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Income Taxes | 12 Months Ended
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Dec. 31, 2017
Income Tax Disclosure [Abstract] |
Income Taxes | Income Taxes The components of income from continuing operations before income taxes were as follows:
| 2017 | 2016 | 2015
United States | $ | 500 |  | $ | 84 |  | $ | 124 |
Foreign | (30 | ) | 330 |  | 59 |
| $ | 470 |  | $ | 414 |  | $ | 183 |
The provision for income taxes consisted of the following:
| 2017 | 2016 | 2015
Current: |  |  |
Federal* | $ | — |  | $ | — |  | $ | — |
Foreign | 98 |  | 133 |  | 115 |
State and local | (2 | ) | 1 |  | (1 | )
| 96 |  | 134 |  | 114 |
Deferred: |  |  |
Federal* | 489 |  | 1,208 |  | 196 |
Foreign | 37 |  | 136 |  | 29 |
State and local | (78 | ) | (2 | ) | — |
| 448 |  | 1,342 |  | 225 |
Total | $ | 544 |  | $ | 1,476 |  | $ | 339 |
* Includes U.S. taxes related to foreign income The exercise of employee stock options generated a tax charge of $1 in 2017 and a benefit of $0 and $2 in 2016 and 2015, respectively, representing only the difference between compensation expense recognized for financial reporting and tax purposes. The tax effects related to the exercise of employee stock options in 2017 were recorded to the income statement within the provision for income taxes. Tax effects related to 2016 and 2015 were recorded to equity. Payments either decreased current taxes payable or increased deferred tax assets (net operating losses) in the respective periods. Arconic has unamortized tax-deductible goodwill of $24 resulting from intercompany stock sales and reorganizations. Arconic recognizes the tax benefits (at a 25% rate) associated with this tax-deductible goodwill as it is being amortized for local income tax purposes rather than in the period in which the transaction is consummated. A reconciliation of the U.S. federal statutory rate to Arconic’s effective tax rate was as follows (the effective tax rate for all periods was a provision on income):
| 2017 | 2016 | 2015
U.S. federal statutory rate | 35.0 | % | 35.0 | % | 35.0 | %
Taxes on foreign operations | (7.5 | ) | (10.2 | ) | 2.5 |
Federal benefit of state tax | 3.1 |  | 0.4 |  | 0.3 |
Permanent differences on restructuring and other charges and asset disposals(1) | (167.4 | ) | (107.8 | ) | 3.6 |
Non-deductible acquisition costs | 0.3 |  | 8.4 |  | 7.1 |
Statutory tax rate and law changes(2) | 52.5 |  | (15.7 | ) | (1.0 | )
Tax holidays | (3.0 | ) | (0.8 | ) | (3.9 | )
Tax credits | (0.7 | ) | (1.2 | ) | (2.8 | )
Changes in valuation allowances | 137.9 |  | 426.8 |  | 145.8 |
Impairment of goodwill | 53.5 |  | — |  | 4.8 |
Company-owned life insurance/split-dollar net premiums | — |  | 23.0 |  | (3.0 | )
Changes in uncertain tax positions | 10.1 |  | 2.1 |  | (2.2 | )
Other | 1.9 |  | (3.5 | ) | (1.0 | )
Effective tax rate | 115.7 | % | 356.5 | % | 185.2 | %
(1) | Additional losses were reported in Spain's 2017 tax return related to the Separation Transaction which are offset by an increased valuation allowance.
(2) | On December 22, 2017, the United States enacted the Tax Cuts and Jobs Act of 2017 ("the 2017 Act”) resulting in significant changes to the Internal Revenue Code (see below). In December 2016, Spain and the United States enacted tax law changes which resulted in the remeasurement of certain deferred tax liabilities recorded by Arconic.
