Income Taxes

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



	Year Ended December 31,
	2016		2015		2014
	(Millions)
U.S. income before income taxes	$	63	$	198	$	130
Foreign income before income taxes	361		243		268
Income before income taxes and noncontrolling interests	$	424	$	441	$	398

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



	Year Ended December 31,
	2016			2015			2014
	(Millions)
Current —
U.S. federal	$	(9	)	$	64		$	38
State and local	4			5			3
Foreign	85			83			92
	80			152			133
Deferred —
U.S. federal	(91		)	(1		)	2
State and local	(1		)	1			7
Foreign	12			(6		)	(11		)
	(80		)	(6		)	(2		)
Income tax expense	$	—		$	146		$	131

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,
	2016			2015			2014
	(Millions)
Income tax expense computed at the statutory U.S. federal income tax rate	$	148		$	154		$	139
Increases (reductions) in income tax expense resulting from:
Foreign income taxed at different rates	(42		)	(14		)	(20		)
Taxes on repatriation of dividends	(105		)	9			4
Remeasurement of estimated tax on unremitted earnings	—			(4		)	—
State and local taxes on income, net of U.S. federal income tax benefit	3			11			8
Changes in valuation allowance for tax loss carryforwards and credits	18			13			12
Foreign tax holidays	—			(7		)	(6		)
Investment and R&D tax credits	(6		)	(26		)	(10		)
Foreign earnings subject to U.S. federal income tax	4			3			7
Adjustment of prior years taxes	—			2			(2		)
Tax contingencies	(7		)	4			—
Other	(13		)	1			(1		)
Income tax expense	$	—		$	146		$	131

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



	Year Ended December 31,
	2016			2015
	(Millions)
Deferred tax assets —
Tax loss carryforwards:
State	$	13		$	14
Foreign	92			72
Tax credits	83			89
Postretirement benefits other than pensions	55			54
Pensions	48			50
Bad debts	3			2
Sales allowances	7			8
Payroll accruals	39			34
Other accruals	50			58
Valuation allowance	(145		)	(127		)
Total deferred tax assets	245			254
Deferred tax liabilities —
Tax over book depreciation	53			40
Total deferred tax liabilities	53			40
Net deferred tax assets	$	192		$	214

State tax loss carryforwards have been presented net of uncertain tax positions that if realized, would reduce tax loss carryforwards in both 2016 and 2015 by $3 million. Additionally, foreign tax loss carryforwards, have been presented net of uncertain tax positions that if realized, would reduce tax loss carryforwards in 2016 and 2015 by $7 million and $13 million, respectively.

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



	Year Ended December 31,
	2016			2015
	(Millions)
Balance Sheet:
Non-current portion — deferred tax asset	$	199		$	221
Non-current portion — deferred tax liability	(7		)	(7		)
Net deferred tax assets	$	192		$	214

As a result of the valuation allowances recorded for $145 million and $127 million at December 31, 2016 and 2015, 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 less than $1 million, $146 million and $131 million in the years ended 2016, 2015 and 2014, respectively. The tax expense recorded in 2016 includes a net tax benefit of $110 million primarily relating to the recognition of a U.S. tax benefit for foreign taxes. In 2016, we completed our detailed analysis of our ability to recognize and utilize foreign tax credits within the carryforward period. As a result, we amended our U.S. federal tax returns for the years 2006 to 2012 to claim foreign tax credits in lieu of deducting foreign taxes paid. The U.S. foreign tax credit law provides for a credit against U.S. taxes otherwise payable for foreign taxes paid with regard to dividends, interest and royalties paid to us in the U.S. Income tax expense also decreased in 2016 as a result of the mix of earnings in our various tax jurisdictions. 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.

We fully utilized our federal net operating loss ("NOL") prior to 2014 as a result of amending our U.S. federal tax returns for years 2006 to 2012 to claim foreign tax credits in lieu of deducting foreign taxes paid. The state NOLs expire in various tax years through 2031.

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 $795 million at December 31, 2016. 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 $159 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:



	2016			2015			2014
	(Millions)
Uncertain tax positions —
Balance January 1	$	123		$	114		$	115
Gross increases in tax positions in current period	6			7			8
Gross increases in tax positions in prior period	2			14			5
Gross decreases in tax positions in prior period	(5		)	(4		)	(5		)
Gross decreases — settlements	—			(1		)	(2		)
Gross decreases — statute of limitations expired	(15		)	(7		)	(7		)
Balance December 31	$	111		$	123		$	114

Included in the balance of uncertain tax positions were $108 million in 2016, $110 million in 2015, $101 million in 2014, 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 2016, 2015 and 2014. Additionally, we accrued interest expense related to uncertain tax positions of less than $1 million in 2016, interest income of less than $1 million in 2015, and interest expense of $1 million in 2014. Our liability for penalties was $1 million at December 31, 2016, $2 million at December 31, 2015 and $3 million at December 31, 2014, respectively, and our liability for interest was $6 million at December 31, 2016, 2015 and 2014.

Our uncertain tax position at December 31, 2016 and 2015 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 $17 million in unrecognized tax benefits related to the expiration of U.S. and 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, 2016, our tax years open to examination in primary jurisdictions are as follows:



	Open To Tax Year
United States	2006
China	2006
Spain	2004
Canada	2013
Brazil	2011
Mexico	2011
Belgium	2014
Germany	2014
United Kingdom	2014