Income Taxes

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



In millions	2016		2015			2014
Income (loss) before income taxes
United States	$	93	$	(88	)	$	301
Foreign	128		(56		)	193
Total income (loss) before income taxes	$	221	$	(144	)	$	494

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



In millions	2016			2015			2014
Income tax expense
Current
Federal	$	67		$	74		$	94
State and local	7			9			8
Foreign	25			26			27
Deferred
Federal	7			(19		)	1
State and local	1			(3		)	—
Foreign	(11		)	(17		)	(3		)
Total income tax expense	$	96		$	70		$	127
Effective income tax rate	43.4		%	(48.6		)%	25.7		%

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:



In millions	2016		2015		2014
Income tax expense at the U.S. federal tax rate	35.0	%	35.0	%	35.0	%
Foreign income tax differential	(13.2	)%	14.0	%	(9.0	)%
State and local income taxes	0.2	%	0.5	%	0.5	%
U.S. permanent book/tax differences	(0.1	)%	3.1	%	0.4	%
U.S. manufacturing deduction permanent difference	(3.5	)%	5.5	%	(2.1	)%
Goodwill impairment	8.9	%	(100.1	)%	—	%
Tax impact of sale of marketing applications business	9.9	%	—	%	—	%
Impact of excess tax benefits and tax deficiencies	2.2	%	—	%	—	%
Tax impact of U.S. tax law change - IRC Section 987	3.5	%	—	%	—	%
Other, net	0.5	%	(6.6	)%	0.9	%
Effective income tax rate	43.4	%	(48.6	)%	25.7	%

The 2016 effective tax rate was impacted by the $57 million of goodwill impairment charges recorded in the first quarter of 2016, all of which was treated as a permanent, non-deductible tax item. In addition, a discrete tax charge of $22 million was recorded in the third quarter of 2016 related to the tax impact of the sale of the marketing applications business, which occurred on July 1, 2016. In the fourth quarter of 2016, the Company recorded $8 million of tax expense associated with the issuance of new U.S. Treasury Regulations under Internal Revenue Code Section 987 on December 7, 2016, which clarified how companies calculate foreign currency translation gains and losses for income tax purposes for branches whose accounting records are kept in a currency other than the currency of the company. Also in the fourth quarter of 2016, the Company elected to early adopt Accounting Standards Update 2016-09, Improvements to Employee Share-based Payment Accounting. As a result, the Company incurred a $5 million discrete tax expense associated with the net shortfall arising from 2016 equity compensation vestings and exercises.

The 2015 effective tax rate was impacted by the $437 million of goodwill impairment charges recorded for 2015, of which $414 million was treated as a permanent non-deductible tax item. This resulted in full-year income tax expense in 2015 of $70 million, on a pre-tax net loss of $(144) million, causing a negative tax rate of (48.6)%. There were no material discrete tax items impacting the effective tax rate for full year 2014.

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



In millions	2016			2015
Deferred income tax assets
Employee pensions and other liabilities	$	59		$	62
Other balance sheet reserves and allowances	18			23
Tax loss and credit carryforwards	53			62
Deferred revenue	3			3
Total deferred income tax assets	133			150
Valuation allowance	(26		)	(25		)
Net deferred income tax assets	107			125
Deferred income tax liabilities
Intangibles and capitalized software	63			81
Property and equipment	22			30
Other	6			1
Total deferred income tax liabilities	91			112
Total net deferred income tax assets	$	16		$	13

As of December 31, 2016, Teradata has net operating loss ("NOL") and tax credit carryforwards totaling $56 million (tax effected and before any valuation allowance offset and application of recognition criteria for uncertain tax positions). Of the total tax carryforwards, $13 million are NOL's in the U.S. and certain foreign jurisdictions, a small portion of which will begin to expire in 2019; $2 million are U.S. foreign tax credit carryforwards, which expire in 2021; $37 million are California R&D tax credits that have an indefinite carryforward period (which has a $26 million valuation allowance offset recorded); and the remaining $4 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, 2016, the Company had not provided for federal income taxes on earnings of approximately $1.3 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, 2016, the Company’s uncertain tax positions totaled approximately $30 million, of which $20 million is reflected in the other liabilities section of the Company’s balance sheet as a non-current liability. The remaining balance of $10 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 $30 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, 2016.

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



In millions	2016			2015
Balance at January 1	$	38		$	36
Gross decreases for prior period tax positions	(7		)	—
Gross increases for current period tax positions	3			6
Decreases due to the lapse of applicable statute of limitations	(4		)	(1		)
Decreases relating to settlements with taxing authorities	—			(3		)
Balance at December 31	$	30		$	38

The Company and its subsidiaries file income tax returns in the U.S. and various state jurisdictions, as well as numerous foreign jurisdictions. As of December 31, 2016, 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 U.S. Federal tax filing for tax year 2011 was finalized in July of 2014 and resulted in a no change audit.