INCOME TAXES

On December 22, 2017, the Tax Cuts and Jobs Act ("The Act") was enacted. The Act reduces the U.S. federal corporate income tax rate from 35 percent to 21 percent, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously deferred, creates new provisions related to foreign sourced earnings, eliminates the domestic manufacturing deduction and moves to a territorial system. At December 31, 2017, the Corporation had not completed its accounting for the tax effects of The Act; however, as described below, the Corporation made a reasonable estimate of the effects on its existing deferred tax balances and the one-time transition tax. In accordance with Staff Accounting Bulletin 118 (“SAB118”), income tax effects of The Act may be refined upon obtaining, preparing or analyzing additional information during the measurement period and such changes could be material. During the measurement period, provisional amounts may also be adjusted for the effects, if any, of interpretive guidance issued after December 31, 2017, by U.S. regulatory and standard-setting bodies.

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As a result of The Act, the Corporation remeasured its U.S. federal deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21 percent. However, the Corporation is still analyzing certain aspects of The Act and refining its 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 Corporation’s deferred tax balance was $250 million, recorded as a charge to "Provision (Credit) for income taxes."

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The Act requires a mandatory deemed repatriation of post-1986 undistributed foreign earnings and profits ("E&P"), which results in a one-time transition tax. As a result, the Corporation recorded an insignificant provisional amount for the transition tax liability for its foreign subsidiaries. The Corporation has not yet completed its calculation of the total post-1986 foreign E&P for its foreign subsidiaries as E&P will not be finalized until the DowDuPont federal income tax return is filed. Further, the transition tax is based in part on the amount of those earnings held in cash and other specified assets, which is a defined term under The Act.

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For tax years beginning after December 31, 2017, The Act introduces new provisions for U.S. taxation of certain global intangible low-taxed income ("GILTI"). Due to its complexity and a current lack of guidance as to how to calculate the tax, the Corporation is not yet able to determine a reasonable estimate for the impact of the incremental tax liability. When additional guidance is available, the Corporation will make a policy election on whether the additional liability will be recorded in the period in which it is incurred or recognized for the basis differences that would be expected to reverse in future years.



Geographic Allocation of Income and Provision (Credit) for Income Taxes
In millions	2017			2016			2015
Income (Loss) Before Income Taxes
Domestic	$	856		$	49		$	1,254
Foreign	(6		)	8			(11		)
Income before income taxes	$	850		$	57		$	1,243
Current tax expense (benefit)
Federal	$	226		$	265		$	373
State and local	2			(3		)	2
Foreign	3			3			104
Total current tax expense	$	231		$	265		$	479
Deferred tax expense (benefit)
Federal ¹	$	392		$	(285	)	$	(31	)
State and local	22			(12		)	(13		)
Total deferred tax expense (benefit)	$	414		$	(297	)	$	(44	)
Provision (Credit) for income taxes	$	645		$	(32	)	$	435
Net Income	$	205		$	89		$	808


1.	2017 includes the impact of The Act; 2016 includes the impact of the asbestos-related charge.



Reconciliation to U.S. Statutory Rate	2017		2016		2015
Statutory U.S. federal income tax rate	35.0	%	35.0	%	35.0	%
U.S. manufacturing deductions	—		(14.0	)	(0.6	)
Unrecognized tax benefits	(0.4	)	(45.6	)	1.9
Federal tax accrual adjustments	(1.1	)	(12.3	)	(0.6	)
Impact of U.S. tax reform	29.4		—		—
Deferred intercompany gain	11.4		—		—
State and local tax impact	2.2		(24.6	)	(0.9	)
Other - net	(0.6	)	5.4		0.2
Effective Tax Rate ¹	75.9	%	(56.1	)%	35.0	%

The tax rate for 2017 was unfavorably impacted by The Act and the recognition of a deferred gain. The tax rate for 2016 was favorably impacted by the release of a reserve in excess of the settlement of an uncertain tax position and from the asbestos-related charge. The tax rate for 2015 was favorably impacted by changes in valuation allowances on state income tax attributes. A change in uncertain tax positions in the fourth quarter of 2015 unfavorably impacted the tax rate and resulted in an increase in "Deferred income tax assets" and "Other noncurrent obligations" in the consolidated balance sheets.

