Income Taxes

The domestic and foreign components of the Company's earnings before income taxes and noncontrolling interests are as follows:



	Year Ended December 31,
	2018			2017			2016
	(Millions)
U.S. income earnings (loss) before income taxes	$	(138	)	$	(28	)	$	52
Foreign earnings (loss) before income taxes	312			364			359
Earnings (loss) before income taxes and noncontrolling interests	$	174		$	336		$	411

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



	Year Ended December 31,
	2018			2017			2016
	(Millions)
Current —
U.S. federal	$	8		$	(23	)	$	(9	)
State and local	1			1			4
Foreign	119			101			85
	128			79			80
Deferred —
U.S. federal	(35		)	16			(95		)
State and local	(5		)	(3		)	(1		)
Foreign	(25		)	(21		)	12
	(65		)	(8		)	(84		)
Income tax expense (benefit)	$	63		$	71		$	(4	)

Following is a reconciliation of income taxes computed at the statutory U.S. federal income tax rate (21% for 2018 and 35% for 2017 and 2016) to the income tax expense (benefit) reflected in the consolidated statements of income:



	Year Ended December 31,
	2018			2017			2016
	(Millions)
Income tax expense computed at the statutory U.S. federal income tax rate	$	37		$	117		$	144
Increases (reductions) in income tax expense resulting from:
Foreign income taxed at different rates	19			(48		)	(42		)
Transition Tax under Tax Cuts and Jobs Act ("TCJA")	11			43			—
Re-measurement of Worldwide Deferred Taxes	—			53			—
State and local taxes on income, net of U.S. federal income tax benefit	(6		)	(2		)	3
Changes in valuation allowance for tax loss carryforwards and credits	—			(1		)	18
Investment and R&D tax credits	(12		)	(6		)	(6		)
Foreign earnings subject to U.S. federal income tax	9			(74		)	(101		)
Tax contingencies	1			(1		)	(7		)
Other	4			(10		)	(13		)
Income tax expense (benefit)	$	63		$	71		$	(4	)

The Company reported income tax expense of $63 million in 2018, $71 million in 2017 and a tax benefit of $4 million in 2016. The tax expense recorded in 2018 included tax benefits of $10 million relating to a valuation allowance release at its Australian entities and $11 million of tax expense for changes in the toll tax as discussed below. The tax expense recorded in 2017 includes a net provisional tax expense of $43 million for one-time transition tax on deemed repatriation of previously deferred foreign earnings under the Tax Cuts and Jobs Act ("TCJA") as discussed below. The Company remeasured U.S. deferred taxes from an applicable federal rate of 35% to the new statutory rate of 21% at which they are expected to be utilized, recording a $51 million provisional expense. The tax expense recorded in 2017 included a net tax benefit of $74 million relating to recognizing a U.S. tax benefit for foreign taxes. The tax expense recorded in 2016 included a net tax benefit of $110 million primarily relating to the recognition of a U.S. tax benefit for foreign taxes. In 2016, the Company completed its detailed analysis of its ability to recognize and utilize foreign tax credits within the carryforward period. As a result, the Company amended its 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 the Company in the U.S. Income tax expense also decreased in 2016 as a result of the mix of earnings in the Company's various tax jurisdictions.

On December 22, 2017, the TCJA was enacted into U.S. law, which, among other provisions, lowered the corporate income tax rate effective January 1, 2018 from 35% to 21%, and implemented significant changes with respect to U.S. tax treatment of earnings originating from outside the U.S. Many of the provisions of TCJA are subject to regulatory interpretation and U.S. state conforming enactments. The Internal Revenue Service (IRS) issued Notice 2018-26 on April 2, 2018 and issued proposed regulations under Section 965 on August 1, 2018, which provided additional guidance to assist taxpayers in computing the toll tax. Based on the new guidance, an $11 million discrete charge was recorded in income tax expense in 2018. The Company has completed our accounting for the tax effects of the enactment as of December 31, 2018.

The Company elected to account for Global Intangible Low-Taxed Income (“GILTI”) as a current-period expense when incurred. Therefore, the Company has not recorded deferred taxes for basis differences expected to reverse in the future periods.