On December 22, 2017, the 2017 Act was signed into law, making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, the transition of U.S. international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the non-previously taxed post-1986 foreign earnings and profits of certain U.S.-owned foreign corporations as of December 31, 2017. Also on December 22, 2017, Staff Accounting Bulletin No. 118 ("SAB 118"), Income Tax Accounting Implications of the Tax Cuts and Jobs Act, was issued by the Securities and Exchange Commission to address the application of U.S. GAAP for financial reporting. SAB 118 permits the use of provisional amounts based on reasonable estimates in the financial statements. SAB 118 also provides that the tax impact may be considered incomplete in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the 2017 Act. Any adjustments to provisional or incomplete amounts should be included in income from continuing operations as an adjustment to tax expense or benefit in the reporting period that the amounts are determined within one year. As of February 2, 2018, the Company has calculated a reasonable estimate of the impact of the 2017 Act’s tax rate reduction and one-time transition tax in its year end income tax provision in accordance with its understanding of the 2017 Act and guidance available and, as a result, has recorded a $272 tax charge in the fourth quarter of 2017, the period in which the legislation was enacted. We anticipate finalizing our accounting during 2018 in accordance with SAB 118. U.S. deferred tax assets and liabilities as of the date of enactment of the 2017 Act are based on estimated temporary differences which will be updated and finalized with the filing of the 2017 U.S. income tax return. Changes to the estimated temporary differences will result in changes to the revaluation of the deferred tax assets and liabilities. As such, the impact of the 2017 Act’s tax rate reduction is a provisional amount under SAB 118 which will be updated during 2018. The impact of the one-time transition tax on the deemed repatriation of non-previously taxed post-1986 foreign earnings and profits of certain U.S.-owned foreign corporations, net of foreign tax credits, is also considered a provisional amount. The Company will continue to analyze the amount of foreign earnings and profits, the associated foreign tax credits, and additional guidance that may be issued during 2018 and will update the estimated deemed repatriation calculation as necessary under SAB 118. The Company has not yet gathered, prepared and analyzed all the necessary information in sufficient detail to determine whether any excess foreign tax credits that may result from the deemed repatriation will be realizable. The need for additional valuation allowance on foreign tax credits that may not be more likely than not to be realized in the future will be reassessed during 2018. The components of net deferred tax assets and liabilities were as follows:
| 2017 |  | 2016
December 31, | Deferred tax assets | Deferred tax liabilities |  | Deferred tax assets | Deferred tax liabilities
Depreciation | $ | 31 |  | $ | 693 |  |  | $ | 15 |  | $ | 817 |
Employee benefits | 936 |  | 23 |  |  | 1,382 |  | 8 |
Loss provisions | 134 |  | 14 |  |  | 181 |  | 1 |
Deferred income/expense | 19 |  | 1,144 |  |  | 20 |  | 74 |
Tax loss carryforwards | 3,305 |  | — |  |  | 1,540 |  | — |
Tax credit carryforwards | 638 |  | — |  |  | 652 |  | — |
Other | 24 |  | 33 |  |  | 164 |  | 19 |
| 5,087 |  | 1,907 |  |  | 3,954 |  | 919 |
Valuation allowance | (2,584 | ) | — |  |  | (1,940 | ) | — |
| $ | 2,503 |  | $ | 1,907 |  |  | $ | 2,014 |  | $ | 919 |
The following table details the expiration periods of the deferred tax assets presented above:
December 31, 2017 | Expires within 10 years | Expires within 11-20 years | No expiration* | Other* | Total
Tax loss carryforwards | $ | 81 |  | $ | 781 |  | $ | 2,443 |  | $ | — |  | $ | 3,305 |
Tax credit carryforwards | 531 |  | 97 |  | 10 |  | — |  | 638 |
Other | — |  | — |  | 84 |  | 1,060 |  | 1,144 |
Valuation allowance | (467 | ) | (646 | ) | (1,376 | ) | (95 | ) | (2,584 | )
| $ | 145 |  | $ | 232 |  | $ | 1,161 |  | $ | 965 |  | $ | 2,503 |
* | Deferred tax assets with no expiration may still have annual limitations on utilization. Other represents deferred tax assets whose expiration is dependent upon the reversal of the underlying temporary difference. A substantial amount of Other relates to employee benefits that will become deductible for tax purposes over an extended period of time as contributions are made to employee benefit plans and payments are made to retirees.
