Income Taxes

Income tax expense (benefit) attributable to continuing operations —



	2017		2016			2015
Current
U.S. federal and state	$	6	$	(18	)	$	12
Non-U.S.	98		74			80
Total current	104		56			92

Deferred
U.S. federal and state	164		(497		)	(9		)
Non-U.S.	15		17			(1		)
Total deferred	179		(480		)	(10		)
Total expense (benefit)	$	283	$	(424	)	$	82

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 —



	2017		2016			2015
U.S. operations	$	60	$	(56	)	$	72
Non-U.S. operations	320		271			220
Earnings from continuing operations before income taxes	$	380	$	215		$	292

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.

U.S.tax reform legislation — On December 22, 2017, the Tax Cuts and Jobs Act ("Act") was signed into law in the U.S. The Act includes a broad range of tax reforms, certain of which were required by GAAP to be recognized upon enactment. The U.S. Securities and Exchange Commission has issued Staff Accounting Bulletin 118 (SAB 118), which provides guidance on accounting for the tax effects of the Act. SAB 118 provides a measurement period that should not extend beyond one year from the enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Act.

Based on our historical financial performance in the U.S., at December 31, 2017, we have a significant net deferred tax asset position. As such, with the Act's reduction of the corporate tax rate from 35% to 21%, we remeasured our net deferred tax assets at the lower corporate rate of 21% and recognized a tax expense to adjust net deferred tax assets to the reduced value. The Act introduced provisions that fundamentally change the U.S. approach to taxation of foreign earnings. Under the Act, qualified dividends of foreign subsidiaries are no longer subject to U.S. tax. Under the previously-existing tax rules, dividends from foreign operations were subjected to U.S. tax, and if not considered permanently reinvested, we had recognized expense and recorded a liability for the tax expected to be incurred upon receipt of the dividend of these foreign earnings. Although the Act excludes dividends of foreign subsidiaries from taxation, it includes provisions for a mandatory deemed dividend of undistributed foreign earnings at tax rates of 15.5% or 8% ("transition tax") depending on the nature of the foreign operations' assets. Companies may utilize tax attributes (including net operating losses and tax credits) to offset the transition tax. The estimated net effect of applying the provisions of the Act on our 2017 results of operations was a non-cash charge to tax expense of $186. This provisional amount could be revised as additional guidance and interpretations are issued and as we continue to examine the details of the Act and the related tax attributes.

Beginning in 2018, the Act may also trigger a taxable deemed dividend to the extent that the annual earnings of our foreign subsidiaries exceed a specified threshold, based on the value of tangible foreign operating assets. The deemed dividend, if any, from this global intangible low-taxed income (GILTI) may be offset by the use of other tax attributes in that year. We intend to account for the tax effect of GILTI as a period cost and will include a provisional estimate for GILTI in our effective tax rate beginning in the first quarter of 2018. The SEC staff has indicated that a company should make and disclose a policy election as to whether it will recognize deferred taxes for basis differences expected to reverse as GILTI or account for the effect of GILTI as a period cost when incurred. We are currently applying the SAB 118 guidance to the selection of a GILTI accounting policy election and, therefore, as of December 31, 2017, our GILTI accounting policy has not been finalized. We intend to finalize our GILTI accounting policy in 2018 during the measurement period.

Effective tax rate reconciliation for continuing operations —



	2017		2016		2015
U.S. federal income tax rate	35	%	35	%	35	%
Adjustments resulting from:
State and local income taxes, net of federal benefit	1		5		(1	)
Non-U.S. income (expense)	(11	)	(15	)	(11	)
Credits and tax incentives	(16	)	(5	)	(4	)
U.S. tax on non-U.S. earnings	12		(19	)	9
Intercompany sale of certain operating assets	(6	)	5		9
Settlement and return adjustments	(2	)	14		1
Enacted change in tax laws	49		4
Miscellaneous items	1		2		5
Valuation allowance adjustments	11		(222	)	(15	)
Effective income tax rate for continuing operations	74	%	(196	)%	28	%

The net effect in 2017 of applying the U.S. tax reform provisions of the Act was tax expense of $186. This impact, which increased the effective rate for 2017 by 49%, was principally attributable to the reduction of net deferred tax assets to reflect the reduced corporate tax rate. Foreign tax credits of $49 which were generated in 2017 but not utilized to offset the transition tax are included as a benefit in the credits and incentives component of the effective rate reconciliation, with an offsetting expense of $49 in the valuation allowance component to recognize that such credits are not likely to be realized.

In the fourth quarter of 2016, we determined that valuation allowances against certain U.S. deferred taxes were no longer required. Release of these valuation allowances resulted in $501 of tax benefit. Valuation allowances against U.S. deferred tax assets primarily related to state operating loss carryforwards and other credits were retained. In the fourth quarter of 2017, based on our improved financial performance and outlook, we determined that release of an additional $27 was appropriate and recognized a tax benefit of this amount. Developments in Brazil in 2016 led to our determination that an allowance against certain deferred taxes in that country was appropriate, and we recognized tax expense of $25 in 2016 to establish this valuation allowance.

