Income Taxes

12 Months Ended

Dec. 31, 2016

Income Taxes

Note 14. Income Taxes

Earnings / (losses) from continuing operations before income taxes and the provision for income taxes consisted of:

	For the Years Ended December 31,
	2016			2015			2014
	(in millions)
Earnings / (losses) from continuing operations before income taxes:
United States	$	(364	)	$	43		$	(135	)
Outside United States		1,818			7,841			2,689
Total	$	1,454		$	7,884		$	2,554
Provision for income taxes:
United States federal:
Current	$	(227	)	$	(90	)	$	(125	)
Deferred		141			136			28
		(86	)		46			(97	)
State and local:
Current		7			6			20
Deferred		8			(3	)		11
		15			3			31
Total United States		(71	)		49			(66	)
Outside United States:
Current		490			707			644
Deferred		(290	)		(163	)		(225	)
Total outside United States		200			544			419
Total provision for income taxes	$	129		$	593		$	353

We recorded out-of-period adjustments of $14 million net expense in 2015 and $31 million net expense in 2014 that had an immaterial impact on the annual provision for income taxes.

The effective income tax rate on pre-tax earnings differed from the U.S. federal statutory rate for the following reasons:

	For the Years Ended December 31,
	2016		2015		2014
U.S. federal statutory rate		35.0%		35.0%		35.0%
Increase / (decrease) resulting from:
State and local income taxes, net of federal tax benefit excluding IRS audit impacts		0.8%		(0.1)%		0.3%
Foreign rate differences		(18.6)%		(2.5)%		(14.5)%
Reversal of other tax accruals no longer required		(7.7)%		(1.4)%		(10.5)%
Tax accrual on investment in Keurig		2.3%		–		–
Tax legislation		(4.0)%		(0.5)%		–
Gains on coffee business transactions and divestitures		–		(26.9)%		–
Loss on deconsolidation of Venezuela		–		3.5%		–
Remeasurement of net monetary assets in Venezuela		–		–		1.7%
Non-deductible expenses		0.9%		0.3%		1.5%
Other		0.2%		0.1%		0.3%
Effective tax rate		8.9%		7.5%		13.8%

Our 2016 effective tax rate of 8.9% was favorably impacted by the mix of pre-tax income in various non-U.S. tax jurisdictions and net tax benefits from $161 million of discrete one-time events. The discrete net tax benefits related to favorable audit settlements and statutes of limitations in various jurisdictions and the net reduction of our U.K. and French deferred tax liabilities resulting from tax legislation enacted during 2016 that reduced the corporate income tax rates in each country.

Our 2015 effective tax rate of 7.5% was favorably impacted by the one-time third quarter sale of our coffee business that resulted in a pre-tax gain of $6,809 million and $184 million of related tax expense, as well as $27 million of tax costs incurred to remit proceeds up from lower-tier foreign subsidiaries to allow cash to be redeployed within our retained foreign operations. The benefit of the third quarter transaction was partially offset by the tax costs associated with the sale of our interest in AGF in the first half of the year and the impact of deconsolidating our Venezuelan operations on December 31, 2015. Excluding the impacts of these transactions, our effective tax rate would have been 17.8%, reflecting favorable impacts from the mix of pre-tax income in various non-U.S. tax jurisdictions and net tax benefits from $119 million of discrete one-time events. The remaining discrete one-time events primarily related to favorable tax audit settlements and expirations of statutes of limitations in several jurisdictions and the net reduction of U.K. deferred tax liabilities resulting from tax legislation enacted during 2015 that reduced the U.K. corporate income tax rate.

Our 2014 effective tax rate of 13.8% was favorably impacted by the mix of pre-tax income in various non-U.S. tax jurisdictions and net tax benefits from $206 million of discrete one-time events. The discrete net tax benefits primarily related to favorable tax audit settlements and expirations of statues of limitations in several jurisdictions.

The tax effects of temporary differences that gave rise to deferred income tax assets and liabilities consisted of the following:

	As of December 31,
	2016			2015
	(in millions)
Deferred income tax assets:
Accrued postretirement and postemployment benefits	$	214		$	230
Accrued pension costs		370			414
Other employee benefits		237			265
Accrued expenses		379			343
Loss carryforwards		619			636
Other		331			352
Total deferred income tax assets		2,150			2,240
Valuation allowance		(310	)		(303	)
Net deferred income tax assets	$	1,840		$	1,937
Deferred income tax liabilities:
Intangible assets	$	(5,174	)	$	(5,365	)
Property, plant and equipment		(557	)		(636	)
Other		(472	)		(409	)
Total deferred income tax liabilities		(6,203	)		(6,410	)
Net deferred income tax liabilities	$	(4,363	)	$	(4,473	)

At December 31, 2016, the company has pre-tax loss carryforwards of $3,517 million, of which $1,223 million will expire at various dates between 2017 and 2036 and the remaining $2,294 million can be carried forward indefinitely.

Our significant valuation allowances relate to loss carryforwards in Mexico and Ireland where we do not currently expect to generate gains of the proper character to utilize the carryforwards in the future.

At December 31, 2016, neither applicable U.S. federal income taxes nor foreign withholding taxes have been provided on approximately $19.8 billion of accumulated earnings of non-U.S. subsidiaries that are expected to be indefinitely reinvested. It is impracticable for us to determine the amount of unrecognized deferred tax liabilities on these indefinitely reinvested earnings. Future tax law changes or changes in the needs of our non-U.S. subsidiaries could require us to recognize deferred tax liabilities on a portion, or all, of our accumulated earnings that were previously expected to be indefinitely reinvested.

The changes in our unrecognized tax benefits were:

	For the Years Ended December 31,
	2016			2015			2014
				(in millions)
January 1	$	756		$	852		$	1,189
Increases from positions taken during prior periods		18			34			143
Decreases from positions taken during prior periods		(123	)		(74	)		(247	)
Increases from positions taken during the current period		90			84			147
Decreases relating to settlements with taxing authorities		(75	)		(13	)		(203	)
Reductions resulting from the lapse of the applicable statute of limitations		(43	)		(41	)		(64	)
Currency / other		(13	)		(86	)		(113	)
December 31	$	610		$	756		$	852

As of January 1, 2016, our unrecognized tax benefits were $756 million. If we had recognized all of these benefits, the net impact on our income tax provision would have been $652 million. Our unrecognized tax benefits were $610 million at December 31, 2016, and if we had recognized all of these benefits, the net impact on our income tax provision would have been $549 million. Within the next 12 months, our unrecognized tax benefits could increase by approximately $40 million due to unfavorable audit developments or decrease by approximately $160 million due to audit settlements and the expiration of statutes of limitations in various jurisdictions. We include accrued interest and penalties related to uncertain tax positions in our tax provision. We had accrued interest and penalties of $185 million as of January 1, 2016 and $189 million as of December 31, 2016. Our 2016 provision for income taxes included $15 million for interest and penalties.

Our income tax filings are regularly examined by federal, state and non-U.S. tax authorities. Examination by the IRS of our 2013-2015 U.S. federal income tax filings will begin in the first quarter of 2017. U.S. state and non-U.S. jurisdictions have statutes of limitations generally ranging from three to five years; however, these statutes are often extended by mutual agreement with the tax authorities. Years still open to examination by non-U.S. tax authorities in major jurisdictions include (earliest open tax year in parentheses): Brazil (2011), China (2007), France (2010), Germany (2010), India (2005), Italy (2011) and the United Kingdom (2013).