INCOME TAXES

The components of income before income taxes and the provision for income taxes were as follows:



(millions)	2015			2014			2013
Income before income taxes
United States	$	551		$	502		$	2,102
Foreign	222			323			504
	773			825			2,606
Income taxes
Currently payable
Federal	212			301			302
State	42			36			68
Foreign	74			103			105
	328			440			475
Deferred
Federal	(136		)	(186		)	331
State	(14		)	(14		)	(2		)
Foreign	(19		)	(54		)	(12		)
	(169		)	(254		)	317
Total income taxes	$	159		$	186		$	792

The difference between the U.S. federal statutory tax rate and the Company’s effective income tax rate was:



	2015		2014		2013
U.S. statutory income tax rate	35.0		35.0	%	35.0	%
Foreign rates varying from 35%	(9.6	)	(7.9	)	(3.5	)
State income taxes, net of federal benefit	2.3		1.7		1.7
Cost (benefit) of remitted and unremitted foreign earnings	(4.4	)	(0.1	)	(0.4	)
U.S. deduction for qualified production activities	(2.3	)	(2.8	)	(0.9	)
Statutory rate changes, deferred tax impact	(0.8	)	(0.4	)	(0.5	)
VIE deconsolidation	(2.3	)	—		—
Venezuela remeasurement	5.0		—		—
Other	(2.3	)	(2.9	)	(1.0	)
Effective income tax rate	20.6	%	22.6	%	30.4	%

As presented in the preceding table, the Company’s 2015 consolidated effective tax rate was 20.6%, as compared to 22.6% in 2014 and 30.4% in 2013.

The 2015 effective income tax rate benefited due to mark-to-market loss adjustments to the Company’s pension plans in primarily higher tax jurisdictions. This results in a greater percentage of total income being generated in lower tax jurisdictions and permanent tax differences in the U.S. having a higher percentage impact on the tax rate. In addition, the tax rate benefited from a reduction in tax related to current year remitted and unremitted earnings. The VIE deconsolidation, described in Note 5, included a $67 million non-cash non-taxable gain which positively impacted the tax rate. During 2015, the Company recorded pre-tax charges of $112 million in the Latin America operating segment due to the devaluation of the Venezuelan currency which had no associated tax benefit. As of January 2, 2016 substantially all foreign earnings were considered permanently invested. Accumulated foreign earnings of approximately $2.0 billion, primarily in Europe, were considered indefinitely reinvested. Due to the varying tax laws around the world and fluctuation in foreign exchange rates, it is not practicable to determine the unrecognized deferred tax liability on these earnings because the actual tax liability, if any, would be dependent on circumstances existing when a repatriation, sale, or liquidation occurs.

The 2014 effective income tax rate benefited due to mark-to-market loss adjustments to the Company’s pension plans in primarily higher tax jurisdictions. This results in a greater percentage of total income being generated in lower tax jurisdictions and permanent tax differences in the U.S. having a higher percentage impact on the tax rate. As of January 3, 2015, the Company recorded a deferred tax liability of $1 million related to $23 million of foreign earnings not considered indefinitely reinvested. Accumulated foreign earnings of approximately $2.2 billion, primarily in Europe, were considered indefinitely reinvested. Due to varying tax laws around the world

and fluctuations in foreign exchange rates, it is not practicable to determine the unrecognized deferred tax liability on these earnings because the actual tax liability, if any, would be dependent on circumstances existing when a repatriation, sale or liquidation occurs.

The 2013 effective income tax rate was negatively impacted by income generated from mark-to-market adjustments for the Company’s pension plans that was generally incurred in jurisdictions with tax rates higher than the effective income tax rate. As of December 28, 2013, the Company recorded a deferred tax liability of $2 million related to $24 million of foreign earnings not considered indefinitely reinvested. Accumulated foreign earnings of approximately $2.2 billion , primarily in Europe and Mexico, were considered indefinitely reinvested. Due to varying tax laws around the world and fluctuations in foreign exchange rates, it is not practicable to determine the unrecognized deferred tax liability on these earnings because the actual tax liability, if any, would be dependent on circumstances existing when a repatriation, sale or liquidation occurs.

