INCOME TAXES

The income tax provisions were calculated based upon the following components of income (loss) before income taxes (in millions):



	2015		2014		2013
U.S. income (loss)	$	24	$	204	$	(59	)
Foreign income	43		111		110
Total	$	67	$	315	$	51

The components of the benefit (provision) for income taxes are summarized as follows (in millions):



	2015			2014			2013
Current tax benefit (expense):
U.S.	$	(4	)	$	(1	)	$	(11	)
Foreign	(20		)	(32		)	(59		)
State and local	(1		)	—			2
Total current tax expense	(25		)	(33		)	(68		)
Deferred tax benefit (expense):
U.S.	3			(1		)	(6		)
Foreign	21			3			13
State and local	—			—			(3		)
Total deferred tax benefit	24			2			4
Income tax expense	$	(1	)	$	(31	)	$	(64	)

The deferred tax expense or benefit represents tax effects of current year deductions or items of income that will be recognized in future periods for tax purposes. The deferred tax benefit in fiscal year 2015 is primarily attributable to valuation allowance reversals. In fiscal year 2015, the foreign deferred tax benefit was also favorably impacted by the benefit received from the Canadian and German pension settlement charges. The foreign current tax expense in fiscal year 2013 includes the tax effect of the Suspensys JV sale. The foreign deferred tax benefit in fiscal year 2013 primarily relates to the benefit received from the Canadian pension settlement charge.

Net current and non-current deferred income tax assets (liabilities) included in the consolidated balance sheet consist of the tax effects of temporary differences related to the following (in millions):



	September 30,
	2015			2014
Accrued compensation and benefits	$	27		$	18
Accrued product warranties	19			18
Inventory costs	20			19
Receivables	16			13
Accrued retiree healthcare benefits	175			190
Retirement pension plans	95			102
Property	9			4
Loss and credit carryforwards	608			678
Other	77			64
Sub-total	1,046			1,106
Less: Valuation allowances	(961		)	(1,030		)
Deferred income taxes - asset	$	85		$	76
Taxes on undistributed income	$	(45	)	$	(46	)
Intangible assets	(85		)	(88		)
Debt basis difference	(8		)	(12		)
Deferred income taxes - liability	$	(138	)	$	(146	)
Net deferred income tax liabilities	$	(53	)	$	(70	)

Net current and non-current deferred income tax assets (liabilities) are included in the consolidated balance sheet as follows (in millions):



	September 30,
	2015			2014
Other current assets (see Note 10)	$	20		$	21
Other current liabilities	(2		)	(3		)
Net current deferred income taxes — asset	18			18

Other assets (see Note 12)	28			15
Other liabilities (see Note 15)	(99		)	(103		)
Net non-current deferred income taxes — liability	$	(71	)	$	(88	)

In prior years, the company established valuation allowances against its U.S. net deferred tax assets and the net deferred tax assets of its 100%-owned subsidiaries in France, Germany, Italy, Sweden, U.K. and certain other countries. In evaluating its ability to recover these net deferred tax assets, the company utilizes a consistent approach which considers its historical operating results, including an assessment of the degree to which any gains or losses are driven by items that are unusual in nature and tax planning strategies. In addition, the company reviews changes in near-term market conditions and other factors that impact future operating results.

During the fourth quarter of fiscal year 2015, as a result of sustained profitability in Germany, Italy, Mexico and Sweden evidenced by a strong earnings history and additional positive evidence, the company determined it was more likely than not future earnings will be sufficient to realize deferred tax assets in these jurisdictions. Accordingly, the company reversed valuation allowances in Germany, Italy, Mexico, and Sweden, resulting in a non-cash income tax benefit of $16 million.

The company continues to maintain the valuation allowances in France, U.K., U.S. and certain other jurisdictions, as the company believes the negative evidence that it will be able to recover these net deferred tax assets continues to outweigh the positive evidence. If, in the future, the company generates taxable income on a sustained basis in jurisdictions where it has recorded valuation allowances, its conclusion regarding the need for valuation allowances in these jurisdictions could change. Accordingly, although the company was profitable in the U.S. in 2014 and 2015, it has not generated enough positive evidence to warrant a reversal of the U.S. valuation allowance, so it continues to record a full valuation allowance against the U.S. net deferred tax assets. Although the weight of negative evidence related to cumulative losses is decreasing as the company delivers on our M2016 plan, the company believes that this objectively-measured negative evidence outweighs the subjectively-determined positive evidence and, as such, the company has not changed its judgment regarding the need for a full valuation allowance in 2015.

Continued improvement in the company's operating results, however, could lead to reversal of some or all of these valuation allowances in the future. Consumption of tax attributes to offset profits will reduce the overall level of deferred tax assets subject to valuation allowance.

The expiration periods for deferred tax assets related to net operating losses and tax credit carryforwards as of September 30, 2015 are included below (in millions). Also included are the associated valuation allowances on these deferred tax assets (in millions).



