Income Taxes

For the years ended December 31, (loss) income before income taxes consisted of the following:



In millions	2015			2014		2013
(Loss) income before income taxes
United States	$	(88	)	$	301	$	362
Foreign	(56		)	193		146
Total (loss) income before income taxes	$	(144	)	$	494	$	508

For the years ended December 31, income tax expense consisted of the following:



In millions	2015			2014			2013
Income tax expense
Current
Federal	$	74		$	94		$	78
State and local	9			8			10
Foreign	26			27			26
Deferred
Federal	(19		)	1			18
State and local	(3		)	—			2
Foreign	(17		)	(3		)	(3		)
Total income tax expense	$	70		$	127		$	131
Effective tax rate	(48.6		%)	25.7		%	25.8		%

The following table presents the principal components of the difference between the effective tax rate and the U.S. federal statutory income tax rate for the years ended December 31:



	2015		2014		2013
Income tax expense at the U.S. federal tax rate	35.0	%	35.0	%	35.0	%
Foreign income tax differential	14.0	%	(9.0	%)	(7.3	%)
State and local income taxes	0.5	%	0.5	%	0.4	%
U.S. permanent book/tax differences	3.1	%	0.4	%	0.5	%
U.S. manufacturing deduction	5.5	%	(2.1	%)	(2.1	%)
Impairment of goodwill and acquired intangibles	(100.1	%)	—	%	—	%
Other, net	(6.6	%)	0.9	%	(0.7	%)
Effective tax rate	(48.6	%)	25.7	%	25.8	%

The 2015 effective tax rate includes a discrete tax expense of $145 million resulting from the $437 million goodwill impairment, of which $414 million is related to non-deductible goodwill. In addition to the goodwill impairment, the higher 2015 effective tax rate as compared to 2014 was also driven by the lower foreign earnings mix in 2015 versus 2014. The 2014 effective tax had no material discrete tax items impacting the effective tax rate.

Deferred income tax assets and liabilities included in the balance sheets at December 31 were as follows:



In millions	2015			2014
Deferred income tax assets
Employee pensions and other liabilities	$	62		$	61
Other balance sheet reserves and allowances	23			22
Tax loss and credit carryforwards	62			59
Deferred revenue	3			—
Total deferred income tax assets	150			142
Valuation allowance	(25		)	(20		)
Net deferred income tax assets	125			122
Deferred income tax liabilities
Intangibles and capitalized software	81			102
Property and equipment	30			29
Deferred revenue	—			17
Other	1			12
Total deferred income tax liabilities	112			160
Total net deferred income tax assets (liabilities)	$	13		$	(38	)

As of December 31, 2015, Teradata has net operating loss ("NOL") and tax credit carryforwards totaling $73 million (tax effected and before any valuation allowance offset and application of recognition criteria for uncertain tax positions). Of the total tax carryforwards, $26 million are NOL's in the U.S. and certain foreign jurisdictions, a small portion of which will begin to expire in 2016; $36 million are R&D tax credits, of which almost 90 percent are California R&D tax credits that have an indefinite carryforward period (which has a $25 million valuation allowance offset recorded); and the remaining $11 million are tax attributes that were acquired from various acquisitions and were not recorded for financial reporting purposes as they did not meet the recognition criteria for uncertain tax positions.

The Company’s intention is to permanently reinvest its foreign earnings outside of the U.S. As a result, the effective tax rates in the periods presented are largely based upon the pre-tax earnings mix and allocation of certain expenses in various taxing jurisdictions where the Company conducts its business; these jurisdictions apply a broad range of statutory income tax rates. At December 31, 2015, the Company had not provided for federal income taxes on earnings of approximately $1.2 billion from its foreign subsidiaries. Should these earnings be distributed in the form of dividends or otherwise, the Company would be subject to U.S. income taxes and potential withholding taxes in various international jurisdictions. The U.S. taxes would be partially offset by U.S. foreign tax credits. Determination of the amount of unrecognized deferred U.S. tax liability is not practical because of the complexities associated with this hypothetical calculation.

The Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The Company reflects any interest and penalties recorded in connection with its uncertain tax positions as a component of income tax expense.

As of December 31, 2015, the Company’s uncertain tax positions totaled approximately $38 million, of which $20 million is reflected in the other liabilities section of the Company’s balance sheet as a non-current liability, and $3 million is recorded in current income taxes payable as the Company expects to settle this uncertain tax position within the next twelve months. The remaining balance of $15 million of uncertain tax positions relates to certain tax attributes both generated by the Company and acquired in various acquisitions, which are netted against the underlying deferred tax assets recorded on the balance sheet. The entire balance of $38 million in uncertain tax positions would cause a decrease in the effective income tax rate upon recognition. Teradata has recorded $2 million of interest accruals related to its uncertain tax liabilities as of December 31, 2015.

Below is a rollforward of the Company’s liability related to uncertain tax positions at December 31:



In millions	2015			2014
Balance at January 1	$	36		$	34
Gross increases for prior period tax positions	—			4
Gross decreases for prior period tax positions	—			(3		)
Gross increases for current period tax positions	6			4
Decreases due to the lapse of applicable statute of limitations	(1		)	(3		)
Decreases relating to settlements with taxing authorities	(3		)	—
Balance at December 31	$	38		$	36

The Company and its subsidiaries file income tax returns in the U.S. federal and various state jurisdictions, as well as numerous foreign jurisdictions. As of December 31, 2015, the Company has ongoing tax audits in a limited number of state and foreign jurisdictions; however, no material adjustments have been proposed or made in any of these examinations to date which would result in any incremental income tax expense in future periods to the company. In addition, the Internal Revenue Service audit of the Company’s United States Federal tax filing for tax year 2011 was finalized in July of 2014 and resulted in a no change audit.