Income Taxes

The domestic and foreign components of our income before income taxes and noncontrolling interests are as follows:



	Year Ended December 31,
	2015		2014		2013
	(Millions)
U.S. income before income taxes	$	198	$	130	$	150
Foreign income before income taxes	254		271		194
Income before income taxes and noncontrolling interests	$	452	$	401	$	344

Following is a comparative analysis of the components of income tax expense:



	Year Ended December 31,
	2015			2014			2013
	(Millions)
Current —
U.S. federal	$	64		$	38		$	25
State and local	5			3			4
Foreign	83			92			81
	152			133			110
Deferred —
U.S. federal	(1		)	2			(4		)
State and local	1			7			2
Foreign	(3		)	(11		)	14
	(3		)	(2		)	12
Income tax expense	$	149		$	131		$	122

Following is a reconciliation of income taxes computed at the statutory U.S. federal income tax rate (35 percent for all years presented) to the income tax expense reflected in the statements of income:



	Year Ended December 31,
	2015			2014			2013
	(Millions)
Income tax expense computed at the statutory U.S. federal income tax rate	$	158		$	140		$	120
Increases (reductions) in income tax expense resulting from:
Foreign income taxed at different rates	(15		)	(21		)	(21		)
Taxes on repatriation of dividends	9			4			9
Remeasurement of estimated tax on unremitted earnings	(4		)	—			(17		)
State and local taxes on income, net of U.S. federal income tax benefit	11			8			6
Changes in valuation allowance for tax loss carryforwards and credits	13			12			27
Foreign tax holidays	(7		)	(6		)	(5		)
Investment and R&D tax credits	(26		)	(10		)	(8		)
Foreign earnings subject to U.S. federal income tax	3			7			5
Adjustment of prior years taxes	2			(2		)	(1		)
Impact of tax law changes	—			—			(3		)
Tax contingencies	4			—			6
Other	1			(1		)	4
Income tax expense	$	149		$	131		$	122

In November 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update 2015-17, Balance Sheet Classification of Deferred Taxes, which requires companies to classify all deferred tax assets and liabilities as noncurrent on the balance sheet instead of separating deferred taxes into current and noncurrent amounts. For public business entities, the standard is effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted for all companies in any interim or annual period. We adopted this standard as of December 31, 2015 and applied prospectively. Adoption of this guidance resulted in a reclassification of our net current deferred tax asset to the net non-current deferred tax asset in our Consolidated Balance Sheet as of December 31, 2015. No prior periods were retrospectively adjusted.

The components of our net deferred tax assets were as follows:



	Year Ended December 31,
	2015			2014
	(Millions)
Deferred tax assets —
Tax loss carryforwards:
U.S. federal	$	—		$	—
State	14			15
Foreign	72			75
Tax credit benefits	89			86
Postretirement benefits other than pensions	54			55
Pensions	50			56
Bad debts	2			2
Sales allowances	8			7
Payroll accruals	34			38
Other accruals	55			58
Valuation allowance	(127		)	(139		)
Total deferred tax assets	251			253
Deferred tax liabilities —
Tax over book depreciation	40			51
Total deferred tax liabilities	40			51
Net deferred tax assets	$	211		$	202

State tax loss carryforwards have been presented net of uncertain tax positions that if realized, would reduce tax loss carryforwards in 2015 and 2014 by $3 million and $6 million, respectively. Additionally, foreign tax loss carryforwards, have been presented net of uncertain tax positions that if realized, would reduce tax loss carryforwards in 2015 and 2014 by $13 million and $12 million, respectively.

Following is a reconciliation of deferred taxes to the deferred taxes shown in the balance sheet:



	Year Ended December 31,
	2015			2014
	(Millions)
Balance Sheet:
Current portion — deferred tax asset	$	—		$	81
Non-current portion — deferred tax asset	218			143
Current portion — deferred tax liability	—			(4		)
Non-current portion — deferred tax liability	(7		)	(18		)
Net deferred tax assets	$	211		$	202

As a result of the valuation allowances recorded for $127 million and $139 million at December 31, 2015 and 2014, respectively, we have potential tax assets that were not recognized on our balance sheet. These unrecognized tax assets resulted primarily from foreign tax loss carryforwards, foreign investment tax credits, foreign research and development credits and U.S. state net operating losses that are available to reduce future tax liabilities.