The total deferred tax asset (net of valuation allowance) is supported by projections of future taxable income exclusive of reversing temporary differences (30%) and taxable temporary differences that reverse within the carryforward period (70%). Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not (greater than 50%) that a tax benefit will not be realized. In evaluating the need for a valuation allowance, management considers all potential sources of taxable income, including income available in carryback periods, future reversals of taxable temporary differences, projections of taxable income, and income from tax planning strategies, as well as all available positive and negative evidence. Positive evidence includes factors such as a history of profitable operations, projections of future profitability within the carryforward period, including from tax planning strategies, and Arconic’s experience with similar operations. Existing favorable contracts and the ability to sell products into established markets are additional positive evidence. Negative evidence includes items such as cumulative losses, projections of future losses, or carryforward periods that are not long enough to allow for the utilization of a deferred tax asset based on existing projections of income. Deferred tax assets for which no valuation allowance is recorded may not be realized upon changes in facts and circumstances, resulting in a future charge to establish a valuation allowance. Existing valuation allowances are re-examined under the same standards of positive and negative evidence. If it is determined that it is more likely than not that a deferred tax asset will be realized, the appropriate amount of the valuation allowance, if any, is released. Deferred tax assets and liabilities are also re-measured to reflect changes in underlying tax rates due to law changes and the granting and lapse of tax holidays. In 2017, Arconic released $98 of certain U.S. state valuation allowances. After weighing all available positive and negative evidence, management determined that the underlying net deferred tax assets were more likely than not realizable based on projected taxable income estimates taking into account expected post-separation apportionment data. Valuation allowances of $750 remain against other net state deferred tax assets expected to expire before utilization. The need for valuation allowances against net state deferred tax assets will be reassessed on a continuous basis in future periods and, as a result, the allowance may increase or decrease based on changes in facts and circumstances. Arconic also recorded an additional valuation allowance of $675 which offsets additional losses reported on the Spanish tax return filed in 2017 related to the Separation Transaction that are not more likely than not to be realized. There is no net impact to the provision for income taxes, as the additional valuation allowance fully offsets the current year tax benefit in Spain. Arconic’s foreign tax credits in the United States have a 10-year carryforward period with expirations ranging from 2018 to 2027 (as of December 31, 2017). Valuation allowances were initially established in prior years on a portion of the foreign tax credit carryforwards, primarily due to insufficient foreign source income to allow for full utilization of the credits within the expiration period. After consideration of all available evidence including potential tax planning strategies and earnings of foreign subsidiaries projected to be distributable as taxable foreign dividends, incremental valuation allowances of $302 and $134 were recognized in 2016 and 2015, respectively. Foreign tax credits of $57, $128, and $15 expired at the end of 2017, 2016, and 2015, respectively, resulting in a corresponding decrease to the valuation allowance. During 2017, an additional valuation allowance of $23 was recorded for current year excess foreign tax credits, offset by a net $14 reduction for other adjustments. At December 31, 2017, the cumulative amount of the valuation allowance was $379. The need for this valuation allowance will be reassessed on a continuous basis in future periods and, as a result, the allowance may increase or decrease based on changes in facts and circumstances, including the impact of the 2017 Act. Arconic will continue its analysis of the 2017 Act, including any additional guidance that may be issued. Further analysis could result in changes to assumptions related to the realizability of certain deferred tax assets including, but not limited to, foreign tax credits, alternative minimum tax credits, and state tax loss carryforwards. Provisional estimates of the impact of the 2017 Act on the realizability of certain deferred tax assets have been made based on information and computations that were available, prepared, and analyzed as of February 2, 2018. In accordance with SAB 118, Arconic will reassess the need for valuation allowances on these deferred tax assets as necessary during 2018. In 2016, Arconic recognized a $1,267 discrete income tax charge for valuation allowances related to the Separation Transaction, including $925 with respect to Alcoa Corporation’s net deferred tax assets in the United States, $302 with respect to Arconic’s foreign tax credits in the United States, $42 with respect to certain deferred tax assets in Luxembourg, and $(2) related to the net impact of other smaller items. After weighing all positive and negative evidence, as described above, management determined that the net deferred tax assets of Alcoa Corporation were not more likely than not to be realized due to lack of historical and projected domestic source taxable income. As such, a valuation allowance was recorded immediately prior to separation. In addition, Arconic recognized a $42 discrete income tax charge in 2016 for a valuation allowance on the full value of certain net deferred tax assets in Luxembourg. Sources of taxable income which previously supported the net deferred tax asset are no longer available as a result of the Separation Transaction. The need for this valuation allowance will be reassessed on a continuous basis in future periods and, as a result, the allowance may increase or decrease based on changes in facts and circumstances. In 2016, Arconic also recognized discrete income tax benefits related to the release of valuation allowances on certain net deferred tax assets in Russia and Canada of $19 and $20, respectively. After weighing all available evidence, management determined that it was more likely than not that the net income tax benefits associated with the underlying deferred tax assets would be realizable based on historic cumulative income