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INCOME TAXES | 12 Months Ended
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Dec. 31, 2018
Income Tax Disclosure [Abstract] |
PROVISION FOR INCOME TAXES |
7. | INCOME TAXES
As previously reported, the Company recognized a provisional net tax benefit for the year ended December 31, 2017, resulting from the Tax Reform Act. In 2017, the Company recognized a $339 million estimated 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. 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. As of December 31, 2018 the Company considers the accounting under SAB 118 for the impacts of the Tax Reform Act to be complete. In preparing the amounts as of December 31, 2018 the Company considered notices, revenue procedures, and proposed regulations issued by the Internal Revenue Service and authoritative accounting guidance to date. In 2018, the Company recognized an adjustment to the 2017 net tax benefit which decreased earnings by $20 million primarily related to the one-time transition tax on deferred foreign income and 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. As of December 31, 2018, the U.S. Department of Treasury has issued a number of proposed regulations related to implementation of the provisions of the Tax Reform Act and certain states may issue clarifying guidance regarding state income tax conformity to the current federal tax code. Finalization of these regulations in 2019 or future periods may result in changes in the period of enactment to the amounts currently reported in the Consolidated Statements of Financial Position. The income tax payable for the transition tax will be paid over eight years. As of December 31, 2018 and 2017, a non-current income tax payable of approximately $56 million and $60 million, respectively, attributable to the transition tax is reflected in “Other long-term liabilities” of the Consolidated Statements of Financial Position. In conjunction with its evaluation of the provisions of the Tax Reform Act, in 2018, the Company made an accounting policy election to account for taxes resulting from GILTI as a component of the provision for income taxes. Components of earnings before income taxes and the provision for (benefit from) U.S. and other income taxes from operations follow:
| For years ended December 31,
(Dollars in millions) | 2018 |  | 2017 |  | 2016
Earnings before income taxes |  |  |  |  |
United States | $ | 718 |  |  | $ | 654 |  |  | $ | 422 |
Outside the United States | 592 |  |  | 635 |  |  | 627 |
Total | $ | 1,310 |  |  | $ | 1,289 |  |  | $ | 1,049 |
Provision for (benefit from) income taxes |  |  |  |  |  |  |  |
United States Federal |  |  |  |  |  |  |  |
Current (1) | $ | 161 |  |  | $ | 220 |  |  | $ | (80 | )
Deferred (2) | (11 | ) |  | (383 | ) |  | 214 |
Outside the United States |  |  |  |  |
Current | 86 |  |  | 62 |  |  | 91 |
Deferred | (22 | ) |  | 2 |  |  | (18 | )
State and other |  |  |  |  |
Current | 30 |  |  | 13 |  |  | 2 |
Deferred | (18 | ) |  | (13 | ) |  | (19 | )
Total | $ | 226 |  |  | $ | (99 | ) |  | $ | 190 |
(1) | A one-time transition tax of $71 million on deferred foreign income tax is included for 2017.
(2) | Includes a 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 for 2017.
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) | 2018 |  | 2017 |  | 2016
Defined benefit pension and other postretirement benefit plans | $ | (10 | ) |  | $ | (16 | ) |  | $ | 21 |
Derivatives and hedging | 3 |  |  | 8 |  |  | 105 |
Total | $ | (7 | ) |  | $ | (8 | ) |  | $ | 126 |
Total income tax expense (benefit) included in the consolidated financial statements was composed of the following:
| For years ended December 31,
(Dollars in millions) | 2018 |  | 2017 |  | 2016
Earnings before income taxes | $ | 226 |  |  | $ | (99 | ) |  | $ | 190 |
Other comprehensive income | (7 | ) |  | (8 | ) |  | 126 |
Total | $ | 219 |  |  | $ | (107 | ) |  | $ | 316 |
Differences between the provision for (benefit from) income taxes and income taxes computed using the U.S. Federal statutory income tax rate follow:
| For years ended December 31,
(Dollars in millions) | 2018 |  | 2017 |  | 2016
Amount computed using the statutory rate | $ | 274 |  |  | $ | 450 |  |  | $ | 366 |
State income taxes, net | 6 |  |  | (4 | ) |  | (18 | )
Foreign rate variance | (52 | ) |  | (150 | ) |  | (121 | )
Domestic manufacturing deduction | — |  |  | (18 | ) |  | (7 | )
Change in reserves for tax contingencies | 21 |  |  | 20 |  |  | — |
General business credits | (60 | ) |  | (65 | ) |  | (20 | )
U.S. tax on foreign earnings | 8 |  |  | 29 |  |  | 25 |
Foreign tax credits | (12 | ) |  | (26 | ) |  | (10 | )
Tax law changes and tax loss from outside-U.S. entity reorganizations (1) | 20 |  |  | (339 | ) |  | — |
Other | 21 |  |  | 4 |  |  | (25 | )
Provision for (benefit from) income taxes | $ | 226 |  |  | $ | (99 | ) |  | $ | 190 |
Effective income tax rate | 17 | % |  | (8 | )% |  | 18 | %
(1) | Includes a 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 in 2017 and a net incremental adjustment to those amounts under the Tax Reform Act in 2018.