We reported income tax expense of $149 million, $131 million and $122 million in the years ended 2015, 2014 and 2013, respectively. The tax expense recorded in 2015 includes a net tax benefit of $15 million primarily relating to prior year U.S. research and development tax credits, changes to uncertain tax positions, and prior year income tax adjustments. The tax expense recorded in 2014 includes a net tax benefit of $11 million for prior year tax adjustments primarily relating to changes to uncertain tax positions and prior year income tax estimates. The tax expense recorded in 2013 differs from the expense that would be recorded using a U.S. Federal statutory rate of 35 percent primarily due to the impact of recording a valuation allowance against a tax benefit for restructuring activities in Spain and Belgium and U.S. taxes on repatriation of dividends, partially offset by tax adjustments related to recognizing a U.S. tax benefit for foreign taxes and a favorable mix of income generated in low tax rate jurisdictions.

We have fully utilized our federal net operating loss ("NOL") as of June 30, 2014. The state NOLs expire in various tax years through 2032.

We do not provide for U.S. income taxes on unremitted earnings of foreign subsidiaries, except for the earnings of certain of our China operations, as our present intention is to reinvest the unremitted earnings in our foreign operations. Unremitted earnings of foreign subsidiaries were approximately $731 million at December 31, 2015. We estimated that the amount of U.S. and foreign income taxes that would be accrued or paid upon remittance of the assets that represent those unremitted earnings was $150 million. The estimated U.S. and foreign income taxes on unremitted earnings may be impacted in the future if we are unable to claim a U.S. foreign tax credit.

U.S. GAAP provides that a tax benefit from an uncertain tax position may be recognized when it is “more likely than not” that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits.

A reconciliation of our uncertain tax positions is as follows:



	2015			2014			2013
	(Millions)
Uncertain tax positions —
Balance January 1	$	114		$	115		$	107
Gross increases in tax positions in current period	7			8			15
Gross increases in tax positions in prior period	14			5			—
Gross decreases in tax positions in prior period	(4		)	(5		)	(1		)
Gross decreases — settlements	(1		)	(2		)	—
Gross decreases — statute of limitations expired	(7		)	(7		)	(6		)
Balance December 31	$	123		$	114		$	115

Included in the balance of uncertain tax positions were $110 million in 2015, $101 million in 2014, $107 million in 2013, of tax benefits, that if recognized, would affect the effective tax rate. We recognize accrued interest and penalties related to unrecognized tax benefits as income tax expense. Penalties of less than $1 million were accrued in 2015, 2014 and 2013. Additionally, we accrued interest income related to uncertain tax positions of less than $1 million in both 2015 and 2014, and interest expense of $2 million in 2013. Our liability for penalties was $2 million at December 31, 2015, $3 million at December 31, 2014 and $2 million at December 31, 2013, respectively, and our liability for interest was $6 million, $6 million, and $7 million at December 31, 2015, 2014 and 2013, respectively.

Our uncertain tax position at December 31, 2015 and 2014 included exposures relating to the disallowance of deductions, global transfer pricing and various other issues. We believe it is reasonably possible that a decrease of up to $10 million in unrecognized tax benefits related to the expiration of foreign statute of limitations and the conclusion of income tax examinations may occur within the next twelve months.

We are subject to taxation in the U.S. and various state and foreign jurisdictions. As of December 31, 2015, our tax years open to examination in primary jurisdictions are as follows:



	Open To Tax Year
United States	2000
China	2005
Spain	2003
Canada	2012
Brazil	2010
Mexico	2010
Belgium	2013
Germany	2013
United Kingdom	2013