T. Income Taxes

The components of income (loss) before income taxes were as follows:


	2015			2014			2013
United States	$	(607	)	$	(125	)	$	(1,269	)
Foreign		855			622			(547	)
	$	248		$	497		$	(1,816	)

The provision for income taxes consisted of the following:


	2015			2014			2013
Current:
Federal*	$	3		$	(3	)	$	14
Foreign		409			357			235
State and local		(1	)		1			1
		411			355			250
Deferred:
Federal*		(108	)		7			84
Foreign		142			(41	)		95
State and local		-			(1	)		(1	)
		34			(35	)		178
Total	$	445		$	320		$	428

*	Includes U.S. taxes related to foreign income

The exercise of employee stock options generated a tax benefit of $3 and $9 in 2015 and 2014, respectively, and a tax charge of $1 in 2013, representing only the difference between compensation expense recognized for financial reporting and tax purposes. These amounts decreased equity and increased either current taxes payable or deferred tax assets (not operating losses) in the respective periods.

Alcoa has unamortized tax-deductible goodwill of $27 resulting from intercompany stock sales and reorganizations. Alcoa recognizes the tax benefits (at a 28% rate in 2015 and will be at a rate of 25% in 2016 and later years) associated with this tax-deductible goodwill as it is being amortized for local income tax purposes rather than in the period in which the transaction is consummated.

A reconciliation of the U.S. federal statutory rate to Alcoa’s effective tax rate was as follows (the effective tax rate for 2015 and 2014 was a provision on income and for 2013 was a provision on a loss):


	2015			2014			2013
U.S. federal statutory rate		35.0	%		35.0	%		35.0	%
Taxes on foreign operations		0.4			(3.2	)		0.7
Permanent differences on restructuring and other charges and asset disposals		2.7			(3.5	)		(0.8	)
Non-deductible acquisition costs		5.2			1.7			-
Equity income/loss		4.9			3.2			(0.7	)
Noncontrolling interests⁽¹⁾		11.4			6.8			(3.1	)
Statutory tax rate and law changes⁽²⁾		(0.8	)		17.9			0.6
Tax holidays⁽³⁾		(11.3	)		6.1			-
Tax credits		(3.6	)		(1.3	)		0.2
Changes in valuation allowances		135.3			3.5			(23.2	)
Impairment of goodwill		3.6			-			(33.3	)
Company-owned life insurance/split-dollar net premiums		(2.2	)		(2.2	)		1.1
Other		(1.2	)		0.4			(0.1	)
Effective tax rate		179.4	%		64.4	%		(23.6	)%

(1)	In 2014, the noncontrolling interests’ impact on Alcoa’s effective tax rate was mostly due to the noncontrolling interest’s share of a loss on the divestiture of an ownership interest in a mining and refining joint venture in Jamaica (see Note F).

(2)	In November 2014, Spain enacted corporate tax reform that changed the corporate tax rate from 30% in 2014 to 28% in 2015 to 25% in 2016. As a result, Alcoa remeasured certain deferred tax assets related to Spanish subsidiaries.

(3)	In 2014, a tax holiday for certain Alcoa subsidiaries in Brazil became effective (see below).

The components of net deferred tax assets and liabilities were as follows:


	2015					2014
December 31,	Deferred tax assets			Deferred tax liabilities		Deferred tax assets			Deferred tax liabilities
Depreciation	$	194		$	1,353	$	147		$	1,187
Employee benefits		2,517			34		2,413			37
Loss provisions		486			9		441			10
Deferred income/expense		37			294		30			230
Tax loss carryforwards		1,917			-		2,075			-
Tax credit carryforwards		693			-		625			-
Derivatives and hedging activities		-			276		5			39
Other		680			339		521			297
		6,524			2,305		6,257			1,800
Valuation allowance		(2,037	)		-		(1,668	)		-
	$	4,487		$	2,305	$	4,589		$	1,800

The following table details the expiration periods of the deferred tax assets presented above:


December 31, 2015	Expires within 10 years			Expires within 11-20 years			No expiration*			Other*			Total
Tax loss carryforwards	$	361		$	694		$	862		$	-		$	1,917
Tax credit carryforwards		492			103			98			-			693
Other		-			-			473			3,441			3,914
Valuation allowance		(596	)		(704	)		(423	)		(314	)		(2,037	)
	$	257		$	93		$	1,010		$	3,127		$	4,487

Deferred tax assets with no expiration may still have annual limitations on utilization. Other represents deferred tax assets whose expiration is dependent upon the reversal of the underlying temporary difference. A substantial amount of Other relates to employee benefits that will become deductible for tax purposes over an extended period of time as contributions are made to employee benefit plans and payments are made to retirees.

