INCOME TAXES

On December 22, 2017, 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 hybrid territorial system. At December 31, 2017, the Corporation had not completed its accounting for the tax effects of The Act; however, 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 ("SAB 118"), income tax effects of The Act were refined upon obtaining, preparing and analyzing additional information during the measurement period. At December 31, 2018, the Corporation had completed its accounting for the tax effects of The Act.

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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 income tax rates at which they are expected to reverse in the future, which is generally 21 percent. The Corporation recorded a cumulative charge of $248 million ($2 million benefit in 2018 and $250 million charge in 2017) to "Provision (Credit) for income taxes" in the consolidated statements of income with respect to the remeasurement of the Corporation's deferred tax balances.


•	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 cumulative provisional amount recorded for the transition tax liability for the Corporation's foreign subsidiaries was insignificant at December 31, 2018.


•	The Corporation recorded an indirect impact of The Act related to prepaid tax on intercompany sales of inventory. The amount related to the inventory was $2 million, recorded as a charge to "Provision (Credit) for income taxes" for the period ended December 31, 2018.


•	For tax years beginning after December 31, 2017, The Act introduced new provisions for U.S. taxation of certain global intangible low-taxed income ("GILTI"). The Corporation has made the policy election to record any liability associated with GILTI in the period in which it is incurred.



Geographic Allocation of Income and Provision (Credit) for Income Taxes
In millions	2018			2017			2016
Income (Loss) before income taxes
Domestic	$	1,305		$	856		$	49
Foreign	(3		)	(6		)	8
Income before income taxes	$	1,302		$	850		$	57
Current tax expense (benefit)
Federal	$	166		$	226		$	265
State and local	6			2			(3		)
Foreign	40			3			3
Total current tax expense	$	212		$	231		$	265
Deferred tax expense (benefit)
Federal ¹	$	27		$	392		$	(285	)
State and local	8			22			(12		)
Total deferred tax expense (benefit)	$	35		$	414		$	(297	)
Provision (Credit) for income taxes	$	247		$	645		$	(32	)
Net income	$	1,055		$	205		$	89


1.	2018 and 2017 includes the impact of The Act; 2016 includes the impact of the asbestos-related charge.



Reconciliation to U.S. Statutory Rate	2018		2017		2016
Statutory U.S. federal income tax rate	21.0	%	35.0	%	35.0	%
U.S. manufacturing deductions	—		—		(14.0	)
Unrecognized tax benefits	(0.3	)	(0.4	)	(45.6	)
Foreign Derived Intangible Income ("FDII") deduction	(2.2	)	—		—
Federal tax accrual adjustments	(0.3	)	(1.1	)	(12.3	)
Impact of U.S. tax reform	(0.2	)	29.4		—
Deferred intercompany gain	—		11.4		—
State and local tax impact	1.0		2.2		(24.6	)
Other - net	—		(0.6	)	5.4
Effective Tax Rate ¹	19.0	%	75.9	%	(56.1	)%


1.	The tax rate for 2018 was favorably impacted by The Act and the FDII deduction. 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.

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	2018					2017
In millions	Assets			Liabilities		Assets			Liabilities
Property	$	—		$	129	$	—		$	132
Tax loss and credit carryforwards	42			—		47			—
Postretirement benefit obligations	234			—		251			—
Other accruals and reserves	326			8		349			1
Inventory	8			—		8			—
Other - net	11			2		9			1
Subtotal	$	621		$	139	$	664		$	134
Valuation allowances ¹	(19		)	—		(19		)	—
Total	$	602		$	139	$	645		$	134


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	2018		2017
In millions	Asset		Asset
Operating loss carryforwards
Expire within 5 years	$	31	$	29
Expire after 5 years or indefinite expiration	5		12
Total operating loss carryforwards	$	36	$	41
Tax credit carryforwards
Expire within 5 years	$	—	$	1
Expire after 5 years or indefinite expiration	6		5
Total tax credit carryforwards	$	6	$	6

Undistributed earnings of foreign subsidiaries and related companies that are deemed to be permanently invested amounted to $35 million at December 31, 2018 and $9 million at December 31, 2017. 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	2018			2017			2016
Total unrecognized tax benefits at Jan 1	$	1		$	1		$	68
Increases related to positions taken on items from prior years	—			—			139
Settlement of uncertain tax positions with tax authorities	—			—			(206		)
Total unrecognized tax benefits at Dec 31	$	1		$	1		$	1
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"	$	(5	)	$	(6	)	$	(36	)

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.

In the first quarter of 2018, a settlement was reached for a tax matter regarding fees paid to the Corporation by a foreign nonconsolidated affiliate. As a result, the Corporation recorded an increase of $40 million to "Income taxes receivable" and "Income taxes payable" in the consolidated balance sheets. There was no impact to the consolidated statements of income. In the second quarter of 2018, a payment of $40 million was made for the settlement of the tax matter.

The Corporation is included in Dow's consolidated federal income tax group and DowDuPont's 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. The Corporation 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 in the next 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, 2018	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.