and projected taxable income. Arconic also recorded additional valuation allowances in Australia of $93 related to the Separation Transaction, in Spain of $163 related to a tax law change and in Luxembourg of $280 related to the Separation Transaction as well as a tax law change. These valuation allowances fully offset current year changes in deferred tax asset balances of each respective jurisdiction, resulting in no net impact to tax expense. The need for a valuation allowance will be reassessed on a continuous basis in future periods by each jurisdiction and, as a result, the allowances may increase or decrease based on changes in facts and circumstances. In 2015, Arconic recognized an additional $141 discrete income tax charge for valuation allowances on certain deferred tax assets in Iceland and Suriname. Of this amount, an $85 valuation allowance was established on the full value of the deferred tax assets in Suriname, which were related mostly to employee benefits and tax loss carryforwards. These deferred tax assets have an expiration period ranging from 2016 to 2022 (as of December 31, 2015). The remaining $56 charge relates to a valuation allowance established on a portion of the deferred tax assets recorded in Iceland. These deferred tax assets have an expiration period ranging from 2017 to 2023. After weighing all available positive and negative evidence, as described above, management determined that it was no longer more likely than not that Arconic will realize the tax benefit of either of these deferred tax assets. This was mainly driven by a decline in the outlook of the Primary Metals business, combined with prior year cumulative losses and a short expiration period. The following table details the changes in the valuation allowance:
December 31, | 2017 | 2016 | 2015
Balance at beginning of year | $ | 1,940 |  | $ | 1,291 |  | $ | 1,151 |
Increase to allowance | 831 |  | 772 |  | 180 |
Release of allowance | (246 | ) | (209 | ) | (42 | )
Acquisitions and divestitures (F) | (1 | ) | (1 | ) | 29 |
Tax apportionment, tax rate and tax law changes | (24 | ) | 106 |  | (15 | )
Foreign currency translation | 84 |  | (19 | ) | (12 | )
Balance at end of year | $ | 2,584 |  | $ | 1,940 |  | $ | 1,291 |
As a result of the 2017 Act, the non-previously taxed post-1986 foreign earnings and profits (calculated based on U.S. tax principles) of certain U.S.-owned foreign corporations has been subject to U.S. tax under the one-time transition tax provisions. The cumulative amount of Arconic’s foreign undistributed U.S. GAAP earnings is estimated to be less than the total foreign earnings and profits already subject to U.S. tax as of December 31, 2017. As such, Arconic expects to be able to repatriate these earnings back to the United States without additional income tax consequences other than foreign withholding taxes which will not have a material impact. At this time, management has no plans to distribute such earnings in the foreseeable future. The Company will continue to evaluate whether to repatriate all or a portion of the cumulative undistributed foreign earnings in light of the 2017 Act and consider that conclusion to be incomplete under SAB 118. The 2017 Act creates a new requirement that certain income earned by foreign subsidiaries, Global Intangible Low Taxed Income (GILTI), must be included in the gross income of the U.S. shareholder. The 2017 Act also established the Base Erosion and Anti-Abuse Tax (BEAT). The Company is continuing to evaluate the impact of these provisions and has not yet completed a reasonable estimate where we do not have the necessary information available, prepared, and/or analyzed (including computations) as it relates to the impact of the GILTI and BEAT provisions. In addition, Arconic is permitted to make an accounting policy election to either treat taxes due on future inclusions in U.S. taxable income related to GILTI as a current period expense when incurred or factor such amounts into the Company’s deferred tax calculation. Arconic has not yet made this policy decision and will update the GILTI and BEAT impact in accordance with SAB 118. Arconic and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions. With a few minor exceptions, Arconic is no longer subject to income tax examinations by tax authorities for years prior to 2006. All U.S. tax years prior to 2017 have been audited by the Internal Revenue Service. Various state and foreign jurisdiction tax authorities are in the process of examining Arconic’s income tax returns for various tax years through 2016. A reconciliation of the beginning and ending amount of unrecognized tax benefits (excluding interest and penalties) was as follows:
December 31, | 2017 | 2016 | 2015
Balance at beginning of year | $ | 28 |  | $ | 18 |  | $ | 7 |
Additions for tax positions of the current year | 23 |  | 12 |  | — |
Additions for tax positions of prior years | 27 |  | — |  | 14 |
Reductions for tax positions of prior years | — |  | — |  | (2 | )
Settlements with tax authorities | — |  | (1 | ) | — |
Expiration of the statute of limitations | (5 | ) | (1 | ) | (1 | )
Foreign currency translation | — |  | — |  | — |
Balance at end of year | $ | 73 |  | $ | 28 |  | $ | 18 |
For all periods presented, a portion of the balance at end of year pertains to state tax liabilities, which are presented before any offset for federal tax benefits. The effect of unrecognized tax benefits, if recorded, that would impact the annual effective tax rate for 2017, 2016 and 2015 would be approximately 15%, 6%, and 7%, respectively, of pre-tax book income. Arconic does not anticipate that changes in its unrecognized tax benefits will have a material impact on the Statement of Consolidated Operations during 2018 (see Tax in Note K for a matter for which no reserve has been recognized). It is Arconic’s policy to recognize interest and penalties related to income taxes as a component of the Provision for income taxes on the accompanying Statement of Consolidated Operations. In 2017, Arconic recognized interest of $1 but did not recognize any interest or penalties in 2016 or 2015. Due to the expiration of the statute of limitations, settlements with tax authorities, and refunded overpayments, Arconic recognized interest income of $2 and $1 in 2017 and 2015, respectively, but did not recognize any interest income in 2016. As of December 31, 2017 and 2016, the amount accrued for the payment of interest and penalties was $2 and $2, respectively.

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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 740 -URI http://asc.fasb.org/topic&trid=2144680 + Details
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