INCOME TAXES

Income tax expense was $186 million, $209 million, and $189 million in 2016, 2015 and 2014, respectively. The following table summarizes the difference between income tax expense at the United States statutory rate of 35% and the income tax expense at effective worldwide tax rates for the respective periods:



Millions of dollars	2016			2015			2014
Earnings before income taxes
United States	$	605		$	555		$	325
Foreign	509			476			556
Earnings before income taxes	1,114			1,031			881

Income tax computed at United States statutory rate	390			361			308
U.S. government tax incentives	(9		)	(13		)	(10		)
Foreign government tax incentives, including BEFIEX	(11		)	(19		)	(46		)
Foreign tax rate differential	(50		)	(36		)	(17		)
U.S. foreign tax credits	(86		)	(103		)	(148		)
Valuation allowances	(121		)	(95		)	9
State and local taxes, net of federal tax benefit	20			18			5
Foreign withholding taxes	36			16			16
U.S. tax on foreign dividends and subpart F income	63			57			56
Settlement of global tax audits	(40		)	16			(5		)
Changes in enacted tax rates	32			—			—
Other items, net	(38		)	7			21
Income tax computed at effective worldwide tax rates	$	186		$	209		$	189

Current and Deferred Tax Provision

The following table summarizes our income tax (benefit) provision for 2016, 2015 and 2014:



	2016					2015					2014
Millions of dollars	Current		Deferred			Current		Deferred			Current			Deferred
United States	$	34	$	120		$	98	$	55		$	7		$	8
Foreign	167		(154		)	181		(143		)	182			12
State and local	7		12			10		8			(2		)	(18		)
	$	208	$	(22	)	$	289	$	(80	)	$	187		$	2
Total income tax expense			$	186				$	209					$	189

United States Government Tax Incentives

On December 18, 2015, the Protecting Americans from Tax Hikes Act of 2015 (the "Act") was signed into law. The Act makes permanent certain provisions including the Research and Development Credit. The Act extends through 2019 certain provisions including Bonus Depreciation and exempts certain types of income payments between related controlled foreign corporations.

United States Tax on Foreign Dividends

We have historically reinvested all unremitted earnings of our foreign subsidiaries and affiliates. We plan to distribute approximately $5 million of foreign earnings over the next several years. This distribution is forecasted to result in tax benefits which have not been recorded because of their contingent nature. There has been no deferred tax liability provided on the remaining amount of unremitted earnings of $4.6 billion at December 31, 2016. The Company had cash and cash equivalents of approximately $1.1 billion at December 31, 2016, of which approximately $1.0 billion was held by subsidiaries in foreign countries. Our intent is to permanently reinvest these funds outside of the United States and our current plans do not demonstrate a need to repatriate these funds to fund our U.S. operations. However, if these funds were repatriated, then we would be required to accrue and pay applicable United States taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable to various countries. The repatriation could result in an adjustment to the tax liability after considering available foreign tax credits and other tax attributes. It is not practicable to estimate the amount of the deferred tax liability associated with these unremitted earnings due to the complexity of its hypothetical calculation.

Valuation Allowances

At December 31, 2016, we had net operating loss carryforwards of $3.5 billion, $1.0 billion of which were United States State net operating loss carryforwards. Of the total net operating loss carryforwards, $2.2 billion do not expire, with substantially all of the remaining carryforwards expiring in various years through 2036. As of December 31, 2016, we had $310 million of foreign tax credit carryforwards and $964 million of United States general business credit carryforwards available to offset future payments of federal income taxes, expiring between 2017 and 2036.

We routinely review the future realization of deferred tax assets based on projected future reversal of taxable temporary differences, available tax planning strategies and projected future taxable income. We have recorded a valuation allowance to reflect the net estimated amount of certain deferred tax assets associated with net operating loss and other deferred tax assets we believe will be realized. Our recorded valuation allowance of $150 million at December 31, 2016 consists of $128 million of net operating loss carryforward deferred tax assets and $22 million of other deferred tax assets. Our recorded valuation allowance was $286 million at December 31, 2015 and consisted of $239 million of net operating loss carryforward deferred tax assets and $47 million of other deferred tax assets. The reduction in our valuation allowance includes $121 million recognized in net earnings which consist of $163 million of valuation allowance releases and $42 million of additional valuation allowances. The remaining change relates to reclassification within our net deferred tax asset. We believe that it is more likely than not that we will realize the benefit of existing deferred tax assets, net of valuation allowances mentioned above.

Settlement of Global Tax Audits

We are in various stages of audits by certain governmental tax authorities. We establish liabilities for the difference between tax return provisions and the benefits recognized in our financial statements. Such amounts represent a reasonable provision for taxes ultimately expected to be paid, and may need to be adjusted over time as more information becomes known. We are no longer subject to any significant United States federal tax examinations for the years before 2008, or any state, local or foreign income tax examinations by tax authorities for years before 2004.

Deferred Tax Liabilities and Assets

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities used for financial reporting purposes and the amounts used for income tax purposes. The following table summarizes the significant components of our deferred tax liabilities and assets at December 31, 2016 and 2015:



Millions of dollars	2016			2015
Deferred tax liabilities
Intangibles	$	765		$	770
Property, net	199			175
LIFO inventory	59			57
Other	156			214
Total deferred tax liabilities	1,179			1,216
Deferred tax assets
U.S. general business credit carryforwards, including Energy Tax Credits	964			1,010
Pensions	322			315
Loss carryforwards	668			683
Postretirement obligations	144			168
Foreign tax credit carryforwards	310			253
Research and development capitalization	273			306
Employee payroll and benefits	111			164
Accrued expenses	106			133
Product warranty accrual	64			64
Receivable and inventory allowances	59			106
Other	344			353
Total deferred tax assets	3,365			3,555
Valuation allowances for deferred tax assets	(150		)	(286		)
Deferred tax assets, net of valuation allowances	3,215			3,269
Net deferred tax assets	$	2,036		$	2,053

Unrecognized Tax Benefits

The following table represents a reconciliation of the beginning and ending amount of unrecognized tax benefits that if recognized would impact the effective tax rate, excluding federal benefits of state and local tax positions, and interest and penalties:



Millions of dollars	2016			2015			2014
Balance, January 1	$	143		$	141		$	113
Additions for tax positions of the current year	14			12			17
Additions for tax positions of prior years	1			27			4
Reductions for tax positions of prior years	(33		)	(25		)	(23		)
Settlements during the period	(20		)	(5		)	(11		)
Positions assumed in acquisitions	—			—			42
Lapses of applicable statute of limitation	(3		)	(7		)	(1		)
Balance, December 31	$	102		$	143		$	141

In connection with our acquisitions of Hefei Sanyo and Indesit in 2014, the Company assumed $72 million of uncertain tax position liabilities, including $31 million of interest and penalties. The acquisition of Hefei Sanyo resulted in an assumed uncertain tax position of $62 million that was reflected in the opening balance sheet, while the acquisition of Indesit resulted in an assumed uncertain tax position of $10 million.

Interest and penalties associated with unrecognized tax benefits resulted in a net benefit of $19 million as of December 31, 2016, a net expense of $5 million in 2015, and a net benefit of $6 million in 2014. We have accrued a total of $42 million at December 31, 2016 and $63 million at December 31, 2015 and 2014 , respectively.

It is reasonably possible that certain unrecognized tax benefits of $21 million could be settled with various related jurisdictions during the next 12 months.