The components of International Paper’s earnings from continuing operations before income taxes and equity earnings by taxing jurisdiction were as follows:



In millions	2017		2016		2015
Earnings (loss)
U.S.	$	297	$	411	$	1,013
Non-U.S.	551		384		119
Earnings (loss) from continuing operations before income taxes and equity earnings	$	848	$	795	$	1,132

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act ("the Tax Act.") The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to, (1) reducing the U.S. federal corporate tax rate from 35% to 21%; (2) requiring companies to pay a one-time deemed repatriation transition tax (the “Transition Tax”) on certain earnings of foreign subsidiaries; (3) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries; (4) requiring a current inclusion in U.S. federal taxable income of certain earnings of controlled foreign corporations; (5) eliminating the corporate alternative minimum tax (“AMT”) and changing how AMT credits can be realized; (6) capital expensing; (7) eliminating the deduction on U.S. manufacturing activities; and (8) creating new limitations on deductible interest expense and executive compensation.

The Securities Exchange Commission staff issued Staff Accounting Bulletin (“SAB”) 118 which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act 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 Tax 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 Tax 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 Tax Act.

In connection with our initial analysis of the impact of the Tax Act, we have recorded a provisional net tax benefit of $1.22 billion in the period ending December 31, 2017. The net tax benefit primarily consists of a net tax benefit for the re-measurement of U.S. deferred taxes of $1.454 billion and an expense for the Transition Tax of $231 million. For various reasons that are discussed more fully below, we have not completed our accounting for the income tax effects of the Tax Act.

Our accounting for the following elements of the Tax Act is incomplete. However, we were able to make reasonable estimates of those elements and, therefore, recorded provisional adjustments as follows:

Reduction of U.S. federal corporate tax rate: The Tax Act reduces the corporate tax rate to 21%, effective January 1, 2018. For certain of our deferred tax assets and liabilities, we have recorded a provisional net decrease of $1.451 billion with a corresponding adjustment to deferred income tax benefit in the same amount for the year ended December 31, 2017. While we are able to make a reasonable estimate of the impact of the reduction in the corporate rate, it may be affected by other analysis related to the Tax Act, including but not limited to, the state tax effect of adjustments made to federal temporary differences.

Deemed Repatriation Transition Tax: This is a tax on previously untaxed accumulated and current earnings and profits (“E&P”) of foreign subsidiaries. To determine the amount of the transition tax, we must determine, in addition to other factors, the amount of post-1986 E&P of the relevant subsidiaries, as well as the amount of non-U.S. income taxes paid on such earnings. We are able to make a reasonable estimate of the Transition Tax and recorded a provisional Transition Tax obligation of $231 million. The provisional amount of current tax liability related to the Transition Tax recorded in Other accrued liabilities is $17 million. However, we are continuing to gather additional information, which may result in our ability to more precisely compute the amount of the Transition Tax.

Valuation Allowances: The Company has assessed whether its U.S. state and local income tax valuation allowance analysis is affected by various aspects of the Tax Act (e.g. deemed repatriation of foreign income, acceleration of cost recovery). Since, as discussed herein, the Company has recorded provisional amounts related to elements of the Tax Act, any corresponding determination of the need for or change in a valuation allowance is also provisional. For certain of our state deferred tax assets, we have recorded a net $3 million provisional decrease in the recorded valuation allowance with a corresponding adjustment to deferred income tax benefit in the same amount for the year ended December 31, 2017. While we are able to make a reasonable estimate of the impact of the Tax Act on state attributes, the resolution of, or changes from, other factors noted herein may result in changes in our recorded valuation allowance.

The Tax Act may impact decisions surrounding the Company’s permanent reinvestment assertions related to its foreign investments and could have an impact on the Company’s accounting for untaxed outside basis differences. We previously considered the earnings in our non-U.S. subsidiaries to be permanently reinvested, and, accordingly deferred income taxes were not provided for such basis differences which totaled approximately $5.9 billion at December 31, 2016. While the transition tax resulted in a reduction in these basis differences, an actual repatriation from our non-U.S. subsidiaries could still be subject to additional taxes, including, but not limited to, foreign withholding taxes and U.S. state income taxes. In light of the Tax Act, the Company is evaluating its global cash management and non-U.S. repatriation strategy but we have yet to determine whether we plan to change our prior assertion. Accordingly, we have not recorded any deferred taxes attributable to our investments in our non-U.S. subsidiaries.

These estimates may change materially due to, among other things, further clarification of existing guidance that may be issued by U.S. taxing authorities or regulatory bodies and/or changes in interpretations and assumptions we have preliminarily made. We will continue to analyze the Tax Act to finalize its financial statement impact, including the mandatory deemed repatriation of foreign earnings, re-measurement of deferred taxes and all other provisions of the legislation and will record the effects of any changes to provisional amounts in the period we can complete our analysis or are first able to make a reasonable estimate, but no later than December 2018.

The provision (benefit) for income taxes from continuing operations (excluding noncontrolling interests) by taxing jurisdiction was as follows:



In millions	2017			2016			2015
Current tax provision (benefit)
U.S. federal	$	(73	)	$	(7	)	$	35
U.S. state and local	(23		)	(12		)	3
Non-U.S.	112			76			111
	$	16		$	57		$	149
Deferred tax provision (benefit)
U.S. federal	$	(1,150	)	$	134		$	306
U.S. state and local	9			27			32
Non-U.S.	40			(25		)	(70		)
	$	(1,101	)	$	136		$	268
Income tax provision (benefit)	$	(1,085	)	$	193		$	417

The Company’s deferred income tax provision (benefit) includes a $1.459 billion benefit, a $18 million provision and a $3 million provision for 2017, 2016 and 2015, respectively, for the effect of various changes in non-U.S. and U.S. federal and state tax rates.