Management monitors the Company’s ability to utilize certain future tax deductions, operating losses and tax credit carryforwards, prior to expiration. Changes resulting from management’s assessment will result in impacts to deferred tax assets and the corresponding impacts on the effective income tax rate. Valuation allowances were recorded to reduce deferred tax assets to an amount that will, more likely than not, be realized in the future. The total tax benefit of carryforwards at year-end 2015 and 2014 were $55 million and $54 million, respectively, with related valuation allowances at year-end 2015 and 2014 of $45 million and $39 million, respectively. Of the total carryforwards at year-end 2015, substantially all will expire after 2019.

The following table provides an analysis of the Company’s deferred tax assets and liabilities as of year-end 2015 and 2014. Deferred tax assets on employee benefits increased in 2015 due to lower asset returns and discount rate decreases associated with the Company’s pension and postretirement plans.



	Deferred tax assets						Deferred tax liabilities
(millions)	2015			2014			2015		2014
U.S. state income taxes	$	13		$	10		$	43	$	49
Advertising and promotion-related	15			21			—		—
Wages and payroll taxes	21			36			—		—
Inventory valuation	31			—			—		—
Employee benefits	366			305			—		—
Operating loss and credit carryforwards	55			54			—		—
Hedging transactions	43			48			—		—
Depreciation and asset disposals	—			—			345		352
Trademarks and other intangibles	—			—			576		555
Deferred compensation	35			35			—		—
Stock options	42			38			—		—
Unremitted foreign earnings	—			—			—		1
Other	86			84			—		—
	707			631			964		957
Less valuation allowance	(63		)	(51		)	—		—
Total deferred taxes	$	644		$	580		$	964	$	957
Net deferred tax asset (liability)	$	(320	)	$	(377	)
Classified in balance sheet as:
Other current assets	$	227		$	184
Other current liabilities	(9		)	(10		)
Other assets	147			175
Other liabilities	(685		)	(726		)
Net deferred tax asset (liability)	$	(320	)	$	(377	)

The change in valuation allowance reducing deferred tax assets was:



(millions)	2015			2014			2013
Balance at beginning of year	$	51		$	61		$	59
Additions charged to income tax expense	23			9			17
Reductions credited to income tax expense	(7		)	(3		)	(3		)
Other (a)	—			—			(10		)
Currency translation adjustments	(4		)	(16		)	(2		)
Balance at end of year	$	63		$	51		$	61


(a)	Reduction due to the disposition of a business resulting in deferred tax asset and valuation allowance being eliminated.

Uncertain tax positions

The Company is subject to federal income taxes in the U.S. as well as various state, local, and foreign jurisdictions. The Company’s 2015 provision for U.S. federal income taxes represents approximately 50% of the Company’s consolidated income tax provision. The Company was chosen to participate in the Internal Revenue Service (IRS) Compliance Assurance Program (CAP) beginning with the 2008 tax year. As a result, with limited exceptions, the Company is no longer subject to U.S. federal examinations by the IRS for years prior to 2015. The Company is under examination for income and non-income tax filings in various state and foreign jurisdictions.

As of January 2, 2016, the Company has classified $13 million of unrecognized tax benefits as a current liability. Management’s estimate of reasonably possible changes in unrecognized tax benefits during the next twelve months is comprised of the current liability balance expected to be settled within one year, offset by approximately $8 million of projected additions related primarily to ongoing intercompany transfer pricing activity. Management is currently unaware of any issues under review that could result in significant additional payments, accruals, or other material deviation in this estimate.

Following is a reconciliation of the Company’s total gross unrecognized tax benefits as of the years ended January 2, 2016, January 3, 2015 and December 28, 2013. For the 2015 year, approximately $48 million represents the amount that, if recognized, would affect the Company’s effective income tax rate in future periods.



(millions)	2015			2014			2013
Balance at beginning of year	$	78		$	79		$	80
Tax positions related to current year:
Additions	8			7			9
Tax positions related to prior years:
Additions	9			10			17
Reductions	(12		)	(12		)	(13		)
Settlements	(10		)	(2		)	(14		)
Lapses in statutes of limitation	—			(4		)	—
Balance at end of year	$	73		$	78		$	79

For the year ended January 2, 2016, the Company paid tax-related interest totaling $3 million reducing the accrual balance to $17 million at year end. For the year ended January 3, 2015, the Company recognized an increase of $3 million of tax-related interest resulting in an accrual balance of $20 million at January 3, 2015. For the year ended December 28, 2013, the Company recognized an increase of $4 million of tax-related interest and payments of $6 million, resulting in an accrual balance of approximately $17 million accrued at December 28, 2013.