Income Taxes

Income tax expense (benefit) attributable to continuing operations —



	2016			2015			2014
Current
U.S. federal and state	$	(18	)	$	12		$	(5	)
Non-U.S.	74			80			134
Total current	56			92			129

Deferred
U.S. federal and state	(497		)	(9		)	(177		)
Non-U.S.	17			(1		)	(22		)
Total deferred	(480		)	(10		)	(199		)
Total expense (benefit)	$	(424	)	$	82		$	(70	)

We record interest and penalties related to uncertain tax positions as a component of income tax expense or benefit. Net interest expense for the periods presented herein is not significant.

Income from continuing operations before income taxes —



	2016			2015		2014
U.S. operations	$	(56	)	$	72	$	175
Non-U.S. operations	271			220		85
Income from continuing operations before income taxes	$	215		$	292	$	260

Income tax audits — We conduct business globally and, as a result, file income tax returns in multiple jurisdictions that are subject to examination by taxing authorities throughout the world. With few exceptions, we are no longer subject to U.S. federal, state and local or foreign income tax examinations for years before 2009. The U.S. federal income tax audits for 2011 and 2012 were settled during the first quarter of 2015, resulting in no incremental cash taxes.

We are currently under audit by U.S. and foreign authorities for certain taxation years. When the issues related to these periods are settled, the total amounts of unrecognized tax benefits for all open tax years may be modified. Audit outcomes and the timing of the audit settlements are subject to uncertainty and we cannot make an estimate of the impact on our financial position at this time.

Effective tax rate reconciliation for continuing operations —



	2016		2015		2014
U.S. federal income tax rate	35	%	35	%	35	%
Adjustments resulting from:
State and local income taxes, net of federal benefit	5		(1	)	4
Non-U.S. income (expense)	(15	)	(11	)	(7	)
Credits and tax incentives	(5	)	(4	)	(6	)
U.S. tax on non-U.S. earnings	(19	)	9		(16	)
Intercompany sale of certain operating assets	5		9
Settlement and return adjustments	14		1		17
Enacted change in tax rates	4
Venezuela write-down					10
Miscellaneous items	2		5		2
Valuation allowance adjustments	(222	)	(15	)	(66	)
Effective income tax rate for continuing operations	(196	)%	28	%	(27	)%

In the fourth quarter of 2016, we determined that valuation allowances against U.S. deferred taxes were no longer required. Release of these valuation allowances resulted in $501 of tax benefit. Additionally, developments in Brazil led to our determination that an allowance against certain deferred taxes in that country was appropriate, and we recognized tax expense of $25 to establish this valuation allowance. Excluding the effects of the valuation allowance adjustments, the effective tax rate was 26% in 2016, which varies from the U.S. federal statutory rate of 35% primarily due to nondeductible expenses, different statutory tax rates outside the U.S. and withholding taxes.

In 2014, income tax expense in the U.S. was reduced by $179 for release of valuation allowances for income forecasted to be realized in 2015 in connection with a tax planning action that involved a sale of an affiliate’s stock and certain operating assets by a U.S. subsidiary of the company to a non-U.S. affiliate expected to be completed in 2015. During the fourth quarter of 2015, the tax planning action was completed. The final income generated by the transaction was higher than anticipated as a consequence of proposed Internal Revenue Service regulations issued in 2015 providing guidance on the tax treatment afforded a component of the tax planning action we undertook, as well as revised income estimates, which resulted in an additional $66 release of valuation allowance. In conjunction with the completion of the intercompany sale of certain operating assets to a non-U.S. affiliate, a prepaid tax asset of $190 was recorded. The prepaid tax asset represents the usage of tax attributes recognized in 2014 and 2015, through the release of valuation allowance on our deferred tax assets, and is being amortized into tax expense over the life of the assets transferred in the transaction. We recognized tax expense of $11 and $2 in 2016 and 2015 as a result of this amortization. In addition, we recognized tax expense of $23 in 2015 related to the sale of the affiliate’s stock.

No tax benefit was recognized on a charge of $80 in 2014 relating to the divestiture of our Venezuela operations due to the existence of a valuation allowance, resulting in an increase in the effective tax rate.

