INCOME TAXES

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



	2017		2016		2015
U.S. income	$	252	$	71	$	24
Foreign income	129		84		43
Total	$	381	$	155	$	67

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



	2017			2016			2015
Current tax benefit (expense):
U.S.	$	(1	)	$	(1	)	$	(4	)
Foreign	(11		)	11			(20		)
State and local	(2		)	(1		)	(1		)
Total current tax benefit (expense)	(14		)	9			(25		)
Deferred tax benefit (expense):
U.S.	(28		)	394			3
Foreign	(9		)	(22		)	21
State and local	(1		)	43			—
Total deferred tax benefit	(38		)	415			24
Income tax benefit (expense)	$	(52	)	$	424		$	(1	)

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 income tax expense in the U.S. in fiscal year 2017 was primarily attributable to the tax effect of the gain on sale of equity investment, partially offset by the additional reversal of a valuation allowance. In fiscal year 2016, the U.S. and state and local deferred tax benefit was primarily attributable to the valuation allowance reversal in the U.S. In fiscal year 2015, the foreign deferred tax benefit was primarily attributable to valuation allowance reversals in Germany, Italy, Mexico and Sweden in addition to the tax benefit received from the Canadian and German pension settlement charges.

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,
	2017			2016
Accrued compensation and benefits	$	32		$	21
Accrued product warranties	14			13
Inventory costs	9			8
Receivables	18			15
Accrued retiree healthcare benefits	39			169
Retirement pension plans	92			119
Property	10			7
Loss and credit carryforwards	349			455
Other	71			67
Sub-total	634			874
Less: Valuation allowances	(307		)	(379		)
Deferred income taxes - asset	$	327		$	495
Taxes on undistributed income	$	(7	)	$	(7	)
Intangible assets	(87		)	(82		)
Debt basis difference	(16		)	(5		)
Deferred income taxes - liability	$	(110	)	$	(94	)
Net deferred income tax assets	$	217		$	401

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



	September 30,
	2017			2016
Other assets (see Note 13)	$	229		$	413
Other liabilities (see Note 16)	(12		)	(12		)
Net non-current deferred income taxes — asset	$	217		$	401

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, the 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 2017, the Company amended the benefits provided to certain former union employee retirees. This amendment resulted in a decrease to the deferred tax asset.

During the fourth quarter of fiscal year 2016, as a result of sustained profitability in the U.S. evidenced by a strong earnings history, future forecasted earnings, and additional positive evidence, the company determined it was more likely than not it would be able to realize deferred tax assets in the U.S. Accordingly, the company reversed a portion of the valuation allowance in the U.S., resulting in a non-cash income tax benefit of $438 million. In the fourth quarter of fiscal year 2017, an additional $52 million of the valuation allowance in the U.S. was released due to increased profitability. In fiscal year 2015, the company reversed valuation allowances in Germany, Italy, Mexico, and Sweden, resulting in a non-cash income tax benefit of $16 million.

During the fourth quarter of fiscal year 2016, due to a three-year cumulative loss and future economic uncertainty, the company concluded that a valuation allowance was required in Brazil. This resulted in a non-cash charge to income tax expense of $9 million. As of September 30, 2017, the company continues to maintain the valuation allowances in Brazil, France, the U.K. 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, its conclusion regarding the need for valuation allowances in these jurisdictions could change.

The expiration periods for deferred tax assets related to net operating losses and tax credit carryforwards as of September 30, 2017 are included below (in millions). Also included are the associated valuation allowances on these deferred tax assets (in millions).



	Fiscal Year Expiration Periods
	2018-2022		2023-2032		2033-2037		Indefinite		Total
Net Operating Losses and Tax Credit Carryforwards	$	8	$	95	$	14	$	232	$	349
Valuation Allowances on these Deferred Tax Assets	$	7	$	19	$	9	$	215	$	250

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 2017 and 2016, no provision has been made for U.S., state or additional foreign income taxes related to approximately $599 million and $687 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):



	2017			2016			2015
Expense for income taxes at statutory tax rate of 35%	$	(133	)	$	(54	)	$	(23	)
State and local income taxes	(14		)	(7		)	(1		)
Foreign income taxed at rates other than 35%	9			5			7
Joint venture equity income	7			3			3
Tax effect of nonfunctional currency transaction	(2		)	(30		)	—
Correlated tax relief	7			51			—
U.S. tax impact on distributions from subsidiaries and joint ventures	(8		)	14			(11		)
Nondeductible expenses	(10		)	(12		)	(9		)
Tax credits	14			61			—
Valuation allowances	56			418			49
Tax rate change	—			(14		)	—
Impact of capital loss	15			—			—
Other	7			(11		)	(16		)
Income tax benefit (expense)	$	(52	)	$	424		$	(1	)

In fiscal year 2016, the company determined it is now more favorable to claim a U.S. foreign tax credit rather than deduct foreign taxes paid, and as a result, a $11 million and $61 million income tax benefit was recorded in fiscal year 2017 and 2016, respectively. Additionally, the company has recorded a U.S. tax benefit related to U.S. research and development tax credits of $3 million in fiscal year 2017.

The total amount of gross unrecognized tax benefits the company recorded in accordance with FASB ASC Topic 740 as of September 30, 2017 was $269 million, of which $226 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):



	2017			2016			2015
Balance at beginning of the period	$	243		$	207		$	209
Additions to tax positions recorded during the current year	—			39			15
Additions to tax positions recorded during the prior year	26			—			—
Reductions to tax position recorded in prior years	—			—			(2		)
Reductions to tax positions due to lapse of statutory limits	(2		)	(3		)	(11		)
Translation, other	2			—			(4		)
Balance at end of the period	$	269		$	243		$	207

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, 2017 and September 30, 2016, the company recorded assets of $9 million and $4 million, respectively of interest on uncertain tax positions in the consolidated balance sheet. In addition, penalties of $1 million and $2 million were recorded as of September 30, 2017 and September 30, 2016, respectively. The income tax benefit related to interest was $5 million and $8 million for the year ended September 30, 2017 and September 30, 2016, respectively. The income tax benefit amount related to interest was immaterial for the year ended September 30, 2015. The income tax benefit related to penalties was immaterial for years ended September 30, 2017, 2016 and 2015.

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 2013 and 2014 are currently under audit. The company's German subsidiary is currently under audit for fiscal years 2008 through 2013. The company's Indian subsidiary is currently under audit for fiscal year 2015. 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 2001-2016 with various significant taxing jurisdictions, including the U.S., 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.