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PROVISION FOR INCOME TAXES | 12 Months Ended
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Dec. 31, 2017
Income Tax Disclosure [Abstract] |
PROVISION FOR INCOME TAXES |
7. | INCOME TAXES
On December 22, 2017, the 2017 "Tax Cuts and Jobs Act" ("Tax Reform Act") was enacted. Accounting for the impacts of newly enacted tax legislation are generally required to be completed in the period of enactment. Following enactment of the Tax Reform Act, the SEC provided guidance for initial accounting for the Tax Reform Act in Staff Accounting Bulletin No. 118, "Income Tax Accounting Implications of the Tax Cuts and Jobs Act" ("SAB 118"). The period to finalize accounting for the Tax Reform Act is up to one year following the enactment date and SAB 118 allows companies to provide for the impact of the Tax Reform Act under three scenarios: (1) a company is complete with its accounting for certain effects of tax reform, (2) a company is able to determine a reasonable estimate for certain effects of the Tax Reform Act and records that estimate as a provisional amount, or (3) a company is not able to determine a reasonable estimate and therefore continues to apply accounting based on the provisions of the tax laws that were in effect immediately prior to tax reform being enacted. Because the enactment of the Tax Reform Act was close to Eastman's year end, the Company was not able to complete the accounting for certain effects of the changes in tax law but has been able to reasonably estimate the effects and has recognized those estimates as provisional amounts as of December 31, 2017. The Company recognized a $339 million estimated net tax benefit in 2017, primarily resulting from the Tax Reform Act and a tax loss from outside-U.S. entity reorganizations as part of the formation of an international treasury services center. The net tax benefit included a $533 million benefit from the one-time revaluation of deferred tax liabilities, partially offset by a one-time transition tax on deferred foreign income of $71 million and $123 million in changes in valuation of deferred tax assets associated with tax law changes and outside-U.S. entity reorganizations as part of the formation of an international treasury services center. The income tax payable for the transition tax will be paid over eight years. As of December 31, 2017, a non-current income tax payable of approximately $60 million attributable to the transition tax is reflected in “Other long term liabilities” of the Consolidated Statement of Financial Position. As of December 31, 2017, the Company considers the accounting for the following impacts of the Tax Reform Act to be provisional and, accordingly, subject to adjustment in future periods: the transition tax on deferred foreign income (which consists of post-1986 accumulated earnings and profits of controlled foreign corporations and the determination of cash versus non-cash balances), the impact of the change in income tax rates on deferred tax assets and liabilities, and the evaluation of gross foreign tax credit carryforwards and related valuation allowances. In preparing the provisional estimates for the year ended December 31, 2017, the Company has considered notices and revenue procedures issued by the Internal Revenue Service and authoritative accounting guidance issued through February 12, 2018. Certain of the provisional amounts will be finalized in conjunction with the filing of the Company's U.S. federal income tax return for the year ended December 31, 2017 that will not be finalized until later in 2018. While historically differences between amounts reported in the Company’s consolidated financial statements and the Company’s U.S. federal income tax return have resulted in offsetting changes in estimates in current and deferred taxes for items which are timing related, the reduction of the U.S. tax rate will result in adjustments to the Company's income tax (benefit) provision when recognized. The Company also considers it likely that further technical guidance regarding certain aspects of the new provisions included in the Tax Reform Act, as well as clarity regarding state income tax conformity to current federal tax code, may be issued which could