Income Taxes

During 2014, the Company recognized income tax expense of $26, primarily as a result of income from certain foreign operations. Losses in the United States and certain foreign jurisdictions had no impact on income tax expense as no tax benefit was recognized due to these jurisdictions being in a full valuation allowance position.

During 2013, the Company recognized income tax expense of $349, primarily as a result of the recording of a valuation allowance against its deferred tax assets in the U.S. Subsequent to the release of the valuation allowance in 2012, the Company executed the refinancing transactions in early 2013, which resulted in higher annual interest expense, and reached an agreement with a foreign tax authority to change certain intercompany agreements that will reduce future income. In addition, certain U.S. businesses experienced significant declines in the fourth quarter of 2013 as a result of sustained overcapacity in the epoxy resins market and increased competition from Asian exports. As a result of these events, the Company was forecasting to be in a three year cumulative loss position in 2014, which represented significant negative evidence to merit the establishment of a valuation allowance against all of the Company’s net U.S. federal and state deferred income tax assets.

Income tax expense (benefit) detail for the Company for the years ended December 31, 2014, 2013 and 2012 is as follows:



	2014			2013			2012
Current:
State and local	$	2		$	3		$	(2	)
Foreign	26			24			12
Total current	28			27			10
Deferred:
Federal	1			332			(365		)
State and local	(1		)	10			(8		)
Foreign	(2		)	(20		)	(21		)
Total deferred	(2		)	322			(394		)
Income tax expense (benefit)	$	26		$	349		$	(384	)

A reconciliation of the Company’s combined differences between income taxes computed at the federal statutory tax rate of 35% and provisions for income taxes for the years ended December 31, 2014, 2013 and 2012 is as follows:



	2014			2013			2012
Income tax benefit computed at federal statutory tax rate	$	(50	)	$	(106	)	$	(20	)
State tax provision, net of federal benefits	1			1			—
Foreign tax rate differential	3			16			7
Foreign source income (loss) subject to U.S. taxation	20			(36		)	(6		)
Goodwill impairment	—			18			—
Losses and other expenses (income) not deductible for tax	1			1			(14		)
Increase (decrease) in the taxes due to changes in valuation allowance	46			454			(321		)
Additional tax expense (benefit) on foreign unrepatriated earnings	8			22			(30		)
Additional (benefit) expense for uncertain tax positions	(3		)	42			—
Tax recognized in other comprehensive income	—			(32		)	—
Changes in enacted tax laws and tax rates	—			(31		)	—
Income tax expense (benefit)	$	26		$	349		$	(384	)

In January 2013, the American Taxpayer Relief Act of 2012 (the “Act”) was signed into law. The Act retroactively reinstated and extended the controlled foreign corporation look-through rule, which provides for the exclusion of certain foreign earnings from U.S. federal taxation from January 1, 2012 through December 31, 2013. The impact of the Act has been accounted for in the period of enactment. As a result, the Company recognized a tax benefit of $29 during the year ended December 31, 2013.

In 2013, the Company reached a settlement agreement with tax authorities in a foreign jurisdiction as a result of negotiations related to various intercompany transactions. As a result, the Company released approximately $36 of unrecognized tax benefits during the year ended December 31, 2013. The tax benefit from the release was offset by an increase in the valuation allowance in this foreign jurisdiction. Consequently, as a result of the settlement in 2013, the Company reversed a domestic deferred tax asset related to these various intercompany transactions that resulted in a tax expense of approximately $54 during the year ended December 31, 2013.

The domestic and foreign components of the Company’s loss before income taxes for the years ended December 31, 2014, 2013 and 2012 is as follows:



	2014			2013			2012
Domestic	$	(183	)	$	(28	)	$	64
Foreign	41			(274		)	(121		)
Total	$	(142	)	$	(302	)	$	(57	)

The tax effects of significant temporary differences and net operating loss and credit carryforwards, which comprise the Company’s deferred tax assets and liabilities at December 31, 2014 and 2013 is as follows:



	2014			2013
Assets:
Non-pension post-employment	$	8		$	9
Accrued and other expenses	91			74
Property, plant and equipment	3			2
Loss and credit carryforwards	647			615
Intangibles	8			9
Pension and postretirement benefit liabilities	58			39
Gross deferred tax assets	815			748
Valuation allowance	(588		)	(518		)
Net deferred tax asset	227			230
Liabilities:
Property, plant and equipment	(119		)	(125		)
Pension and postretirement benefit assets	—			(5		)
Unrepatriated earnings of foreign subsidiaries	(73		)	(65		)
Intangible assets	(25		)	(28		)
Gross deferred tax liabilities	(217		)	(223		)
Net deferred tax asset	$	10		$	7

