Note Q. Income Taxes

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

	Years Ended September 30
	2017			2016			2015
	(In millions)
Domestic	$	(19	)	$	(26	)	$	(439	)
Foreign		307			220			62
Income from continuing operations before income taxes and equity in earnings of affiliated companies	$	288		$	194		$	(377	)

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

	Years Ended September 30
	2017			2016			2015
	(In millions)
U.S. federal and state:
Current	$	5		$	7		$	(7	)
Deferred		(30	)		(33	)		(74	)
Total		(25	)		(26	)		(81	)
Foreign:
Current		59			62			48
Deferred		(5	)		(2	)		(12	)
Total		54			60			36
Provision (benefit) for income taxes	$	29		$	34		$	(45	)

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
	2017			2016			2015
	(In millions)
Computed tax expense at the federal statutory rate	$	101		$	68		$	(132	)
Foreign income:
Impact of taxation at different rates, repatriation, losses and other		(75	)		(37	)		(24	)
Impact of increase (decrease) in valuation allowance on deferred taxes		(7	)		7			(7	)
Impact of foreign losses for which a current tax benefit is not available		1			—			9
Impact of non-deductible net currency losses		—			2			(1	)
U.S. and state benefits from research and experimentation activities		(2	)		(2	)		(2	)
Provision (settlement) of unrecognized tax benefits		7			1			(7	)
Benefit from prior currency loss		—			(3	)		—
Impact of goodwill impairment charge		—			—			123
Permanent differences, net		5			—			—
State taxes, net of federal effect		(1	)		(2	)		(4	)
Provision (benefit) for income taxes	$	29		$	34		$	(45	)

Significant components of deferred income taxes were as follows:

	September 30
	2017			2016
	(In millions)
Deferred tax assets:
Deferred expenses	$	22		$	25
Intangible assets		43			45
Inventory		14			13
Other		14			4
Pension and other benefits		59			83
Net operating loss carry-forwards		149			144
Foreign tax credit carry-forwards		132			63
R&D credit carry-forwards		38			35
Other business credit carry-forwards		37			41
Subtotal		508			453
Valuation allowance		(168	)		(177	)
Total deferred tax assets	$	340		$	276

	September 30
	2017			2016
	(In millions)
Deferred tax liabilities:
Property, plant and equipment	$	(116	)	$	(101	)
Unremitted earnings of non-U.S. subsidiaries		(12	)		—
Total deferred tax liabilities	$	(128	)	$	(101	)

In the fiscal 2017 tax provision, Cabot recorded $25 million of net discrete tax benefits, composed of net tax benefits of $16 million associated with the generation of excess foreign tax credits upon repatriation of previously taxed foreign earnings and the accrual of U.S. tax on certain foreign earnings, a net tax benefit of $6 million from a change in valuation allowance on a beginning of year tax balance, net tax benefits of $4 million for various return to provision adjustments related to tax return filings and net tax charges of $1 million related to other miscellaneous tax items.

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.

Approximately $798 million of net operating loss carryforwards (“NOLs”) and $212 million of other tax credit carryforwards remain at September 30, 2017. 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:

Years Ended September 30	NOLs		Credits
	(In millions)
2018 to 2024	$	235	$	55
2025 and thereafter		226		136
Indefinite carry-forwards		337		21
Total	$	798	$	212

As of September 30, 2017, provisions have not been made for U.S. income taxes or non-U.S. withholding taxes on approximately $1.9 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, 2017, net deferred tax assets of $220 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 was a profit of $210 million for the year ended September 30, 2017 and was a cumulative profit of $89 million for the three years ended September 30, 2017 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, 2017, the Company needs to generate approximately $629 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, 2017 and 2016 represent management’s best estimate of the non-realizable portion of the deferred tax assets. The valuation allowance decreased by $9 million in 2017 due to net increases in the value of certain future tax benefits and net operating losses generated that are included in deferred tax assets. The valuation allowance increased by $16 million in 2016 due to net 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, 2017, the total amount of unrecognized tax benefits was $36 million, of which $25 million was recorded in the Company’s Consolidated Balance Sheets and $11 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 both September 30, 2017 and 2016. Total penalties and interest recorded in the tax provision in the Consolidated Statements of Operations was $2 million in each of the years ended September 30, 2017, 2016, and 2015. If the unrecognized tax benefits were recognized at a given point in time, there would be approximately $34 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 2017, 2016 and 2015 is as follows:

	Years Ended September 30
	2017			2016			2015
	(In millions)
Balance at beginning of the year	$	30		$	30		$	41
Additions based on tax provisions related to the current year		2			2			1
Additions for tax positions of prior years		8			5			—
Reductions of tax provisions of prior years		(1	)		(3	)		(1	)
Reductions related to settlements		(2	)		—			(9	)
Reductions from lapse of statute of limitations		(1	)		(4	)		(2	)
Balance at end of the year	$	36		$	30		$	30

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 2013 through 2015 tax years generally remain subject to examination by the IRS and various tax years from 2005 through 2015 remain subject to examination by the respective state tax authorities. In significant non-U.S. jurisdictions, various tax years from 2002 through 2015 remain subject to examination by their respective tax authorities. As of September 30, 2017, Cabot’s significant non-U.S. jurisdictions include Canada, China, France, Germany, Italy, Japan, and the Netherlands.