result in changes to the provisional amounts reported as of December 31, 2017 and related state income tax effects. The Company is analyzing the future impact of the Tax Reform Act for the fiscal year beginning January 1, 2018, including the new provisions known as the base erosion anti-abuse tax (“BEAT”) and global intangible low-tax income (“GILTI”) tax, as well as other provisions. Under U.S. GAAP, companies can make an accounting policy election to either treat taxes resulting from GILTI as a current-period expense when incurred or factor such amounts into the measurement of deferred taxes. The Company has not completed its analysis of the effects of the GILTI provisions and will further consider the accounting policy election within the measurement period as provided under SAB 118. Components of earnings before income taxes and the (benefit from) provision for U.S. and other income taxes from operations follow:
| For years ended December 31,
(Dollars in millions) | 2017 |  | 2016 |  | 2015
Earnings before income taxes |  |  |  |  |
United States | $ | 654 |  |  | $ | 422 |  |  | $ | 618 |
Outside the United States | 635 |  |  | 627 |  |  | 511 |
Total | $ | 1,289 |  |  | $ | 1,049 |  |  | $ | 1,129 |
(Benefit from) provision for income taxes |  |  |  |  |  |  |  |
United States Federal |  |  |  |  |  |  |  |
Current (1) | $ | 220 |  |  | $ | (80 | ) |  | $ | 87 |
Deferred (2) | (383 | ) |  | 214 |  |  | 119 |
Outside the United States |  |  |  |  |
Current | 62 |  |  | 91 |  |  | 59 |
Deferred | 2 |  |  | (18 | ) |  | 16 |
State and other |  |  |  |  |
Current | 13 |  |  | 2 |  |  | 22 |
Deferred | (13 | ) |  | (19 | ) |  | (28 | )
Total | $ | (99 | ) |  | $ | 190 |  |  | $ | 275 |
(1) | Includes a one-time transition tax of $71 million on deferred foreign income.
(2) | Includes one-time benefit of $517 million primarily due to the re-measurement of certain net deferred tax liabilities using the lower U.S. corporate income tax rate and a one-time $72 million valuation allowance on deferred tax assets for foreign tax credit carryforwards.
The following represents the deferred tax (benefit) charge recorded as a component of AOCI in the Consolidated Statements of Financial Position:
| For years ended December 31,
(Dollars in millions) | 2017 |  | 2016 |  | 2015
Defined benefit pension and other postretirement benefit plans | $ | (16 | ) |  | $ | 21 |  |  | $ | 42 |
Derivatives and hedging | 8 |  |  | 105 |  |  | 21 |
Total | $ | (8 | ) |  | $ | 126 |  |  | $ | 63 |
Total income tax (benefit) expense included in the consolidated financial statements was composed of the following:
| For years ended December 31,
(Dollars in millions) | 2017 |  | 2016 |  | 2015
Earnings before income taxes | $ | (99 | ) |  | $ | 190 |  |  | $ | 275 |
Other comprehensive income | (8 | ) |  | 126 |  |  | 63 |
Total | $ | (107 | ) |  | $ | 316 |  |  | $ | 338 |
Differences between the (benefit from) provision for income taxes and income taxes computed using the U.S. Federal statutory income tax rate follow:
| For years ended December 31,
(Dollars in millions) | 2017 |  | 2016 |  | 2015
Amount computed using the statutory rate | $ | 450 |  |  | $ | 366 |  |  | $ | 393 |
State income taxes, net | (4 | ) |  | (18 | ) |  | (3 | )
Foreign rate variance | (150 | ) |  | (121 | ) |  | (93 | )
Domestic manufacturing deduction | (18 | ) |  | (7 | ) |  | (12 | )
Change in reserves for tax contingencies | 20 |  |  | — |  |  | (7 | )
General business credits | (65 | ) |  | (20 | ) |  | (15 | )
U.S. tax on foreign earnings | 29 |  |  | 25 |  |  | 7 |
Foreign tax credits | (26 | ) |  | (10 | ) |  | (9 | )
Tax law changes and tax loss from outside-U.S. entity reorganizations (1) | (339 | ) |  | — |  |  | — |
Other | 4 |  |  | (25 | ) |  | 14 |
(Benefit from) provision for income taxes | $ | (99 | ) |  | $ | 190 |  |  | $ | 275 |
Effective income tax rate | (8 | )% |  | 18 | % |  | 24 | %
(1) | Includes one-time net benefit primarily due to the re-measurement of certain net deferred tax liabilities using the lower U.S. corporate income tax rate partially offset by the transition tax on deferred foreign income and changes in the valuation of deferred tax assets associated with tax law changes and the tax impact from intercompany reorganization activities.