The following table summarizes the presentation of the Company’s net deferred tax asset in the Consolidated Balance Sheets at December 31, 2014 and 2013:



	2014			2013
Assets:
Current deferred income taxes (Other current assets)	$	11		$	7
Long-term deferred income taxes	18			21
Liabilities:
Long-term deferred income taxes	(19		)	(21		)
Net deferred tax asset	$	10		$	7

Hexion LLC, which is not a member of the registrant, and its eligible subsidiaries file a consolidated U.S. Federal income tax return. Since Hexion LLC is the Company's parent, the Company can utilize Hexion LLC's tax attributes or vice versa. The Company accounts for Hexion LLC under the separate return method and, therefore, cumulative income at Hexion LLC has reduced the amount of net operating loss carryforwards available to the Company by $27, which has not been reflected in the deferred tax asset above related to net operating loss carryforwards.

As of December 31, 2014, the Company had a $588 valuation allowance for a portion of its net deferred tax assets that management believes, more likely than not, will not be realized. The Company’s deferred tax assets include federal, state and foreign net operating loss carryforwards. The federal net operating loss carryforwards available are $999, which is reduced by the cumulative income from Hexion LLC, as described above. The federal net operating loss carryforwards expire beginning in 2026. The Company’s deferred assets also include minimum tax credits of $2, which are available indefinitely. A full valuation allowance has been provided against these items. The Company has provided a full valuation allowance against its state deferred tax assets, primarily related to state net operating loss carryforwards of $63. A valuation allowance of $154 has been provided against a portion of foreign net operating loss carryforwards, primarily in Germany and the Netherlands.

As of December 31, 2014, the Company had undistributed earnings of certain foreign subsidiaries of $433, on which deferred taxes have not been provided because these earnings are permanently invested outside of the United States. It is not practical to estimate the amount of the deferred tax liability on these undistributed earnings.

The following table summarizes the changes in the valuation allowance for the years ended December 31, 2014, 2013 and 2012:



	Balance at Beginning of Period		Changes in Related Gross Deferred Tax Assets/Liabilities			Charge/(Release)			Balance at End of Period
Valuation allowance on Deferred tax assets:
Year ended December 31, 2012	$	432	$	11		$	(321	)	$	122
Year ended December 31, 2013	122		(58		)	454			518
Year ended December 31, 2014	518		24			46			588

Examination of Tax Returns

The Company conducts business globally and, as a result, certain of its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business, the Company is subject to examinations by taxing authorities throughout the world, including major jurisdictions such as Brazil, Canada, the Czech Republic, France, Germany, Italy, South Korea, Netherlands and the United States.

The Company is no longer subject to U.S. federal examinations for years before December 31, 2010; however, certain state and foreign tax returns are under examination by various regulatory authorities.

The Company continuously reviews issues that are raised from ongoing examinations and open tax years to evaluate the adequacy of its liabilities. As the various taxing authorities continue with their audit/examination programs, the Company will adjust its reserves accordingly to reflect these settlements.

Unrecognized Tax Benefits

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:



	2014			2013
Balance at beginning of year	$	70		$	92
Additions based on tax positions related to the current year	7			6
Additions for tax positions of prior years	2			8
Reductions for tax positions of prior years	(7		)	(38		)
Settlements	(1		)	—
Foreign currency translation	(5		)	2
Balance at end of year	$	66		$	70

During the year ended December 31, 2014, the Company decreased the amount of its unrecognized tax benefits, including its accrual for interest and penalties, by $1, primarily as a result of a release of unrecognized tax benefits from negotiations with foreign jurisdictions offset by increases in the unrecognized tax benefit for various intercompany transactions. During the years ended December 31, 2014, 2013 and 2012, the Company recognized approximately $3, $6 and $(2), respectively, in interest and penalties. The Company had approximately $34 and $31 accrued for the payment of interest and penalties at December 31, 2014 and 2013, respectively.

$66 of unrecognized tax benefits, if recognized, would affect the effective tax rate; however, a portion of the unrecognized tax benefit would be in the form of a net operating loss carryforward, which would be subject to a full valuation allowance. The Company anticipates recognizing less than $1 of the total amount of unrecognized tax benefits within the next 12 months as a result of negotiations with foreign jurisdictions and completion of audit examinations.