Note S. Income Taxes

Income from continuing operations before income taxes and equity in net earnings of affiliated companies was as follows:

	Years ended September 30
	2016			2015			2014
	(Dollars in millions)
Income from continuing operations:
Domestic	$	(26	)	$	(439	)	$	50
Foreign		220			62			258
Total	$	194		$	(377	)	$	308

Tax provision (benefit) for income taxes consisted of the following:

	Years ended September 30
	2016			2015			2014
	(Dollars in millions)
U.S. federal and state:
Current	$	7		$	(7	)	$	(4	)
Deferred		(33	)		(74	)		(4	)
Total		(26	)		(81	)		(8	)
Foreign:
Current		62			48			86
Deferred		(2	)		(12	)		14
Total		60			36			100
Total U.S. and foreign	$	34		$	(45	)	$	92

The provision (benefit) for income taxes differed from the provision for income taxes as calculated using the U.S. statutory rate as follows:

	Years ended September 30
	2016			2015			2014
	(Dollars in millions)
Computed tax expense at the federal statutory rate	$	68		$	(132	)	$	108
Foreign income:
Impact of taxation at different rates, repatriation and other		(37	)		(24	)		(29	)
Impact of increase (decrease) in valuation allowance on deferred taxes		7			(7	)		20
Impact of foreign losses for which a current tax benefit is not available		—			9			7
Impact of non-deductible net currency losses		2			(1	)		—
U.S. and state benefits from research and experimentation activities		(2	)		(2	)		—
Tax settlements		1			(7	)		(7	)
Benefit from prior currency loss		(3	)		—			—
Impact of goodwill impairment charge		—			123			—
Nontaxable gain on existing equity investment		—			—			(10	)
Permanent differences, net		—			—			3
State taxes, net of federal effect		(2	)		(4	)		—
Total	$	34		$	(45	)	$	92

Significant components of deferred income taxes were as follows:

	September 30
	2016			2015
	(Dollars in millions)
Deferred tax assets:
Deferred expenses	$	25		$	38
Intangible assets		45			32
Inventory		13			9
Other		4			3
Pension and other benefits		83			72
Net operating loss carry-forwards		144			145
Foreign tax credit carry-forwards		63			42
R&D credit carry-forwards		35			31
Other business credit carry-forwards		41			40
Subtotal		453			412
Valuation allowance		(177	)		(161	)
Total deferred tax assets	$	276		$	251

	September 30
	2016			2015
	(Dollars in millions)
Deferred tax liabilities:
Property, plant and equipment	$	(101	)	$	(116	)
Total deferred tax liabilities	$	(101	)	$	(116	)

In the fiscal 2016 tax provision, Cabot recorded less than $1 million of discrete tax charges composed of charges of $5 million for valuation allowances on beginning of the year tax balances partially offset by benefits of $3 million for a currency loss and $1 million each for the renewal of the U.S. research and experimentation credit and net tax settlements.

In the fiscal 2015 tax benefit, Cabot recorded $13 million of discrete tax benefits including benefits of $7 million for tax settlements, $4 million for repatriation, and $2 million for the renewal of the U.S. research and experimentation credit.

In the fiscal 2014 tax provision, Cabot recorded $17 million of net discrete tax charges including a $20 million charge for a valuation allowance on deferred tax assets in a foreign jurisdiction, a $2 million charge for return to provision adjustments, a $2 million charge for interest on uncertain tax positions and a $4 million charge for miscellaneous tax items, offset by an $11 million net tax benefit for tax audit settlements.

Approximately $760 million of net operating loss carryforwards (“NOLs”) and $144 million of other tax credit carryforwards remain at September 30, 2016. The benefits of these carryforwards are dependent upon taxable income during the carryforward period in the jurisdictions in which they arose. Accordingly, a valuation allowance has been provided where management has determined that it is more likely than not that the carryforwards will not be utilized. The following table provides detail surrounding the expiration dates of these carryforwards:

	NOLs		Credits
	(Dollars in millions)
Expiration periods
2017 to 2023	$	350	$	78
2024 and thereafter		134		45
Indefinite carry-forwards		276		21
Total	$	760	$	144

As of September 30, 2016, provisions have not been made for U.S. income taxes or non-U.S. withholding taxes on approximately $1.6 billion of undistributed earnings of non-U.S. subsidiaries, as these earnings are considered indefinitely reinvested. Cabot continually reviews the financial position and forecasted cash flows of its U.S. consolidated group and foreign subsidiaries in order to reaffirm the Company’s intent and ability to continue to indefinitely reinvest earnings of its foreign subsidiaries or whether such earnings will need to be repatriated in the foreseeable future. Such review encompasses operational needs and future capital investments. From time to time, however, the Company’s intentions relative to specific indefinitely reinvested amounts change because of certain unique circumstances. These earnings could become subject to U.S. income taxes and non-U.S. withholding taxes if they were remitted as dividends, were loaned to Cabot Corporation or a U.S. subsidiary, or if Cabot should sell its stock in the subsidiaries with the reinvested earnings.