The 2017 effective tax rate was lower than the 2016 effective tax rate due to a $339 million net tax benefit, primarily resulting from the Tax Reform Act and a tax loss from outside-U.S. entity reorganizations as part of the formation of an international treasury services center, a $20 million benefit due to amendments to prior years’ domestic income tax returns, and a $30 million benefit reflecting the finalization of prior years’ foreign income tax returns. The 2016 effective tax rate included one-time tax benefits discussed immediately below. The 2016 effective tax rate was lower than 2015 due to a benefit in the foreign rate variance as a result of higher earnings in foreign jurisdictions partially offset by a reduction in the U.S. federal tax manufacturing deduction due to a decrease in domestic taxable income. The 2016 effective tax rate included a tax benefit of $16 million related to foreign tax credits as a result of the amendment of prior year income tax returns, a $16 million one-time benefit for the restoration of tax basis for which depreciation deductions were previously limited, and a $9 million tax benefit primarily due to adjustments to the tax provision to reflect the finalization of 2014 foreign income tax returns. The significant components of deferred tax assets and liabilities follow:
| December 31,
(Dollars in millions) | 2017 |  | 2016
Deferred tax assets |  |  |
Post-employment obligations | $ | 242 |  |  | $ | 378 |
Net operating loss carryforwards | 690 |  |  | 337 |
Tax credit carryforwards | 202 |  |  | 248 |
Environmental reserves | 72 |  |  | 119 |
Unrealized derivative loss | 17 |  |  | 50 |
Other | 90 |  |  | 186 |
Total deferred tax assets | 1,313 |  |  | 1,318 |
Less: Valuation allowance | 410 |  |  | 278 |
Deferred tax assets less valuation allowance | $ | 903 |  |  | $ | 1,040 |
Deferred tax liabilities |  |  |  |  |
Property, plant, and equipment | $ | (835 | ) |  | $ | (1,237 | )
Intangible assets | (535 | ) |  | (847 | )
Investments | (274 | ) |  | — |
Other | (131 | ) |  | (128 | )
Total deferred tax liabilities | $ | (1,775 | ) |  | $ | (2,212 | )
Net deferred tax liabilities | $ | (872 | ) |  | $ | (1,172 | )
As recorded in the Consolidated Statements of Financial Position: |  |  |  |  |
Other noncurrent assets | $ | 21 |  |  | $ | 34 |
Deferred income tax liabilities | (893 | ) |  | (1,206 | )
Net deferred tax liabilities | $ | (872 | ) |  | $ | (1,172 | )
As of December 31, 2017, the Company has accumulated undistributed earnings generated by our foreign subsidiaries of approximately $1.2 billion which was subject to the one-time transition tax of approximately $71 million on deferred foreign income as required by the Tax Reform Act. We continue to consider these earnings as reinvested indefinitely. For certain consolidated foreign subsidiaries, income and losses directly flow through to taxable income in the United States. These entities are also subject to taxation in the foreign tax jurisdictions. Net operating loss carryforwards exist to offset future taxable income in foreign tax jurisdictions and valuation allowances are provided to reduce deferred related tax assets if it is more likely than not that this benefit will not be realized. Changes in the estimated realizable amount of deferred tax assets associated with net operating losses for these entities could result in changes in the deferred tax asset valuation allowance in the foreign tax jurisdiction. At the same time, because these entities are also subject to tax in the United States, a deferred tax liability for the expected future taxable income will be established concurrently. Therefore, the impact of any reversal of valuation allowances on consolidated income tax expense will be only to the extent that there are differences between the United States statutory tax rate and the tax rate in the foreign jurisdiction. A valuation allowance of $17 million at December 31, 2017 has been provided against the deferred tax asset resulting from these operating loss carryforwards. At December 31, 2017, foreign net operating loss carryforwards totaled $2.5 billion. Of this total, $285 million will expire in 1 to 20 years and $2.2 billion have no expiration date. A valuation allowance of approximately $260 million has been provided against such net operating loss carryforwards. At December 31, 2017, federal net operating loss carryforwards of $16 million were available to offset future taxable income, which expire from 2027 to 2030. At December 31, 2017, foreign tax credit carryforwards