  | (2,315 | ) |  | (24 | ) |  | (2,134 | )
Other valuation allowances |  | (15 | ) |  | (7 | ) |  | (29 | )
Total deferred income taxes |  | $ | (28 | ) |  | $ | 593 |  |  | $ | (673 | )
During the fourth quarter of 2015, the Company early adopted Accounting Standards Update 2015-17, Balance Sheet Classification of Deferred Taxes (ASU 2015-17). ASU 2015-17 requires that all deferred tax assets and liabilities, along with any related valuation allowance, be classified as noncurrent on the Company's consolidated balance sheet starting in 2017. The Company elected to apply this standard prospectively for 2015 financial statements. As a result, prior periods were not retrospectively adjusted. In July 2013, the FASB issued Accounting Standards Update No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Loss, or a Tax Credit Carryforward Exists (ASU 2013-11). ASU 2013-11 requires the netting of unrecognized tax benefits against a deferred tax asset for a loss or other carryforward that would apply in settlement of the uncertain tax positions except where the deferred tax asset or other carryforward are not available for use. The adoption of this standard resulted in a reduction of the Company’s consolidated long term deferred tax assets by $262 in 2015 and $146 in 2014. At the end of 2015, United States federal income tax loss carryforwards and income tax credit carryforwards are available to reduce future United States federal income tax liabilities. These carryforwards and their respective expiration dates are summarized below:
| 2016 through 2020 |  | 2021 through 2025 |  | 2026 through 2030 |  | 2031 through 2035 |  | 2036 through 2040 |  | Not subject to expiration |  | Valuation allowance
United States federal income tax loss carryforwards | $ | — |  |  | $ | — |  |  | $ | 35 |  |  | $ | 415 |  |  | $ | — |  |  | $ | — |  |  | $ | — |
United States federal deferred income tax assets for income tax loss carryforwards | — |  |  | — |  |  | 12 |  |  | 107 |  |  | — |  |  | — |  |  | (12 | )
United States federal deferred income tax assets for income tax loss carryforwards after ASU 2013-11 | — |  |  | — |  |  | 12 |  |  | 8 |  |  | — |  |  | — |  |  | (12 | )
United States federal income tax credit carryforwards | 28 |  |  | 69 |  |  | 27 |  |  | 108 |  |  | 21 |  |  | 30 |  |  | (66 | )
United States federal income tax credit carryforwards after ASU 2013-11 | 28 |  |  | 69 |  |  | 25 |  |  | 40 |  |  | 21 |  |  | — |  |  | (66 | )
United States state and local tax loss carryforwards and tax credit carryforwards with a future tax benefit are also available at the end of 2015. The deferred tax assets for these carryforwards and their respective expiration dates are summarized below:
| 2016 through 2020 |  | 2021 through 2025 |  | 2026 through 2030 |  | 2031 through 2035 |  | 2036 through 2040 |  | Not subject to expiration |  | Valuation allowance
United States state and local deferred income tax assets for income tax loss carryforwards - net of federal tax effect | $ | 7 |  |  | $ | 17 |  |  | $ | 12 |  |  | $ | 9 |  |  | $ | — |  |  | $ | — |  |  | $ | (18 | )
United States state and local deferred income tax assets for income tax loss carryforwards - net of federal tax effect after ASU 2013-11 | — |  |  | 12 |  |  | 12 |  |  | 9 |  |  | — |  |  | — |  |  | (18 | )
United States state and local income tax credit carryforwards - net of federal tax effect | 10 |  |  | 10 |  |  | 6 |  |  | 3 |  |  | 5 |  |  | — |  |  | (16 | )
United States state and local income tax credit carryforwards - net of federal tax effect after ASU 2013-11 | 8 |  |  | 9 |  |  | 6 |  |  | 2 |  |  | 5 |  |  | — |  |  | (16 | )
At December 31, 2015, certain non-United States subsidiaries had tax loss carryforwards and income tax credit carryforwards that are available to offset future taxable income. These carryforwards and their respective expiration dates are summarized below:
| 2016 through 2020 |  | 2021 through 2025 |  | 2026 through 2030 |  | 2031 through 2035 |  | Not subject to expiration |  | Valuation allowance
Non-United States income tax loss carryforwards | $ | 125 |  |  | $ | 146 |  |  | $ | 3 |  |  | $ | — |  |  | $ | 10,092 |  |  | $ | — |
Non-United States deferred income tax assets for income tax loss carryforwards | 33 |  |  | 35 |  |  | 1 |  |  | — |  |  | 2,196 |  |  | (2,171 | )
Non-United States income tax credit carryforwards | 7 |  |  | 15 |  |  | 16 |  |  | — |  |  | 32 |  |  | (32 | )
Recoverability of Deferred Income Tax Assets Eaton is subject to the income tax laws in the jurisdictions in which it operates. In order to determine its income tax provision for financial statement purposes, Eaton must make significant estimates and judgments about its business operations in these jurisdictions. These estimates and judgments are also used in determining the deferred income tax assets and liabilities that have been recognized for differences between the financial statement and income tax basis of assets and liabilities, and income tax loss carryforwards and income tax credit carryforwards. Management evaluates the realizability of deferred income tax assets for each of the jurisdictions in which it operates. If the Company experiences cumulative pretax income in a particular jurisdiction in the three-year period including the current and prior two years, management normally concludes that the deferred income tax assets will more likely than not be realizable and no valuation allowance is recognized, unless known or planned operating developments would lead management to conclude otherwise. However, if the Company experiences cumulative pretax losses in a particular jurisdiction in the three-year period including the current and prior two years, management then considers a series of factors in the determination of whether the deferred income tax assets can be realized. These factors include historical operating results, known or planned operating developments, the period of time over which certain