	Fiscal Year Expiration Periods
	2016-2020		2021-2030		2031-2035		Indefinite		Total
Net Operating Losses and Tax Credit Carryforwards	$	36	$	274	$	30	$	268	$	608
Valuation Allowances on these Deferred Tax Assets	$	33	$	271	$	30	$	245	$	579

Realization of deferred tax assets representing net operating loss carryforwards for which a valuation allowance has not been provided is dependent on generating sufficient taxable income prior to expiration of the loss carryforwards. Although realization is not assured, management believes it is more likely than not that all of such deferred tax assets will be realized. The amount of the deferred tax assets considered realizable, however, could be reduced in the near term if the company is unable to generate sufficient future taxable income during the carryforward period.

For fiscal years 2015 and 2014, no provision has been made for U.S., state or additional foreign income taxes related to approximately $686 million and $666 million of undistributed earnings of foreign subsidiaries that have been or are intended to be permanently reinvested. Quantification of the deferred tax liability, if any, associated with permanently reinvested earnings is not practicable.

The company’s provision for income taxes was different from the provision for income taxes calculated at the U.S. statutory rate for the reasons set forth below (in millions):



	2015			2014			2013
Expense for income taxes at statutory tax rate of 35%	$	(23	)	$	(110	)	$	(18	)
State and local income taxes	(1		)	—			1
Foreign income taxed at rates other than 35%	7			13			3
Joint venture equity income	3			5			6
Tax effect of Suspensys JV sale	—			—			(16		)
Goodwill	(2		)	(1		)	(8		)
Debt basis difference	(4		)	(1		)	—
U.S. tax impact on distributions from subsidiaries and joint ventures	(18		)	(18		)	19
Nondeductible expenses	(9		)	(10		)	(9		)
Valuation allowances	47			89			(44		)
Other	(1		)	2			2
Income tax expense	$	(1	)	$	(31	)	$	(64	)

In fiscal year 2014, the company recorded $210 million of earnings related to the antitrust lawsuit settlement with Eaton Corporation. The earnings did not impact U.S. federal income tax expense, since they were offset by a corresponding valuation allowance in the U.S.

In fiscal year 2013, the company changed its permanently reinvested assertion in certain jurisdictions, which resulted in a non-cash benefit of $42 million. This benefit does not impact income tax expense, since it is offset by a corresponding release of a valuation allowance in the U.S.

The total amount of gross unrecognized tax benefits the company recorded in accordance with FASB ASC Topic 740 as of September 30, 2015 was $76 million, of which $17 million represents the amount that, if recognized, would favorably affect the effective income tax rate in future periods.

A reconciliation of the total amounts of unrecognized tax benefits at the beginning and end of the period is as follows (in millions):



	2015			2014			2013
Balance at beginning of the period	$	88		$	94		$	107
Additions to tax positions recorded during the current year	5			3			3
Reduction to tax position recorded in prior years	(2		)	(2		)	(6		)
Reductions to tax positions due to lapse of statutory limits	(11		)	(7		)	(10		)
Translation, other	(4		)	—			—
Balance at end of the period	$	76		$	88		$	94

The company’s continuing practice is to recognize interest and penalties on uncertain tax positions in the provision for income taxes in the consolidated statement of operations. At September 30, 2015 and September 30, 2014, the company recorded $3 million, of interest on uncertain tax positions in the consolidated balance sheet. In addition, penalties of $2 million were recorded at each of September 30, 2015 and September 30, 2014. The company recorded an income tax benefit of $3 million related to interest for the year ended September 30, 2013. The amount was immaterial for year ended September 30, 2015 and 2014. The company recorded an income tax benefit of $2 million related to penalties for the year ended September 30, 2013. The amount was immaterial for the years ended September 30, 2015 and 2014.

The company files tax returns in multiple jurisdictions and is subject to examination by taxing authorities throughout the world. The company’s Canadian federal income tax returns for fiscal years 2010 through 2012 are currently under audit. The company’s Brazil subsidiary is currently under audit for calendar year 2011. The company's German subsidiary is currently under audit for fiscal years 2009 through 2013. The company's Singapore subsidiary is currently under audit for fiscal year 2012. In addition, the company is under audit in the U.S. for federal, fiscal years 2010 and 2011, along with various state tax jurisdictions for various years. It is reasonably possible that audit settlements, the conclusion of current examinations or the expiration of the statute of limitations in several jurisdictions could change the company’s unrecognized tax benefits during the next twelve months. It is not possible to reasonably estimate the expected change to the total amount of unrecognized tax benefit in the next twelve months.

In addition to the audits listed above, the company has open tax years primarily from 2001-2014 with various significant taxing jurisdictions, including the United States, Brazil, Canada, China, France, Mexico and the U.K. These open years contain matters that could be subject to differing interpretations of applicable tax laws and regulations as they relate to the amount, timing or inclusion of revenue and expenses or the sustainability of income tax credits for a given audit cycle. The company has recorded a tax benefit only for those positions that meet the more-likely-than-not standard.