The 2018 effective tax rate includes the impact of the U.S. corporate tax rate reduction resulting from the Tax Reform Act and the repeal of the domestic manufacturing deduction. The 2018 effective tax rate also includes a $20 million increase to the provision for income taxes resulting from adjustments to the provisional net tax benefit recognized in fourth quarter 2017 resulting from tax law changes, primarily the Tax Reform Act. These adjustments related to the one-time transition tax on deferred foreign income and 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 2017 effective tax rate includes 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 2017 effective tax rate also includes an $8 million tax benefit due to a tax ruling permitting deductibility of a liquidation loss on a previously impaired site. The 2016 effective tax rate includes 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) | 2018 |  | 2017
Deferred tax assets |  |  |
Post-employment obligations | $ | 230 |  |  | $ | 242 |
Net operating loss carryforwards | 708 |  |  | 690 |
Tax credit carryforwards | 239 |  |  | 202 |
Environmental reserves | 70 |  |  | 72 |
Unrealized derivative loss | 18 |  |  | 17 |
Other | 94 |  |  | 90 |
Total deferred tax assets | 1,359 |  |  | 1,313 |
Less: Valuation allowance | 466 |  |  | 410 |
Deferred tax assets less valuation allowance | $ | 893 |  |  | $ | 903 |
Deferred tax liabilities |  |  |  |  |
Property, plant, and equipment | $ | (856 | ) |  | $ | (835 | )
Intangible assets | (473 | ) |  | (535 | )
Investments | (274 | ) |  | (274 | )
Other | (131 | ) |  | (131 | )
Total deferred tax liabilities | $ | (1,734 | ) |  | $ | (1,775 | )
Net deferred tax liabilities | $ | (841 | ) |  | $ | (872 | )
As recorded in the Consolidated Statements of Financial Position: |  |  |  |  |
Other noncurrent assets | $ | 43 |  |  | $ | 21 |
Deferred income tax liabilities | (884 | ) |  | (893 | )
Net deferred tax liabilities | $ | (841 | ) |  | $ | (872 | )
As of December 31, 2018, the Company has accumulated undistributed earnings generated by our foreign subsidiaries of approximately $1.3 billion. As of December 31, 2017, the Company had accumulated undistributed earnings generated by our foreign subsidiaries of approximately $1.2 billion, which was subject to the one-time transition tax of $71 million on deferred foreign income as required by the Tax Reform Act. Beginning January 1, 2019, the Company is not asserting indefinite reinvestment on short-term liquid assets of certain foreign subsidiaries. All other foreign earnings, including basis differences of certain foreign subsidiaries, continue to be considered indefinitely reinvested. For certain consolidated foreign subsidiaries, income and losses directly flow through to taxable income in the U.S. 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 U.S., 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 U.S. statutory tax rate and the tax rate in the foreign jurisdiction. A valuation allowance of $20 million at December 31, 2018 has been provided against the deferred tax asset resulting from these operating loss carryforwards. At December 31, 2018, foreign net operating loss carryforwards totaled $2.5 billion. Of this total, $145 million will expire in 1 to 20 years and $2.4 billion have no expiration date. A valuation allowance of approximately $304 million has been provided against such net operating loss carryforwards. At December 31, 2018, federal net operating loss carryforwards of $12 million were available to offset future taxable income, which expire from 2028 to 2030. At December 31, 2018, foreign tax credit carryforwards of approximately $64 million were available to reduce possible future U.S. income taxes and which expire from 2019 to 2028. 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 $48 million on the remaining deferred tax asset as of December 31, 2018. At December 31, 2018, a valuation allowance of $36 million was established against state tax credits that the Company may not be able to utilize. 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) | 2018 |  | 2017
Miscellaneous receivables | $ | 135 |  |  | $ | 215 |
Payables and other current liabilities | $ | 43 |  |  | $ | 58 |
Other long-term liabilities | 162 |  |  | 137 |
Total income taxes payable | $ | 205 |  |  | $ | 195 |
A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows:
(Dollars in millions) | 2018 |  | 2017 |  | 2016
Balance at January 1 | $ | 142 |  |  | $ | 114 |  |  | $ | 125 |
Adjustments based on tax positions related to current year | 44 |  |  | 29 |  |  | (7 | )
Lapse of statute of limitations | (4 | ) |  | (1 | ) |  | (4 | )
Balance at December 31 | $ | 182 |  |  | $ | 142 |  |  | $ | 114 |
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, 2018, Eastman had accrued a liability of $6 million for interest, net of tax, and $1 million for estimated tax penalties. During 2018, the Company recognized $4 million of expense for interest, net of tax, and no penalties associated with unrecognized tax benefits, no income for interest, net of tax, and no penalties, associated with the expiration of the statute of limitations. At December 31, 2018, the Company had accrued balances of $10 million for interest, net of tax benefit, and $1 million for penalties. As of January 1, 2017, Eastman had accrued a liability of $4 million for interest, net of tax, and $1 million for 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, Eastman 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 of 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. Eastman 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 2011. 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 2011. 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 $8 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://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -URI http://asc.fasb.org/topic&trid=2144680 + Details
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