International Paper made income tax payments, net of refunds, of $7 million, $90 million and $149 million in 2017, 2016 and 2015, respectively.

A reconciliation of income tax expense using the statutory U.S. income tax rate compared with the actual income tax provision follows:



In millions	2017			2016			2015
Earnings (loss) from continuing operations before income taxes and equity earnings	$	848		$	795		$	1,132
Statutory U.S. income tax rate	35		%	35		%	35		%
Tax expense (benefit) using statutory U.S. income tax rate	297			278			396
State and local income taxes	(7		)	8			20
Tax rate and permanent differences on non-U.S. earnings	(36		)	(26		)	(44		)
Net U.S. tax on non-U.S. dividends	44			21			12
Tax expense (benefit) on manufacturing activities	23			(10		)	(12		)
Non-deductible business expenses	7			9			8
Non-deductible impairments	—			—			109
Sale of non-strategic assets	—			12			(61		)
Tax audits	—			(14		)	—
U.S. federal tax rate change	(1,451		)	—			—
Foreign tax credits	(96		)	(11		)	—
Subsidiary liquidation	—			(63		)	—
Deemed repatriation, net of foreign tax credits	231			—			—
General business and other tax credits	(86		)	(15		)	(15		)
Other, net	(11		)	4			4
Income tax provision (benefit)	$	(1,085	)	$	193		$	417
Effective income tax rate	(128		)%	24		%	37		%

The tax effects of significant temporary differences, representing deferred income tax assets and liabilities at December 31, 2017 and 2016, were as follows:



In millions	2017			2016
Deferred income tax assets:
Postretirement benefit accruals	$	102		$	165
Pension obligations	516			1,344
Alternative minimum and other tax credits	416			270
Net operating and capital loss carryforwards	665			662
Compensation reserves	174			257
Other	139			251
Gross deferred income tax assets	2,012			2,949
Less: valuation allowance (a)	(429		)	(403		)
Net deferred income tax asset	$	1,583		$	2,546
Deferred income tax liabilities:
Intangibles	$	(139	)	$	(231	)
Plants, properties and equipment	(2,000		)	(2,828		)
Forestlands, related installment sales, and investment in subsidiary	(1,454		)	(2,260		)
Gross deferred income tax liabilities	$	(3,593	)	$	(5,319	)
Net deferred income tax liability	$	(2,010	)	$	(2,773	)

(a) The net change in the total valuation allowance for the years ended December 31, 2017 and 2016 was an increase of $26 million and a decrease of $27 million, respectively.

Deferred income tax assets and liabilities are recorded in the accompanying consolidated balance sheet under the captions Deferred charges and other assets and Deferred income taxes. There was a decrease in deferred income tax assets principally relating to the U.S. tax rate change, the impact of changes in qualified pension liabilities, and the utilization of tax credits and net operating loss carryforwards. Deferred tax liabilities decreased primarily due to the U.S. tax rate change offset by tax greater than book depreciation. Of the $1.5 billion forestlands, related installment sales, and investment in subsidiary deferred tax liability, $884 million is attributable to an investment in subsidiary and relates to a 2006 International Paper installment sale of forestlands and $538 million is attributable to a 2007 Temple-Inland installment sale of forestlands (see Note 12).

A reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended December 31, 2017, 2016 and 2015 is as follows:



In millions	2017			2016			2015
Balance at January 1	$	(98	)	$	(150	)	$	(158	)
(Additions) reductions based on tax positions related to current year	(54		)	(4		)	(6		)
Additions for tax positions of prior years	(40		)	(3		)	(6		)
Reductions for tax positions of prior years	4			33			7
Settlements	6			19			2
Expiration of statutes of limitations	1			5			4
Currency translation adjustment	(7		)	2			7
Balance at December 31	$	(188	)	$	(98	)	$	(150	)

If the Company were to prevail on the unrecognized tax benefits recorded, substantially all of the balances at December 31, 2017, 2016 and 2015 would benefit the effective tax rate.

The Company accrues interest on unrecognized tax benefits as a component of interest expense. Penalties, if incurred, are recognized as a component of income tax expense. The Company had approximately $17 million and $22 million accrued for the payment of estimated interest and penalties associated with unrecognized tax benefits at December 31, 2017 and 2016, respectively.

The major jurisdictions where the Company files income tax returns are the United States, Brazil, France, Poland and Russia. Generally, tax years 2006 through 2016 remain open and subject to examination by the relevant tax authorities. The Company is typically engaged in various tax examinations at any given time, both in the United States and overseas. Pending audit settlements and the expiration of statute of limitations could reduce the uncertain tax positions by $5 million during the next twelve months. While the Company believes that it is adequately accrued for possible audit adjustments, the final resolution of these examinations cannot be determined at this time and could result in final settlements that differ from current estimates.

International Paper uses the flow-through method to account for investment tax credits earned on eligible open-loop biomass facilities and combined heat and power system expenditures. Under this method, the investment tax credits are recognized as a reduction to income tax expense in the year they are earned rather than a reduction in the asset basis. The Company recorded a tax benefit of $68 million during 2017 related to Investment Tax Credits earned in tax years 2013-2017.

The following details the scheduled expiration dates of the Company’s net operating loss and income tax credit carryforwards:



In millions	2018 Through 2027		2028 Through 2037		Indefinite		Total
U.S. federal and non-U.S. NOLs	$	65	$	2	$	432	$	499
State taxing jurisdiction NOLs	147		68		—		215
U.S. federal, non- U.S. and state tax credit carryforwards	199		18		269		486
U.S. federal and state capital loss carryforwards	2		—		—		2
Total	$	413	$	88	$	701	$	1,202