INCOME TAXES

The components of income tax expense (benefit) applicable to pretax earnings for the years ended December 31 were as follows:



(In millions)	Foreign			U.S.				Total
2016:
Current		$	650		$	234			$	884
Deferred		136			388				524
Total income tax expense		$	786		$	622			$	1,408
2015:
Current		$	1,063		$	225			$	1,288
Deferred		42			(1		)		41
Total income tax expense		$	1,105		$	224			$	1,329
2014:
Current		$	995		$	84			$	1,079
Deferred		125			336				461
Total income tax expense		$	1,120		$	420			$	1,540

The Japan income tax rate for the fiscal year 2014 was 33.3%. The rate was reduced to 30.8% for the fiscal year 2015 and reduced to 28.8% for the fiscal year 2016.

Income tax expense in the accompanying statements of earnings varies from the amount computed by applying the expected U.S. tax rate of 35% to pretax earnings. The principal reasons for the differences and the related tax effects for the years ended December 31 were as follows:



(In millions)	2016				2015				2014
Income taxes based on U.S. statutory rates		$	1,424			$	1,352			$	1,572
Utilization of foreign tax credit		(30		)		(27		)		(32		)
Nondeductible expenses		8				3				5
Other, net		6				1				(5		)
Income tax expense		$	1,408			$	1,329			$	1,540

Total income tax expense for the years ended December 31 was allocated as follows:



(In millions)	2016				2015				2014
Statements of earnings		$	1,408			$	1,329			$	1,540
Other comprehensive income (loss):
Unrealized foreign currency translation gains (losses) during period		70				16				(419		)
Unrealized gains (losses) on investment securities:
Unrealized holding gains (losses) on investment securities during period		962				(931		)		2,237
Reclassification adjustment for realized (gains) losses on investment securities included in net earnings		18				21				19
Unrealized gains (losses) on derivatives during period		1				0				(3		)
Pension liability adjustment during period		(16		)		(7		)		(31		)
Total income tax expense (benefit) related to items of other comprehensive income (loss)		1,035				(901		)		1,803
Additional paid-in capital (exercise of stock options)		(10		)		4				(7		)
Total income taxes		$	2,433			$	432			$	3,336

The income tax effects of the temporary differences that gave rise to deferred income tax assets and liabilities as of December 31 were as follows:



(In millions)	2016			2015
Deferred income tax liabilities:
Deferred policy acquisition costs		$	2,439		$	2,282
Unrealized gains on investment securities		2,636			1,684
Premiums receivable		111			139
Policy benefit reserves		1,638			1,313
Depreciation		70			61
Other		0			0
Total deferred income tax liabilities		6,894			5,479
Deferred income tax assets:
Other basis differences in investment securities		1,167			1,422
Unfunded retirement benefits		13			15
Other accrued expenses		11			7
Policy and contract claims		146			113
Foreign currency loss on Japan branch		185			208
Deferred compensation		210			181
Capital loss carryforwards		3			0
Other		103			95
Total deferred income tax assets		1,838			2,041
Net deferred income tax liability		5,056			3,438
Current income tax liability		331			902
Total income tax liability		$	5,387		$	4,340

Based upon a review of the Company's anticipated future taxable income, and including all other available evidence, both positive and negative, the Company's management has concluded that it is more likely than not that the net deferred tax assets will be realized.

Under U.S. income tax rules, only 35% of non-life operating losses can be offset against life insurance taxable income each year. For current U.S. income tax purposes, there were no unused operating loss carryforwards available to offset against future taxable income. The Company has capital loss carryforwards of $9 million available to offset capital gains which expire in 2021.

The Company files federal income tax returns in the United States and Japan as well as state or prefecture income tax returns in various jurisdictions in the two countries. The Company is currently under audit by the State of Illinois for tax years 2006-2012. There are currently no other open Federal, State, or local U.S. income tax audits. U.S. federal income tax returns for years before 2011 are no longer subject to examination. The Company is currently under a corporate income tax audit in Japan by the National Tax Agency (NTA) for tax years 2012-2015. Japan corporate income tax returns for years before 2012 are no longer subject to examination. Management believes it has established adequate tax liabilities and final resolution of all open audits is not expected to have a material impact on the Company's consolidated financial statements.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows for the years ended December 31:



(In millions)	2016			2015
Balance, beginning of year	$	264		$	309
Additions for tax positions of prior years	33			0
Reductions for tax positions of prior years	(3		)	(45		)
Balance, end of year	$	294		$	264

Included in the balance of the liability for unrecognized tax benefits at December 31, 2016, are $293 million of tax positions for which the ultimate deductibility is highly certain, but for which there is uncertainty about the timing of such deductibility, compared with $261 million at December 31, 2015. Because of the impact of deferred tax accounting, other than interest and penalties, the disallowance of the shorter deductibility period would not affect the annual effective tax rate, but would accelerate the payment of cash to the taxing authority to an earlier period. The Company has accrued approximately $1 million as of December 31, 2016, for permanent uncertainties, which if reversed would not have a material effect on the annual effective rate.

The Company recognizes accrued interest and penalties related to unrecognized tax benefits in income tax expense. We recognized approximately $13 million in interest and penalties in 2016, compared with $11 million in 2015 and 2014. The Company has accrued approximately $26 million for the payment of interest and penalties as of December 31, 2016, compared with $22 million a year ago.

As of December 31, 2016, there were no material uncertain tax positions for which the total amounts of unrecognized tax benefits will significantly increase or decrease within the next 12 months.