As of September 30, 2016, net deferred tax assets of $188 million are in the U.S. Management believes that the Company’s history of generating domestic profits provides adequate evidence that it is more likely than not that all of the U.S. net deferred tax assets will be realized in the normal course of business. U.S. income from continuing operations adjusted for U.S. permanent differences and excluding the impairment of long-lived assets within the U.S. (see Note G) was a loss of $19 million for the year ended September 30, 2016 and was a cumulative profit of $120 million for the three years ended September 30, 2016 including dividends from non-U.S. subsidiaries. Realization of deferred tax assets is dependent upon future taxable income generated over an extended period of time.

As of September 30, 2016, the Company needs to generate approximately $536 million in cumulative future U.S. taxable income at various times over approximately 20 years to realize all of its net U.S. deferred tax assets. The Company reviews its forecast in relation to actual results and expected trends on a quarterly basis. Failure to achieve operating income targets may change the Company’s assessment regarding the realization of Cabot’s deferred tax assets and such change could result in a valuation allowance being recorded against some or all of the Company’s deferred tax assets. Any increase in a valuation allowance would result in additional income tax expense, lower stockholders’ equity and could have a significant impact on Cabot’s earnings in future periods.

The valuation allowances at September 30, 2016 and 2015 represent management’s best estimate of the non-realizable portion of the deferred tax assets. The valuation allowance increased by $16 million in 2016 related to certain future tax benefits and net operating losses generated that are included in deferred tax assets. The valuation allowance decreased by $25 million in 2015 primarily due to reductions in value of certain future tax benefits and net operating losses generated that are included in deferred tax assets.

Cabot has filed its tax returns in accordance with the tax laws in each jurisdiction and recognizes tax benefits for uncertain tax positions when the position would more likely than not be sustained based on its technical merits and recognizes measurement adjustments when needed. As of September 30, 2016, the total amount of unrecognized tax benefits was $30 million, of which $18 million was recorded in the Company’s Consolidated Balance Sheet and $12 million of deferred tax assets, principally related to state net operating loss carry-forwards, have not been recorded. In addition, accruals of $1 million and $8 million have been recorded for penalties and interest, respectively, as of September 30, 2016 and $1 million and $8 million, respectively, as of September 30, 2015. Total penalties and interest recorded in the tax provision in the Consolidated Statement of Operations was $2 million in fiscal 2016, $2 million in fiscal 2015, and $3 million in fiscal 2014. If the unrecognized tax benefits were recognized at a given point in time, there would be approximately $26 million favorable impact on the Company’s tax provision before consideration of the impact of the potential need for valuation allowances.

A reconciliation of the beginning and ending amount of unrecognized tax benefits for fiscal years 2016, 2015 and 2014 is as follows:

	Years ended September 30
	2016			2015			2014
	(Dollars in millions)
Balance at beginning of the year	$	30		$	41		$	50
Additions based on tax provisions related to the current year		2			1			1
Additions for tax positions of prior years		5			—			—
Reductions of tax provisions of prior years		(3	)		(1	)		(1	)
Reductions related to settlements		—			(9	)		(5	)
Reductions from lapse of statute of limitations		(4	)		(2	)		(4	)
Balance at end of the year	$	30		$	30		$	41

Cabot and certain subsidiaries are under audit in a number of jurisdictions. In addition, certain statutes of limitations are scheduled to expire in the near future. It is reasonably possible that a further change in the unrecognized tax benefits may occur within the next twelve months related to the settlement of one or more of these audits or the lapse of applicable statutes of limitations; however, an estimated range of the impact on the unrecognized tax benefits cannot be quantified at this time.

Cabot files U.S. federal and state and non-U.S. income tax returns in jurisdictions with varying statutes of limitations. The 2012 through 2014 tax years generally remain subject to examination by the IRS and various tax years from 2005 through 2014 remain subject to examination by the respective state tax authorities. In significant non-U.S. jurisdictions, various tax years from 2002 through 2014 remain subject to examination by their respective tax authorities. As of September 30, 2016, Cabot’s significant non-U.S. jurisdictions include Canada, China, France, Germany, Italy, Japan, and the Netherlands.