The total deferred tax asset (net of valuation allowance) is supported by projections of future taxable income exclusive of reversing temporary differences (58%) and taxable temporary differences that reverse within the carryforward period (42%).

Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not (greater than 50%) that a tax benefit will not be realized. In evaluating the need for a valuation allowance, management considers all potential sources of taxable income, including income available in carryback periods, future reversals of taxable temporary differences, projections of taxable income, and income from tax planning strategies, as well as all available positive and negative evidence. Positive evidence includes factors such as a history of profitable operations, projections of future profitability within the carryforward period, including from tax planning strategies, and Alcoa’s experience with similar operations. Existing favorable contracts and the ability to sell products into established markets are additional positive evidence. Negative evidence includes items such as cumulative losses, projections of future losses, or carryforward periods that are not long enough to allow for the utilization of a deferred tax asset based on existing projections of income. In certain jurisdictions, deferred tax assets related to cumulative losses exist without a valuation allowance where in management’s judgment the weight of the positive evidence more than offsets the negative evidence of the cumulative losses. Upon changes in facts and circumstances, management may conclude that deferred tax assets for which no valuation allowance is currently recorded may not be realized, resulting in a future charge to establish a valuation allowance. Existing valuation allowances are re-examined under the same standards of positive and negative evidence. If it is determined that it is more likely than not that a deferred tax asset will be realized, the appropriate amount of the valuation allowance, if any, is released. Deferred tax assets and liabilities are also re-measured to reflect changes in underlying tax rates due to law changes and the granting and lapse of tax holidays.

In 2013, Alcoa recognized a $372 discrete income tax charge for valuation allowances on certain deferred tax assets in Spain and the United States. Of this amount, a $237 valuation allowance was established on the full value of the deferred tax assets related to a Spanish consolidated tax group. These deferred tax assets have an expiration period ranging from 2016 (for certain credits) to an unlimited life (for operating losses). After weighing all available positive and negative evidence, as described above, management determined that it was no longer more likely than not that Alcoa will realize the tax benefit of these deferred tax assets. This was mainly driven by a decline in the outlook of the Primary Metals business (2013 realized prices were the lowest since 2009) combined with prior year cumulative losses of the Spanish consolidated tax group. During 2014, the underlying value of the deferred tax assets decreased due to a remeasurement as a result of the enactment of new tax rates in Spain beginning in 2015, the sale of a member of the Spanish consolidated tax group, and a change in foreign currency exchange rates. As a result the valuation allowance decreased by the same amount. At December 31, 2015, the amount of the valuation allowance was $149. This valuation allowance was reevaluated as of December 31, 2015, and no change to the allowance was deemed necessary based on all available evidence. The need for this valuation allowance will be assessed on a continuous basis in future periods and, as a result, a portion or all of the allowance may be reversed based on changes in facts and circumstances.

The remaining $135 recognized in 2013 relates to a valuation allowance established on a portion of available foreign tax credits in the United States. These credits can be carried forward for 10 years, and have an expiration period ranging from 2016 to 2023 as of December 31, 2013 (2016 to 2025 as of December 31, 2015). After weighing all available positive and negative evidence, as described above, management determined that it was no longer more likely than not that Alcoa will realize the full tax benefit of these foreign tax credits. This was primarily due to lower foreign sourced taxable income after consideration of tax planning strategies and after the inclusion of earnings from foreign subsidiaries projected to be distributable as taxable foreign dividends. This valuation allowance was reevaluated as of December 31, 2015, and due to reductions in foreign sourced taxable income, a $134 discrete income tax charge was recognized. Additionally, $15 of foreign tax credits expired at the end of 2015 resulting in a corresponding decrease to the valuation allowance. At December 31, 2015, the amount of the valuation allowance was $254. The need for this valuation allowance will be assessed on a continuous basis in future periods and, as a result, an increase or decrease to this allowance may result based on changes in facts and circumstances.

