21.

INCOME TAX

Income (loss) before income tax is comprised of the following:


	Year ended December 31, 2017			Year ended December 31, 2016			Year ended December 31, 2015
Income (loss) recorded in The Netherlands		(17	)		(10	)		(18	)
Income (loss) from foreign operations		970			211			107

Income (loss) before income tax benefit (expense)		953			201			89

STMicroelectronics N.V. and its subsidiaries are individually liable for income taxes in their jurisdictions. Tax losses can only offset profits generated by the taxable entity incurring such loss.

Income tax benefit (expense) is comprised of the following:


	Year ended December 31, 2017			Year ended December 31, 2016			Year ended December 31, 2015
The Netherlands Taxes — current		(1	)		(2	)		5
Foreign taxes — current		(101	)		(69	)		(43	)

Total current taxes		(102	)		(71	)		(38	)
The Netherlands Taxes — deferred		—			—			—
Foreign taxes — deferred		(41	)		40			59

Total deferred taxes		(41	)		40			59
Income tax benefit (expense)		(143	)		(31	)		21
Effective tax rate		15	%		15	%		-24	%

The principal items comprising the differences in income taxes computed at the Netherlands statutory rate of 25.0% in 2017, 2016 and 2015, and the effective income tax rate are the following:


	Year ended December 31, 2017			Year ended December 31, 2016			Year ended December 31, 2015
Income tax benefit (expense) computed at statutory rate		(238	)		(51	)		(23	)
Non-deductible and non-taxable permanent differences, net		17			5			(18	)
Income (loss) on equity-method investments		—			2			—
Valuation allowance adjustments		92			10			1
Effect on deferred taxes of changes in enacted tax rates		(70	)		(9	)		(15	)
Current year credits		40			34			44
Other tax and credits		(36	)		(25	)		2
Benefits from tax holidays		114			49			42
Net impact of changes to uncertain tax positions		(43	)		(22	)		8
Earnings of subsidiaries taxed at different rates		(19	)		(24	)		(20	)

Income tax benefit (expense)		(143	)		(31	)		21

The tax holidays represent a tax exemption period aimed to attract foreign technological investment in certain tax jurisdictions. The effect of the tax benefits, from tax holidays for countries which are profitable, on basic earnings per share was $0.13, $0.05 and $0.05 for the years ended December 31, 2017, 2016, and 2015, respectively. These agreements are present in various countries and include programs that reduce up to and including 100% of taxes in years affected by the agreements. The Company’s tax holidays expire at various dates through the year ending December 31, 2022. In certain countries, tax holidays can be renewed depending on the Company still meeting certain conditions at the date of expiration of the current tax holidays.

Deferred tax assets and liabilities consisted of the following:


	December 31, 2017			December 31, 2016
Tax loss carryforwards and investment credits		740			804
Less unrecognized tax benefit		(235	)		(195	)

Tax loss carryforwards net of unrecognized tax benefit		505			609
Inventory valuation		35			29
Impairment and restructuring charges		16			20
Fixed asset depreciation in arrears		32			34
Increased depreciation incentives		118			—
Capitalized development costs		101			91
Receivables for government funding		6			7
Tax credits granted on past capital investments		1,160			1,165
Pension service costs		65			68
Stock awards		5			—
Commercial accruals		11			19
Other temporary differences		99			92

Total deferred tax assets		2,153			2,134
Valuation allowances		(1,502	)		(1,577	)

Deferred tax assets, net		651			557
Accelerated fixed asset depreciation		(13	)		(10	)
Acquired intangible assets		(10	)		(8	)
Advances of government funding		(9	)		(16	)
Other temporary differences		(6	)		—

Deferred tax liabilities		(38	)		(34	)

Net deferred income tax asset		613			523

For a particular tax-paying component of the Company and within a particular tax jurisdiction, all current deferred tax liabilities and assets are offset and presented as a single amount, similarly to non-current deferred tax liabilities and assets. The Company does not offset deferred tax liabilities and assets attributable to different tax-paying components or to different tax jurisdictions.

The net deferred tax assets are recorded in legal entities which have been historically profitable and are expected to be profitable in the next coming years.

As of December 31, 2017, the Company and its subsidiaries have gross deferred tax assets on tax loss carryforwards and investment credits that expire starting 2018, as follows:


Year
2018			4
2019			78
2020			14
2021			3
2022			7
Thereafter			634

Total			740

The “Tax credits granted on past capital investments” mainly related to a 2003 agreement granting the Company certain tax credits for capital investments purchased through the year ending December 31, 2006. Any unused tax credits granted under the agreement will be impacted by yearly by a legal inflationary index (currently -0.13% per annum). The credits may be utilized through 2020 or later depending on the Company meeting certain program criteria. In addition to this agreement, starting in 2007 the Company continues to receive tax credits on the yearly capital investments, which may be used to offset that year’s tax liabilities and increases by the legal inflationary rate. However, pursuant to the inability to utilize these credits currently and in future years, the Company did not recognize any deferred tax asset on such tax allowance. As a result, there is no financial impact to the net deferred tax assets of the Company.

The amounts of deferred tax benefit (expense) recorded as a component of other comprehensive income (loss) was $(1) million and $(1) million in 2017 and 2016, respectively. They were related primarily to the tax effects of the recognized unfunded status on defined benefits plan.

The cumulative amount of distributable earnings related to the Company’s investments in foreign subsidiaries and corporate joint ventures was $1,893 million and $1,046 million as at December 31, 2017 and December 31, 2016, respectively. Due to the Company’s legal and tax structure, with the parent company established in the Netherlands, there was no significant tax impact from the distribution of earnings from investments in foreign subsidiaries and corporate joint ventures. This is because there is no tax impact on dividends paid up to a Dutch holding company.

A reconciliation of 2017, 2016 and 2015 beginning and ending amounts of unrecognized tax benefits is as follows:


	December 31, 2017			December 31, 2016			December 31, 2015
Balance at beginning of year		238			226			313
Additions based on tax positions related to the current year		43			34			38
Additions for tax positions of prior years		13			1			—
Reduction for tax positions of prior years		(9	)		(13	)		(48	)
Settlements		(2	)		—			(48	)
Prepayment		(4	)		—			(3	)
Reductions due to lapse of statute of limitations		—			(4	)		(1	)
Foreign currency translation		31			(6	)		(25	)

Balance at end of year		310			238			226

At December 31, 2017 and 2016, $235 million and $195 million, respectively, of unrecognized tax benefits were classified as a reduction of deferred tax assets. It is reasonably possible that certain of the uncertain tax positions disclosed in the table above could increase within the next 12 months due to ongoing tax audits. The Company is not able to make an estimate of the range of the reasonably possible change.

Additionally, the Company elected to classify accrued interest and penalties related to uncertain tax positions as components of income tax expense in the consolidated statements of income, they were less than $1 million in 2017, $1 million in 2016, $1 million in 2015, $27 million in 2014 and not material in the previous years. Accrued interest and penalties amounted to $10 million at December 31, 2017 and $9 million at December 31, 2016.

The tax years that remain open for review in the Company’s major tax jurisdictions, including France, Italy, United States and India, are from 1997 to 2017.