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 was being amortized into tax expense over the life of the assets transferred in the transaction until 2017. 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. As described in Note 1 of the consolidated financial statements, in 2017 we adopted new accounting guidance applicable to intra-entity transfers. Adoption of this guidance effective January 1, 2017 resulted in the unamortized value of the prepaid tax asset being written off to retained earnings.

Foreign income repatriation — Prior to the U.S. tax reform provisions enacted with passage of the Act, we provided 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. As indicated above, with passage of the Act, dividends of earnings from non-U.S. operations are generally no longer subjected to U.S. income tax. Accordingly, in the fourth quarter of 2017, we reduced the previously recorded liability for U.S. income tax on expected repatriations of non-U.S. earnings. We continue to analyze and adjust the estimated impact of the non-U.S. income and withholding tax liabilities based on the amount and source of these earnings, as well as the expected means through which those earnings may be taxed. We recognized net expense of $2 for 2017, a net benefit of $58 for 2016 and expense of $1 for 2015 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 $7, $6 and $7 during 2017, 2016 and 2015 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 $5 at December 31, 2017.

The earnings of our certain non-U.S. subsidiaries may be repatriated to the U.S. in the form of repayments of intercompany borrowings. Certain of our international operations had intercompany loan obligations to the U.S. totaling $1,119 at the end of 2017. Included in this amount are intercompany loans and related interest accruals with an equivalent value of $23 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. We believe it is reasonably possible that a valuation allowance of up to $8 related to a subsidiary in Argentina will be released in the next twelve months.

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 of 2016, 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 would be sufficient to realize most of our deferred tax assets in the U.S. Accordingly, we 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.

At December 31, 2016, we 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. During 2017, based on our financial performance and outlook, we determined that $27 of this allowance met the more-likely-than not standard for release.

At December 31, 2016, 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 date of the analysis and planned future actions, reflected three years of historical cumulative losses and our annual one- and five-year financial plans forecasted 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 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.



	2017			2016
Net operating loss carryforwards	$	319		$	472
Postretirement benefits, including pensions	119			152
Research and development costs	85			113
Expense accruals	78			54
Other tax credits recoverable	122			67
Capital loss carryforwards	43			40
Inventory reserves	16			18
Postemployment and other benefits	5			8
Other				20
Total	787			944
Valuation allowance	(301		)	(285		)
Deferred tax assets	486			659

Unremitted earnings	(30		)	(27		)
Intangibles	(22		)	(29		)
Depreciation	(60		)	(52		)
Other	(13		)
Deferred tax liabilities	(125		)	(108		)
Net deferred tax assets	$	361		$	551

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, 2017. 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	$	135	$	—		20	2029
U.S. state	101		(81		)	Various	2018
Brazil	20		(20		)	Unlimited
France	9					Unlimited
Australia	35		(35		)	Unlimited
Italy	7		(7		)	Unlimited
Germany	5		(5		)	Unlimited
U.K.	3		(3		)	Unlimited
Argentina	3		(3		)	5	2018
China	1		(1		)	5	2019
Total	$	319	$	(155	)

In addition to the NOL carryforwards listed in the table above, we have deferred tax assets related to capital loss carryforwards of $43 which are fully offset with valuation allowances at December 31, 2017. We also have deferred tax assets of $122 related to other credit carryforwards which are partially offset with $76 of valuation allowances at December 31, 2017. The capital losses can be carried forward indefinitely while the other credits are generally available for 10 to 20 years. 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 $643 U.S. federal NOL as of December 31, 2017 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 2017, we estimate that $458 of our U.S. federal NOLs remains subject to limitation as of December 31, 2017. 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 $11 and $7 was accrued on the uncertain tax positions at December 31, 2017 and 2016.

Reconciliation of gross unrecognized tax benefits —



	2017			2016			2015
Balance, beginning of period	$	117		$	87		$	109
Decrease related to expiration of statute of limitations	(3		)	(5		)	(6		)
Decrease related to prior years tax positions	(25		)	(1		)	(9		)
Increase related to prior years tax positions	15			28			1
Increase related to current year tax positions	15			8			8
Decrease related to settlements							(16		)
Balance, end of period	$	119		$	117		$	87

The 2017 decrease related to prior years tax positions includes $23 that resulted from the reduction of the U.S. income tax rate from 35% to 21% since these positions represent a reduction of U.S. net operating losses. We anticipate that our gross unrecognized tax benefits will decrease by $17 in the next twelve months upon the expected completion of examinations in various jurisdictions. The settlement of these matters will not impact the effective tax rate. Gross unrecognized tax benefits of $83 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.