Foreign income repatriation — We provide for U.S. federal income and non-U.S. withholding taxes on the earnings of our non-U.S. operations that are not considered to be permanently reinvested. Accordingly, we continue to analyze and adjust the estimated tax impact of the income and non-U.S. withholding liabilities based on the amount and source of these earnings. We recognized net benefit of $58 for 2016 and expense of $1 and $3 for 2015 and 2014 related to future income taxes and non-U.S. withholding taxes on repatriations from operations that are not permanently reinvested. We also paid withholding taxes of $6, $7 and $7 during 2016, 2015 and 2014 related to the actual transfer of funds to the U.S. The unrecognized tax liability associated with the operations in which we are permanently reinvested is $30 at December 31, 2016.

The earnings of our non-U.S. subsidiaries will likely be repatriated to the U.S. in the form of repayments of intercompany borrowings and distributions from earnings. Certain of our international operations had intercompany loan obligations to the U.S. totaling $978 at the end of 2016. Included in this amount are intercompany loans and related interest accruals with an equivalent value of $32 which are denominated in a foreign currency and considered to be permanently invested.

Valuation allowance adjustments — We have recorded valuation allowances in several entities where the recent history of operating losses does not allow us to satisfy the “more likely than not” criterion for the recognition of deferred tax assets. Consequently, there is no income tax expense or benefit recognized on the pre-tax income or losses in these jurisdictions as valuation allowances are adjusted to offset the associated tax expense or benefit.

When evaluating the need for a valuation allowance we consider all components of comprehensive income, and we weigh the positive and negative evidence, putting greater reliance on objectively verifiable evidence than on projections of future profitability that are dependent on actions that have not occurred as of the assessment date. We also consider changes to the historical financial results due to activities that were either new to the business or not expected to recur in the future, in order to identify the core earnings of the business. A sustained period of profitability, after considering changes to the historical results due to implemented actions and nonrecurring events, along with positive expectations for future profitability are necessary to reach a determination that a valuation allowance should be released.

Prior to 2016, we carried a valuation allowance against deferred tax assets in the U.S. While our U.S. operations have experienced improved profitability in recent years, our analysis of the income of the U.S. operations, as adjusted for changes in historical results due to developments through 2015, demonstrated historical losses as of December 31, 2015. Additionally, there were considerable uncertainties in the U.S. in certain of our end markets. Therefore, we had not achieved a level of sustained profitability that would, in our judgment, support a release of the valuation allowance prior to 2016.

During the fourth quarter, following the completion of an enterprise wide strategy assessment and our annual one and five year financial plans, the Company assessed the weight of all available positive and negative evidence and determined it was more likely than not that future earnings will be sufficient to realize most of our deferred tax assets in the U.S. Accordingly, we have released the U.S. valuation allowance at December 31, 2016, resulting in an income tax benefit of $501. In arriving at the conclusion that we had achieved sustained profitability in the U.S., we considered the following positive evidence: we were in a cumulative three-year historical income position in the U.S., we had income in seven of the eight previous quarters; we successfully launched a replacement business for one of our largest customer programs for Light Vehicle in the U.S. with actual volumes and margins which were consistent with our forecast in the fourth quarter; we stabilized our U.S. Commercial Vehicle business despite lower than expected volumes; and, we secured certain new programs with customers that increased our sales backlog in the U.S.

We have retained a valuation allowance of $137 against deferred tax assets in the U.S. primarily related to state operating loss carryforwards and other credits which do not meet the more likely than not criterion for releasing the valuation allowance.

Our analysis of the operations of a subsidiary in Brazil, adjusted for changes in the historical results due to the effects of developments through the current date and planned future actions, reflects three years of historical cumulative losses and our annual one and five year financial plans forecast continued near term losses. Therefore, we determined it was not more likely than not that future earnings will be sufficient to realize the deferred tax assets. Accordingly, we have recorded a valuation allowance as of December 31, 2016, resulting in income tax expense of $25.

Deferred tax assets and liabilities — Temporary differences and carryforwards give rise to the following deferred tax assets and liabilities.



