INCOME TAXES

We recognize income tax-related penalties in the Provision for/(Benefit from) income taxes on our consolidated income statement. We recognize income tax-related interest income and interest expense in Non-Financial Services interest income and other income/(loss), net and Financial Services other income/(loss), net on our consolidated income statement.

Valuation of Deferred Tax Assets and Liabilities

Deferred tax assets and liabilities are recognized based on the future tax consequences attributable to temporary differences that exist between the financial statement carrying value of assets and liabilities and their respective tax bases, and operating loss and tax credit carryforwards on a taxing jurisdiction basis. We measure deferred tax assets and liabilities using enacted tax rates that will apply in the years in which we expect the temporary differences to be recovered or paid.

Our accounting for deferred tax consequences represents our best estimate of the likely future tax consequences of events that have been recognized on our financial statements or tax returns and their future probability. In assessing the need for a valuation allowance, we consider both positive and negative evidence related to the likelihood of realization of the deferred tax assets. If, based on the weight of available evidence, it is more likely than not that the deferred tax assets will not be realized, we record a valuation allowance.

NOTE 21. INCOME TAXES (Continued)

Components of Income Taxes

Components of income taxes excluding cumulative effects of changes in accounting principles, other comprehensive income, and equity in net results of affiliated companies accounted for after-tax, for the years ended December 31 were as follows:



	2014			2015			2016
Income before income taxes (in millions)
U.S.	$	3,852		$	5,374		$	5,266
Non-U.S.	(2,618		)	4,878			1,530
Total	$	1,234		$	10,252		$	6,796
Provision for/(Benefit from) income taxes (in millions)
Current
Federal	$	(2	)	$	75		$	(122	)
Non-U.S.	389			572			630
State and local	(22		)	17			12
Total current	365			664			520
Deferred
Federal	(735		)	1,494			1,323
Non-U.S.	160			472			121
State and local	214			251			225
Total deferred	(361		)	2,217			1,669
Total	$	4		$	2,881		$	2,189
Reconciliation of effective tax rate
U.S. statutory rate	35.0		%	35.0		%	35.0		%
Non-U.S. tax rates under U.S. rates	(5.2		)	(2.7		)	(1.0		)
State and local income taxes	8.3			1.7			2.3
General business credits	(27.1		)	(3.0		)	(3.1		)
Dispositions and restructurings	13.0			0.4			7.4
U.S. tax on non-U.S. earnings	(23.7		)	(3.0		)	(5.6		)
Prior year settlements and claims	(9.1		)	(0.4		)	—
Tax-exempt income	(24.1		)	(2.0		)	(0.9		)
Enacted change in tax laws	3.9			0.1			(4.2		)
Valuation allowances	32.3			3.6			2.7
Other	(3.0		)	(1.6		)	(0.4		)
Effective rate	0.3		%	28.1		%	32.2		%

Our 2016 tax provision includes a $300 million benefit for the recognition of deferred taxes resulting from a 2016 change in U.S. tax law related to the taxation of foreign currency gains and losses for our non-U.S. branch operations.

At December 31, 2016, $5.7 billion of non-U.S. earnings are considered indefinitely reinvested in operations outside the United States, for which deferred taxes have not been provided. Repatriation of these earnings in their entirety would result in a residual U.S. tax liability of about $300 million. Our measure of the amount of non-U.S. earnings considered indefinitely reinvested in operations outside of the United States reflects accumulated earnings determined under U.S. tax law.

NOTE 21. INCOME TAXES (Continued)

Components of Deferred Tax Assets and Liabilities

The components of deferred tax assets and liabilities at December 31 were as follows (in millions):



	2015			2016
Deferred tax assets
Employee benefit plans	$	6,620		$	6,870
Net operating loss carryforwards	2,327			1,764
Tax credit carryforwards	6,456			5,860
Research expenditures	1,279			1,469
Dealer and dealers’ customer allowances and claims	2,394			2,500
Other foreign deferred tax assets	442			28
All other	2,206			2,289
Total gross deferred tax assets	21,724			20,780
Less: valuation allowances	(1,831		)	(909		)
Total net deferred tax assets	19,893			19,871
Deferred tax liabilities
Leasing transactions	3,329			4,523
Deferred income	1,215			807
Depreciation and amortization (excluding leasing transactions)	2,484			3,175
Finance receivables	688			593
Other foreign deferred tax liabilities	407			371
All other	763			1,388
Total deferred tax liabilities	8,886			10,857
Net deferred tax assets/(liabilities)	$	11,007		$	9,014

At December 31, 2016, we have a valuation allowance of $909 million primarily related to deferred tax assets in various non-U.S. operations.

Deferred tax assets for net operating losses and other temporary differences related to certain non-U.S. operations have not been recorded as a result of elections to tax these operations simultaneously in U.S. tax returns. Reversal of these elections would result in the recognition of $7.6 billion of deferred tax assets, subject to valuation allowance testing. During 2016, we extended these elections to a significant portion of our South American operations resulting in a $1.1 billion reduction in deferred tax assets and related valuation allowances.

Operating loss carryforwards for tax purposes were $5 billion at December 31, 2016, resulting in a deferred tax asset of $1.8 billion. There is no expiration date for $3.3 billion of these losses. A substantial portion of the remaining losses will expire beyond 2018. Tax credits available to offset future tax liabilities are $5.9 billion. A substantial portion of these credits have a remaining carryforward period of five years or more. Tax benefits of operating loss and tax credit carryforwards are evaluated on an ongoing basis, including a review of historical and projected future operating results, the eligible carryforward period, and other circumstances.

NOTE 21. INCOME TAXES (Continued)

Other

A reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended December 31 were as follows (in millions):



	2015			2016
Beginning balance	$	1,286		$	1,601
Increase – tax positions in prior periods	330			12
Increase – tax positions in current period	91			69
Decrease – tax positions in prior periods	(24		)	(67		)
Settlements	(65		)	(23		)
Lapse of statute of limitations	(7		)	(3		)
Foreign currency translation adjustment	(10		)	(3		)
Ending balance	$	1,601		$	1,586

The amount of unrecognized tax benefits that would affect the effective tax rate if recognized were $1.5 billion and $1.5 billion at December 31, 2015 and 2016, respectively.

Examinations by tax authorities have been completed through 2004 in Germany, 2008 in Canada, 2011 in the United States, 2013 in China and United Kingdom. Although examinations have been completed in these jurisdictions, limited transfer pricing disputes exist for years dating back to 1996.

Net interest income on income taxes was $96 million, $3 million, and $3 million for the years ended December 31, 2014, 2015, and 2016, respectively. These were reported in Non-Financial Services interest income and other income/(loss), net and Financial Services other income/(loss), net in our consolidated income statement. Net payables for tax related interest were $93 million and $67 million as of December 31, 2015 and 2016, respectively.

We paid income taxes of $467 million, $585 million, and $740 million in 2014, 2015, and 2016, respectively.