temporary differences will reverse, consideration of the utilization of certain deferred income tax liabilities, tax law carryback capability in the particular country, prudent and feasible tax planning strategies, and estimates of future earnings and taxable income using the same assumptions as those used for the Company's goodwill and other impairment testing. After evaluation of these factors, if the deferred income tax assets are expected to be realized within the tax carryforward period allowed for that specific country, management would conclude that no valuation allowance would be required. To the extent that the deferred income tax assets exceed the amount that is expected to be realized within the tax carryforward period for a particular jurisdiction, management would establish a valuation allowance. Applying the above methodology, valuation allowances have been established for certain deferred income tax assets to the extent they are not expected to be realized within the particular tax carryforward period. Unrecognized Income Tax Benefits A summary of gross unrecognized income tax benefits follows:
| 2015 |  | 2014 |  | 2013
Balance at January 1 | $ | 493 |  |  | $ | 479 |  |  | $ | 444 |
Increases and decreases as a result of positions taken during prior years |  |  |  |  |
Transfers from valuation allowances | — |  |  | (3 | ) |  | 13 |
Other increases, including currency translation | 34 |  |  | 37 |  |  | 7 |
Other decreases, including currency translation | (34 | ) |  | (3 | ) |  | (7 | )
Balances related to acquired businesses | (1 | ) |  | (3 | ) |  | 2 |
Increases as a result of positions taken during the current year | 109 |  |  | 65 |  |  | 35 |
Decreases relating to settlements with tax authorities | — |  |  | (51 | ) |  | (6 | )
Decreases as a result of a lapse of the applicable statute of limitations | (17 | ) |  | (28 | ) |  | (9 | )
Balance at December 31 | $ | 584 |  |  | $ | 493 |  |  | $ | 479 |
Eaton's long-term policy has been to enter into tax planning strategies only if it is more likely than not that the benefit would be sustained upon audit. For example, the Company does not enter into any of the United States Internal Revenue Service (IRS) Listed Transactions as set forth in Treasury Regulation 1.6011-4. If all unrecognized tax benefits were recognized, the net impact on the provision for income tax expense would be $475. As of December 31, 2015 and 2014, Eaton had accrued approximately $108 and $120, respectively, for the payment of worldwide interest and penalties, which are not included in the table of unrecognized income tax benefits above. Eaton recognizes interest and penalties related to unrecognized income tax benefits in the provision for income tax expense. The Company has accrued penalties in jurisdictions primarily where they are automatically applied to any deficiency, regardless of the merit of the position. The resolution of the majority of Eaton's unrecognized income tax benefits is dependent upon uncontrollable factors such as the prospect of retroactive regulations; new case law; the willingness of the income tax authority to settle the issue, including the timing thereof; and other factors. Therefore, for the majority of unrecognized income tax benefits, it is not reasonably possible to estimate the increase or decrease in the next 12 months. For each of the unrecognized income tax benefits where it is possible to estimate the increase or decrease in the balance within the next 12 months, the Company does not anticipate any significant change. Eaton or its subsidiaries file income tax returns in Ireland and many countries around the world. The IRS has completed its examination of Eaton Corporation and Includible Subsidiaries United States income tax returns for 2007 through 2010 and has issued a Statutory Notice of Deficiency (Notice) as discussed below. The statute of limitations on these tax years remains open until the matter is resolved. In 2015, the IRS began its examination of tax years 2011 through 2013. During 2015, the Company extended the statute of limitations to September 2018 for tax years 2011 through 2013. Tax years 2014 and 2015 are still subject to examination by the IRS. With respect to the pre-acquisition years of BZ Holdings Inc. and Subsidiaries (the former U.S. holding company for Cooper Industries), the IRS examination of the United States income tax returns for 2010, 2011, and the period ended December 21, 2012 was completed and settled without significant effect on the consolidated financial statements. The statute of limitations closed for tax years 2010 and 2011 on September 15, 2015. The statute of limitations on the final return period ended December 21, 2012 remains open until September 15, 2016. On December 22, 2012, BZ Holdings Inc. and Subsidiaries joined the Eaton US Holdings Inc. and Includible Subsidiaries consolidated United States income tax return for 2012. Eaton is also under examination for the income tax filings in various states of the United States and in many other foreign jurisdictions. With only a few exceptions, Eaton Corporation and Includible Subsidiaries are no longer subject to income tax examinations from states and localities within the United States for years before 2011. Income tax returns of states and localities within the United States will be reopened to the extent of United States federal income tax adjustments, if any, going back to 2005 when those audit years are finalized. Some states and localities may not limit their assessment to the United States federal adjustments, and may require the opening of the entire tax year. In addition, with only a few exceptions, BZ Holdings Inc. and Includible Subsidiaries are no longer subject to United States state and local income tax examinations for years before 2011. With only a few exceptions, the other foreign subsidiaries of both Eaton and Cooper are no longer subject to examinations for years before 2007. At the end of the fourth