A transaction for the sale of stock between the Corporation and Dow in 2014 created a gain that was initially deferred for tax purposes. This deferred gain became taxable as a result of activities executed in anticipation of the intended separation of DowDuPont into three publicly traded companies. As a result, in the third quarter of 2017, the Corporation increased “Income taxes payable” in the consolidated balance sheets and recorded a charge to "Provision (Credit) for income taxes" in the consolidated statements of income of $97 million.



Deferred Tax Balances at Dec 31	2017					2016
In millions	Assets			Liabilities		Assets			Liabilities
Property	$	—		$	132	$	—		$	183
Tax loss and credit carryforwards	47			—		53			—
Postretirement benefit obligations	251			—		442			—
Other accruals and reserves	349			1		611			—
Inventory	8			—		14			—
Other - net	9			1		13			2
Subtotal	$	664		$	134	$	1,133		$	185
Valuation allowances ¹	(19		)	—		(20		)	—
Total	$	645		$	134	$	1,113		$	185


1.	Primarily related to the realization of recorded tax benefits on state tax loss carryforwards from operations in the United States.



Operating Loss and Tax Credit Carryforwards	2017		2016
In millions	Asset		Asset
Operating loss carryforwards
Expire within 5 years	$	29	$	31
Expire after 5 years or indefinite expiration	12		17
Total operating loss carryforwards	$	41	$	48
Tax credit carryforwards
Expire within 5 years	$	1	$	1
Expire after 5 years or indefinite expiration	5		4
Total tax credit carryforwards	$	6	$	5

Undistributed earnings of foreign subsidiaries and related companies that are deemed to be permanently invested amounted to $9 million at December 31, 2017 and $36 million at December 31, 2016. The unrecognized deferred tax liability on those earnings is not material.

The following table provides a reconciliation of the Corporation's unrecognized tax benefits:



Total Gross Unrecognized Tax Benefits
In millions	2017			2016			2015
Total unrecognized tax benefits at Jan 1	$	1		$	68		$	1
Increases related to positions taken on items from prior years	—			139			67
Settlement of uncertain tax positions with tax authorities	—			(206		)	—
Total unrecognized tax benefits at Dec 31	$	1		$	1		$	68
Total unrecognized tax benefits that, if recognized, would impact the effective tax rate	$	1		$	1		$	1
Total amount of interest and penalties (benefit) recognized in "Provision (Credit) for income taxes"	$	(6	)	$	(36	)	$	37
Total accrual for interest and penalties recognized in the consolidated balance sheets	$	—		$	—		$	38

In the fourth quarter of 2016, a settlement in the amount of $206 million was reached for a tax matter regarding a historical change in the legal ownership structure of a nonconsolidated affiliate. As a result of the settlement, the Corporation recorded a net decrease to uncertain tax positions of $67 million in "Other noncurrent obligations" in the consolidated balance sheets.

The Corporation is included in Dow's consolidated federal income tax group and consolidated tax return. Current and deferred tax expenses are calculated for the Corporation as a stand-alone group and are allocated to the group from the consolidated totals, consistent with the Dow-UCC Tax Sharing Agreement. UCC is currently under examination in a number of tax jurisdictions, including the U.S. federal and various state jurisdictions. It is reasonably possible that these examinations may be resolved within twelve months. The impact on the Corporation’s results of operations is not expected to be material.

Tax years that remain subject to examination for the Corporation's major tax jurisdictions are shown below:



Tax Years Subject to Examination by Major Tax Jurisdiction at Dec 31, 2017	Earliest Open Year
Jurisdiction	Earliest Open Year
United States:
Federal income tax	2004
State and local income tax	2004

Inherent uncertainties exist in estimates of tax contingencies due to changes in tax law, both legislated and concluded through the various jurisdictions' tax court systems. It is the opinion of the Corporation's management that the possibility is remote that costs in excess of those accrued will have a material impact on the Corporation's consolidated financial statements.