The components of the Company's net deferred tax assets were as follows:



	December 31,
	2018			2017
	(Millions)
Deferred tax assets —
Tax loss carryforwards:
State	$	18		$	19
Foreign	364			114
Tax credits	159			118
Postretirement benefits other than pensions	21			37
Pensions	158			24
Payroll accruals	24			18
Book over tax depreciation	68			(45		)
Other accruals	163			80
Valuation allowance	(514		)	(163		)
Total deferred tax assets	461			202
Deferred tax liabilities —
Amortization of intangibles	82			—
Total deferred tax liabilities	82			—
Net deferred tax assets	$	379		$	202

State tax loss carryforwards have been presented net of uncertain tax positions that, if realized, would reduce tax loss carryforwards in both 2018 and 2017 by $2 million. Additionally, foreign tax loss carryforwards, have been presented net of uncertain tax positions that, if realized, would reduce tax loss carryforwards in 2018 and 2017 by $68 million and $7 million, respectively.



	December 31,
	2018			2017
	(Millions)
Consolidated Balance Sheets:
Non-current portion — deferred tax asset	$	467		$	213
Non-current portion — deferred tax liability	(88		)	(11		)
Net deferred tax assets	$	379		$	202

We evaluate our deferred income taxes quarterly to determine if valuation allowances are required or should be adjusted. This assessment considers, among other matters, the nature, frequency and amount of recent losses, the duration of statutory carryforward periods, and tax planning strategies. In making such judgments, significant weight is given to evidence that can be objectively verified. If recent operational improvements continue in our foreign subsidiaries or if certain restructuring steps are completed as part of the Federal-Mogul acquisition and future spin of the Ride Performance / Aftermarket company, we believe it is reasonably possible that sufficient positive evidence may be available to release all, or a portion, of its valuation allowance in the next twelve months. This may result in a one-time tax benefit of up to $51 million, primarily related to Spain, China, and Czech Republic.

As a result of the valuation allowances recorded of $514 million and $163 million at December 31, 2018 and 2017, respectively, the Company has potential tax assets that were not recognized on its consolidated balance sheets. 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 ("NOLs") that are available to reduce future tax liabilities.

The Company's state NOLs expire in various tax years through 2039. The Company's non-U.S. NOLs expire in various tax years through 2038, or have unlimited carryforward potential.

The Company does not provide for U.S. income taxes on unremitted earnings of foreign subsidiaries, except for the earnings of certain of its China operations and in certain of its joint ventures in Spain, South Korea, and India, as its present intention is to reinvest the unremitted earnings in its foreign operations. Unremitted earnings of foreign subsidiaries were approximately $2.6 billion at December 31, 2018. The Company 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 $117 million.

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 the Company's uncertain tax positions is as follows:



	2018			2017			2016
	(Millions)
Uncertain tax positions —
Balance January 1	$	112		$	111		$	123
Gross increases in tax positions due to acquisition	110			—			—
Gross increases in tax positions in current period	8			6			6
Gross increases in tax positions in prior period	7			2			2
Gross decreases in tax positions in prior period	(1		)	(2		)	(5		)
Gross decreases — settlements	(2		)	—			—
Gross decreases — statute of limitations expired	(10		)	(5		)	(15		)
Balance December 31	$	224		$	112		$	111

Included in the balance of uncertain tax positions were $134 million in 2018, $108 million in 2017, $108 million in 2016, of tax benefits, that if recognized, would affect the effective tax rate. The Company recognizes accrued interest and penalties related to unrecognized tax benefits as income tax expense. Penalties of less than $1 million were accrued in 2018, 2017 and 2016. Additionally, the Company accrued interest expense related to uncertain tax positions of $2 million in 2018, and interest expense of less than $1 million in both 2017 and 2016. The Company's liability for penalties was $12 million at December 31, 2018, and $1 million at both December 31, 2017 and December 31, 2016, and its liability for interest was $11 million at December 31, 2018 and $4 million at both December 31, 2017 and December 31, 2016.

The Company's uncertain tax position at December 31, 2018 and 2017 included exposures relating to the disallowance of deductions, global transfer pricing and various other issues. The Company believes it is reasonably possible that a decrease of up to $14 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.

The Company is subject to taxation in the U.S. and various state and foreign jurisdictions. As of December 31, 2018, the Company's tax years open to examination in primary jurisdictions are as follows:



	Open To Tax Year
United States	2003
Belgium	2016
Brazil	2014
China	2009
Germany	2009
Mexico	2013
Poland	2013
Spain	2000
United Kingdom	2015
Italy	2013
France	2009
India	1995