In 2015, Alcoa recognized an additional $141 discrete income tax charge for valuation allowances on certain deferred tax assets in Iceland and Suriname. Of this amount, an $85 valuation allowance was established on the full value of the deferred tax assets in Suriname, which were related mostly to employee benefits and tax loss carryforwards. These deferred tax assets have an expiration period ranging from 2016 to 2022. The remaining $56 charge relates to a valuation allowance established on a portion of the deferred tax assets recorded in Iceland. These deferred tax assets have an expiration period ranging from 2017 to 2023. After weighing all available positive and negative evidence, as described above, management determined that it was no longer more likely than not that Alcoa will realize the tax benefit of either of these deferred tax assets. This was mainly driven by a decline in the outlook of the Primary Metals business, combined with prior year cumulative losses and a short expiration period. The need for this valuation allowance will be assessed on a continuous basis in future periods and, as a result, a portion or all of the allowance may be reversed based on changes in facts and circumstances.

In December 2011, one of Alcoa’s subsidiaries in Brazil applied for a tax holiday related to its expanded mining and refining operations. During 2013, the application was amended and re-filed and, separately, a similar application was filed for another one of the Company’s subsidiaries in Brazil. The deadline for the Brazilian government to deny the application was July 11, 2014. Since Alcoa did not receive notice that its applications were denied, the tax holiday took effect automatically on July 12, 2014. As a result, the tax rate applicable to qualified holiday income for these subsidiaries decreased significantly (from 34% to 15.25%), resulting in future cash tax savings over the 10-year holiday period (retroactively effective as of January 1, 2013). Additionally, a portion of one of the subsidiaries net deferred tax asset that reverses within the holiday period was remeasured at the new tax rate (the net deferred tax asset of the other subsidiary was not remeasured since it could still be utilized against the subsidiary’s future earnings not subject to the tax holiday). This remeasurement resulted in a decrease to that subsidiary’s net deferred tax asset and a noncash charge to earnings of $52 ($31 after noncontrolling interest).

The following table details the changes in the valuation allowance:


December 31,	2015			2014			2013
Balance at beginning of year	$	1,668		$	1,804		$	1,400
Increase to allowance		472			117			471
Release of allowance		(42	)		(77	)		(41	)
Acquisitions and divestitures (F)		29			(37	)		-
U.S. state tax apportionment and tax rate changes		(45	)		(80	)		(32	)
Foreign currency translation		(45	)		(59	)		6
Balance at end of year	$	2,037		$	1,668		$	1,804

The cumulative amount of Alcoa’s foreign undistributed net earnings for which no deferred taxes have been provided was approximately $4,000 at December 31, 2015. Alcoa has a number of commitments and obligations related to the Company’s growth strategy in foreign jurisdictions. As such, management has no plans to distribute such earnings in the foreseeable future, and, therefore, has determined it is not practicable to determine the related deferred tax liability.

Alcoa and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions. With a few minor exceptions, Alcoa is no longer subject to income tax examinations by tax authorities for years prior to 2006. All U.S. tax years prior to 2015 have been audited by the Internal Revenue Service. Various state and foreign jurisdiction tax authorities are in the process of examining Alcoa’s income tax returns for various tax years through 2014.

A reconciliation of the beginning and ending amount of unrecognized tax benefits (excluding interest and penalties) was as follows:


December 31,	2015			2014			2013
Balance at beginning of year	$	35		$	63		$	66
Additions for tax positions of the current year		2			2			2
Additions for tax positions of prior years		15			5			11
Reductions for tax positions of prior years		(2	)		(4	)		(2	)
Settlements with tax authorities		(2	)		(29	)		(8	)
Expiration of the statute of limitations		(1	)		-			(2	)
Foreign currency translation		(4	)		(2	)		(4	)
Balance at end of year	$	43		$	35		$	63

For all periods presented, a portion of the balance at end of year pertains to state tax liabilities, which are presented before any offset for federal tax benefits. The effect of unrecognized tax benefits, if recorded, that would impact the annual effective tax rate for 2015, 2014, and 2013 would be approximately 12%, 4%, and (1)%, respectively, of pretax book income (loss). Alcoa does not anticipate that changes in its unrecognized tax benefits will have a material impact on the Statement of Consolidated Operations during 2016 (see Other Matters in Note N for a matter for which no reserve has been recognized).

It is Alcoa’s policy to recognize interest and penalties related to income taxes as a component of the Provision for income taxes on the accompanying Statement of Consolidated Operations. In 2015, 2014, and 2013, Alcoa recognized $8, $1, and $2, respectively, in interest and penalties. Due to the expiration of the statute of limitations, settlements with tax authorities, and refunded overpayments, Alcoa also recognized interest income of $2, $5, and $12 in 2015, 2014, and 2013, respectively. As of December 31, 2015 and 2014, the amount accrued for the payment of interest and penalties was $9.