Income Taxes

The provision for income taxes the years ended September 30 consisted of:



(Millions of dollars)	2017			2016			2015
Current:
Federal	$	(230	)	$	312		$	50
State and local, including Puerto Rico	(20		)	17			15
Foreign	200			286			252
	$	(50	)	$	616		$	318
Deferred:
Domestic	$	(64	)	$	(441	)	$	(238	)
Foreign	(10		)	(78		)	(37		)
	(74		)	(519		)	(274		)
Income tax provision	$	(124	)	$	97		$	44

The components of Income Before Income Taxes for the years ended September 30 consisted of:



(Millions of dollars)	2017			2016			2015
Domestic, including Puerto Rico	$	(386	)	$	(232	)	$	(408	)
Foreign	1,362			1,306			1,147
Income Before Income Taxes	$	976		$	1,074		$	739

The table below summarizes the gross amounts of unrecognized tax benefits without regard to reduction in tax liabilities or additions to deferred tax assets and liabilities if such unrecognized tax benefits were settled. The Company believes it is reasonably possible that certain audits will close within the next twelve months but no significant increases or decreases in the amount of the unrecognized tax benefits are expected to result.



(Millions of dollars)	2017			2016			2015
Balance at October 1	$	469		$	593		$	206
Increase due to acquisitions	—			—			326
Increase due to current year tax positions	41			81			62
Increase due to prior year tax positions	19			10			14
Decreases due to prior year tax positions	(30		)	(3		)	(2		)
Decrease due to settlements with tax authorities	(145		)	(147		)	(10		)
Decrease due to lapse of statute of limitations	(5		)	(65		)	(3		)
Balance at September 30	$	349		$	469		$	593

Upon the Company's acquisition of CareFusion, the Company became a party to a tax matters agreement with Cardinal Health resulting from Cardinal Health's spin-off of CareFusion in fiscal year 2010. Under the tax matters agreement, the Company is obligated to indemnify Cardinal Health for certain tax exposures and transaction taxes prior to CareFusion’s spin-off from Cardinal Health. The indemnification payable is approximately $134 million at September 30, 2017 and is included in Deferred Income Taxes and Other on the consolidated balance sheet.

At September 30, 2017, 2016 and 2015, there are $415 million, $478 million and $620 million of unrecognized tax benefits that if recognized, would affect the effective tax rate. During the fiscal years ended September 30, 2017, 2016 and 2015, the Company reported interest and penalties associated with unrecognized tax benefits of $57 million, $(38) million and $5 million on the consolidated statements of income as a component of Income tax provision.

The Company conducts business and files tax returns in numerous countries and currently has tax audits in progress in a number of tax jurisdictions. While the IRS has completed its audit for the BD legacy fiscal year 2014 and combined company fiscal year 2016, the IRS has recently commenced the audit for the CareFusion legacy fiscal year 2014 and short period 2015. For the BD legacy business, all years are effectively settled with the exception of 2015 for which the Company believes it is adequately reserved for any potential exposures. With the exception of the CareFusion legacy fiscal year 2010 audit, all other periods are at various stages of appeals or protests. For the Company’s other major tax jurisdictions where it conducts business, the Company’s tax years are generally open after 2011.

Deferred income taxes at September 30 consisted of:



	2017					2016
(Millions of dollars)	Assets			Liabilities		Assets			Liabilities
Compensation and benefits	$	618		$	—	$	720		$	—
Property and equipment	—			244		—			164
Intangibles	—			1,584		—			1,571
Loss and credit carryforwards	1,098			—		1,101			—
Other	531			164		783			664
	2,247			1,992		2,604			2,399
Valuation allowance	(1,032		)	—		(997		)	—
Net (A)	$	1,216		$	1,992	$	1,606		$	2,399

(A)Net deferred tax assets are included in Other Assets and net deferred tax liabilities are included in Deferred Income Taxes and Other.

Deferred tax assets and liabilities are netted on the balance sheet by separate tax jurisdictions. Deferred taxes are not provided on undistributed earnings of foreign subsidiaries that are indefinitely reinvested. At September 30, 2017, the cumulative amount of such undistributed earnings indefinitely reinvested outside the United States was $9.6 billion. Determining the tax liability that would arise if these earnings were remitted is not practicable. Deferred taxes are provided for earnings outside the United States when those earnings are not considered indefinitely reinvested.

Generally, deferred tax assets have been established as a result of net operating losses and credit carryforwards with expiration dates from 2018 to an unlimited expiration date. Valuation allowances have been established as a result of an evaluation of the uncertainty associated with the realization of certain deferred tax assets on these losses and credit carryforwards. The valuation allowance for 2017 is primarily the result of foreign losses due to the Company’s global re-organization of its foreign entities and these generally have no expiration date. Valuation allowances are also maintained with respect to deferred tax assets for certain federal and state carryforwards that may not be realized and that principally expire in 2021.

A reconciliation of the federal statutory tax rate to the Company’s effective income tax rate was as follows:



	2017		2016		2015
Federal statutory tax rate	35.0	%	35.0	%	35.0	%
State and local income taxes, net of federal tax benefit	(2.6	)	1.5		(3.6	)
Effect of foreign and Puerto Rico earnings and foreign tax credits	(40.8	)	(23.7	)	(24.5	)
Effect of Research Credits and Domestic Production Activities	(2.7	)	(4.4	)	(1.6	)
Effect of change in accounting for excess tax benefit relating to share-based compensation (see Note 2)	(7.9	)	—		—
Other, net	6.3		0.7		0.6
Effective income tax rate	(12.7	)%	9.1	%	5.9	%

The approximate amounts of tax reductions related to tax holidays in various countries in which the Company does business were $144 million, $121 million and $103 million, in 2017, 2016 and 2015, respectively. The benefit of the tax holiday on diluted earnings per share was approximately $0.64, $0.56, and $0.48 for fiscal years 2017, 2016 and 2015, respectively. The tax holidays expire at various dates through 2026.

The Company made income tax payments, net of refunds, of $265 million in 2017, $218 million in 2016 and $240 million in 2015.