NOTE I – INCOME TAXES

Tax Law Changes

The Tax Cuts and Jobs Act (Tax Act) was enacted on December 22, 2017. The Tax Act reduces the U.S. federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings. At June 30, 2018, Ashland has not completed the internal accounting assessment for the tax effects of enactment of the Tax Act; however, Ashland determined a reasonable estimate of the effects on our existing deferred tax balances and the one-time transition tax. Ashland recognized a provisional amount for the nine months ended June 30, 2018, which is included as a component of income tax expense from continuing operations. Ashland recorded net unfavorable tax adjustments of $16 million during the nine months ended June 30, 2018 primarily related to deferred tax rate changes and a one-time transition tax assessed on foreign cash and unremitted earnings.

Provisional amounts - Deferred and other income tax assets and liabilities

Ashland remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%. However, Ashland is still analyzing certain aspects of the Tax Act and refining certain calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. The provisional amount recorded related to the remeasurement of the deferred tax balance was a favorable tax adjustment of $126 million during the nine months ended June 30, 2018.

Provisional amounts - Foreign tax effects

The one-time transition tax is based on Ashland's total post-1986 earnings and profits (E&P) of foreign subsidiaries that were previously deferred from U.S. income taxes. Ashland recorded a provisional amount for this one-time transition tax liability of $142 million during the nine months ended June 30, 2018, which is primarily included within the other liabilities caption on the Condensed Consolidated Balance Sheet. Ashland has not yet completed its calculation of the total post-1986 E&P for these foreign subsidiaries. In addition, the transition tax is based in part on the amount of those earnings held in cash and other specified assets. This amount may change when Ashland finalizes the calculation of post-1986 E&P of foreign subsidiaries previously deferred from U.S. federal taxation and finalizes the amounts held in cash or other specified assets. No additional income taxes have been provided for any remaining undistributed foreign earnings not subject to the transition tax, or any additional outside basis difference inherent in these entities, as these amounts continue to be indefinitely reinvested in foreign operations. Ashland determined that the amount of unrecognized deferred tax liability related to any remaining undistributed foreign earnings not subject to the transition tax and additional outside basis difference in these entities (i.e., basis difference in excess of that subject to the one-time transition tax) is not practicable at this time.

Current fiscal year

Ashland’s effective tax rate in any interim period is subject to adjustments related to discrete items and the mix of domestic and foreign operating results. The overall effective tax rate was a benefit rate of 16% and expense of 10% for the three and nine months ended June 30, 2018, respectively. The current quarter tax rate was impacted by income mix as well as $8 million from favorable tax discrete items including a valuation allowance release related to a foreign entity and a domestic tax rate change. In addition to income mix, the current nine-month period tax rate was impacted by net unfavorable tax discrete adjustments of $16 million primarily related to the Tax Act, partially offset by a favorable tax discrete adjustment of $4 million related to a deferred tax rate change for a foreign entity and the current quarter favorable discrete items of $8 million previously noted.

Prior fiscal year

The overall effective tax rate was 20% and 48% for the three and nine months ended June 30, 2017, respectively. The prior quarter tax rate was impacted by income mix and net unfavorable tax discrete adjustments primarily related to changes in the realization of certain historic tax attributes due to the Valvoline distribution and the Pharmachem acquisition as well as tax on certain restructuring items. For the prior nine-month period, the tax rate was primarily impacted by net unfavorable tax discrete adjustments previously noted, partially offset by a reversal for unrecognized tax benefits due to lapse of the statute of limitations.

Unrecognized tax benefits

Changes in unrecognized tax benefits are summarized as follows for the nine months ended June 30, 2018.

(In millions)
Balance at October 1, 2017	$	194
Increases related to positions taken on items from prior years		3
Decreases related to positions taken on items from prior years		(2	)
Increases related to positions taken in the current year		8
Settlements		(1	)
Lapse of statute of limitations		(1	)
Balance at June 30, 2018	$	201

From a combination of statute expirations and audit settlements in the next twelve months, Ashland expects a decrease in the amount accrued for uncertain tax positions of between $35 million and $39 million. It is reasonably possible that there could be other material changes to the amount of uncertain tax positions due to activities of the taxing authorities, settlement of audit issues or the reassessment of existing uncertain tax positions; however, Ashland is not able to estimate the impact of these items at this time.