of approximately $72 million were available to reduce possible future U.S. income taxes and which expire from 2018 to 2021. As a result of the Tax Reform Act, the Company may no longer be able to utilize the Solutia, Inc. ("Solutia") U.S. foreign tax credit carryforwards; therefore, management established a full valuation allowance of $72 million on the remaining deferred tax asset as of December 31, 2017. A partial valuation allowance of $54 million has been established for the Solutia state net operating loss carryforwards. The valuation allowance will be retained until there is sufficient positive evidence to conclude that it is more likely than not that the deferred tax assets will be realized or the related statute expires. Amounts due to and from tax authorities as recorded in the Consolidated Statements of Financial Position:
| December 31,
(Dollars in millions) | 2017 |  | 2016
Miscellaneous receivables | $ | 215 |  |  | $ | 235 |
Payables and other current liabilities | $ | 58 |  |  | $ | 56 |
Other long-term liabilities | 137 |  |  | 60 |
Total income taxes payable | $ | 195 |  |  | $ | 116 |
A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows:
(Dollars in millions) | 2017 |  | 2016 |  | 2015
Balance at January 1 | $ | 114 |  |  | $ | 125 |  |  | $ | 117 |
Adjustments based on tax positions related to current year | 29 |  |  | (7 | ) |  | (12 | )
Additions based on acquisitions | — |  |  | — |  |  | 27 |
Lapse of statute of limitations | (1 | ) |  | (4 | ) |  | (7 | )
Balance at December 31 | $ | 142 |  |  | $ | 114 |  |  | $ | 125 |
All of the unrecognized tax benefits would, if recognized, impact the Company's effective tax rate. Interest, net of tax, related to unrecognized tax benefits is recorded as a component of income tax expense. As of January 1, 2017, the Company had accrued a liability of $4 million for interest, net of tax, and $1 million for estimated tax penalties. During 2017, the Company recognized $3 million of expense for interest, net of tax, and no penalties associated with unrecognized tax benefits, offset by $1 million of income for interest, net of tax, and no penalties, associated with the expiration of the statute of limitations. At December 31, 2017, the Company had accrued balances of $6 million for interest, net of tax benefit, and $1 million for penalties. As of January 1, 2016, the Company had accrued a liability of $4 million for interest, net of tax, and $1 million for tax penalties. During 2016, the Company recognized $1 million of expense for interest, net of tax, and no penalties associated with unrecognized tax benefits, offset by $1 million of income for interest, net of tax, and no penalties, associated with the expiration of the statute of limitations. At December 31, 2016, the Company had accrued balances of $4 million for interest, net of tax benefit, and $1 million for penalties. As of January 1, 2015, the Company had accrued a liability of $4 million for interest, net of tax, and $3 million for tax penalties. During 2015, the Company recognized $2 million of expense for interest, net of tax, and no penalties associated with unrecognized tax benefits, offset by $2 million of income for interest, net of tax, and $2 million of penalties, associated with the expiration of the statute of limitations. At December 31, 2015, the Company had accrued balances of $4 million for interest, net of tax benefit, and $1 million for penalties. The Company files income tax returns in the United States and various state and foreign jurisdictions. The Company is no longer subject to U.S. Federal income tax examinations by tax authorities for years before 2011 for Eastman legal entities and years before 2002 for Solutia legal entities. With few exceptions, Eastman is no longer subject to state and local income tax examinations by tax authorities for years before 2010. Solutia and related subsidiaries are no longer subject to state and local income tax examinations for years before 2000. With few exceptions, the Company is no longer subject to foreign income tax examinations by tax authorities for tax years before 2007. It is reasonably possible that, as a result of the resolution of federal, state, and foreign examinations and appeals, and the expiration of various statutes of limitation, unrecognized tax benefits could decrease within the next twelve months by up to $20 million.

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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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