	2016			2015
Net operating loss carryforwards	$	472		$	448
Postretirement benefits, including pensions	152			137
Research and development costs	113			89
Expense accruals	54			58
Other tax credits recoverable	67			63
Capital loss carryforwards	40			50
Inventory reserves	18			15
Postemployment and other benefits	8			5
Other	20
Total	944			865
Valuation allowance	(285		)	(662		)
Deferred tax assets	659			203

Unremitted earnings	(27		)	(68		)
Intangibles	(29		)	(29		)
Depreciation	(52		)	(43		)
Other				(27		)
Deferred tax liabilities	(108		)	(167		)
Net deferred tax assets	$	551		$	36

Carryforwards — Our deferred tax assets include benefits expected from the utilization of net operating loss (NOL), capital loss and credit carryforwards in the future. The following table identifies the net operating loss deferred tax asset components and the related allowances that existed at December 31, 2016. Due to time limitations on the ability to realize the benefit of the carryforwards, additional portions of these deferred tax assets may become unrealizable in the future.



	Deferred Tax Asset		Valuation Allowance			Carryforward Period	Earliest Year of Expiration
Net operating losses
U.S. federal	$	279	$	—		20	2028
U.S. state	97		(92		)	Various	2017
Brazil	38		(38		)	Unlimited
France	11		—			Unlimited
Australia	31		(31		)	Unlimited
South Africa	2		—			Unlimited
U.K.	5		(3		)	Unlimited
Argentina	8		(8		)	5	2017
China	1		(1		)	5	2019
Total	$	472	$	(173	)

In addition to the NOL carryforwards listed in the table above, we have deferred tax assets related to capital loss carryforwards of $40 which are fully offset with valuation allowances at December 31, 2016. We also have deferred tax assets of $67 related to other credit carryforwards which are offset with $23 of valuation allowances at December 31, 2016. The capital losses can be carried forward indefinitely while the other credits are generally available for 10 to 20 years with portions currently expiring. We elected to adopt the new guidance for share based payments in the third quarter of 2016, requiring us to reflect any adjustments as of January 1, 2016 in retained earnings. The primary impact of adopting the new guidance was an increase in deferred tax assets of $32 related to the cumulative excess tax benefits resulting from share-based payments. Because we continued to carry a valuation allowance against certain of our deferred tax assets in the U.S., the increase in deferred tax assets was offset by an increase in our valuation allowance of $32, resulting in no impact to retained earnings as of January 1, 2016.

The use of a portion of our $796 U.S. federal NOL as of December 31, 2016 is subject to limitation due to the change in ownership of our stock upon emergence from bankruptcy. Generally, the application of the relevant Internal Revenue Code (IRC) provisions will release the limitation on $84 of pre-change NOLs each year, allowing pre-change losses to offset post-change taxable income. Through further evaluation and audit adjustment, and after considering U.S. taxable income in 2016, we estimate that $577 of our U.S. federal NOLs remains subject to limitation as of December 31, 2016. The remainder of our U.S. federal NOLs represents a combination of post-change NOLs and pre-change NOLs on which the limitation has been released. However, there can be no assurance that trading in our shares will not effect another change in ownership under the IRC which would further limit our ability to utilize our available NOLs.

Unrecognized tax benefits — Unrecognized tax benefits are the difference between a tax position taken, or expected to be taken, in a tax return and the benefit recognized for accounting purposes. Interest income or expense, as well as penalties relating to income tax audit adjustments and settlements, are recognized as components of income tax expense or benefit. Interest of $7 and $6 was accrued on the uncertain tax positions at December 31, 2016 and 2015.

Reconciliation of gross unrecognized tax benefits —



	2016			2015			2014
Balance, beginning of period	$	87		$	109		$	101
Decrease related to expiration of statute of limitations	(5		)	(6		)	(3		)
Decrease related to prior years tax positions	(1		)	(9		)
Increase related to prior years tax positions	28			1
Increase related to current year tax positions	8			8			25
Decrease related to settlements				(16		)	(14		)
Balance, end of period	$	117		$	87		$	109

We anticipate that the change in our gross unrecognized tax benefits as a result of examinations in various jurisdictions will not be significant in the next twelve months. The settlement of these matters will not impact the effective tax rate. Gross unrecognized tax benefits of $72 would impact the effective tax rate if recognized. If other open matters are settled with the IRS or other taxing jurisdictions, the total amounts of unrecognized tax benefits for open tax years may be modified.