quarter of 2011, the IRS issued a Notice for Eaton Corporation and Includible Subsidiaries 2005 and 2006 tax years (the 2011 Notice). The 2011 Notice proposed assessments of $75 in additional taxes plus $52 in penalties related primarily to transfer pricing adjustments for products manufactured in the Company's facilities in Puerto Rico and the Dominican Republic and sold to affiliated companies located in the U.S., net of agreed credits and deductions. The Company has set its transfer prices for products sold between these affiliates at the same prices that the Company sells such products to third parties as required by two successive Advance Pricing Agreements (APAs) the Company entered into with the IRS. For the years 2001 through 2004, the IRS had previously accepted the transfer pricing methodology related to these APAs after a comprehensive review conducted in two separate audit cycles. On December 16, 2011, immediately prior to the 2011 Notice being issued, the IRS sent a letter stating that it was retrospectively canceling the APAs, even though their respective APA terms had already expired. The Company is contesting the proposed assessments. The Company believes that it was in full compliance with the terms of the two APAs, and that the IRS's cancellation of these two APAs is without merit. On February 29, 2012, the Company filed a Petition with the U.S. Tax Court in which it asserted that the transfer pricing established in the APAs meets the arms-length standard set by the U.S. income tax laws, and accordingly, that the APAs should be enforced in accordance with their terms. The case involves both whether the APAs should be enforced and, if not, the appropriate transfer pricing methodology. The Company believes that another important U.S. Tax Court decision in 2015 further supports the Company's arms-length transfer pricing methodology. The case was tried before the U.S. Tax Court in August and September 2015. The case will be fully submitted to the Court after the parties complete post-trial briefing in April 2016. During the third quarter of 2014, the Company received a Notice from the IRS for the 2007 through 2010 tax years (the 2014 Notice) proposing assessments of $190 in additional taxes plus $72 in penalties, net of agreed credits and deductions. The proposed assessments pertain primarily to the same transfer pricing issues that are currently in litigation for the 2011 Notice, as noted above. During 2007 through 2010, the Company set its transfer prices for products sold between these affiliates consistent with the terms of a written APA between it and the IRS that covered the years at issue. To establish the relevant transfer prices, the APA relied on prices at which the Company sells the products to third parties. The Company has continued to apply the arms-length transfer pricing methodology for 2011 through the current reporting period. The 2014 Notice includes a separate proposed assessment involving the recognition of income for several of the Company’s controlled foreign corporations. The Company believes that these proposed assessments are without merit. On November 25, 2014, the Company filed a Petition with the U.S. Tax Court in which it challenged the IRS's adjustments. The Company expects the outcome of the 2014 Notice on the transfer pricing matter to be determined by the judicial decision related to the 2011 Notice. Also during the third quarter of 2014, the Company resolved an uncertain tax position with a European government. The resolution had minimal impact on the Company's Consolidated Statements of Income. During 2010, the Company received a tax assessment of $64, plus interest and penalties, in Brazil for the tax years 2005 through 2008 that relates to the amortization of certain goodwill generated from the acquisition of third-party businesses and corporate reorganizations. The Company is contesting the assessment, which is under review at the second of three administrative appeals levels. During 2013, the Brazilian tax authorities began an audit of tax years 2009 through 2012. During the third quarter of 2014, the Company received a tax assessment of $50, plus interest and penalties, for the 2009 through 2012 tax years (primarily relating to the same issues concerning the 2005 through 2008 tax years), which the Company is also contesting and is under review in the second of three administrative appeals levels. Multiple outside advisors have stated that Brazilian tax authorities are raising the issue for most clients with similar facts and that the matter is expected to require at least 10 years to resolve. The Company continues to believe that final resolution of the assessments will not have a material impact on its consolidated financial statements. For the first time, during 2015, the Organization for Economic Cooperation and Development (OECD), in conjunction with the G20, finalized broad-based international tax policy guidelines that involve transfer pricing and other international tax subjects. While some member jurisdictions automatically adopt the new OECD guidelines, most member countries can adopt the guidelines only by new law or regulations. The Company is currently adopting processes to comply with the reporting requirements specified by the guidelines and is evaluating the other parts of the guidelines.

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- Definition The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SX 210.4-08.(h)) -URI http://asc.fasb.org/extlink&oid=26873400&loc=d3e23780-122690 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32559-109319 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 15 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32718-109319 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 9 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32639-109319 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32537-109319 + Details
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