Income Taxes

For financial reporting purposes, income before income taxes includes the following components:



For the Years Ended December 31,
(In millions of dollars)	2015		2014		2013
Income before income taxes:
U.S.	$	702	$	313	$	407
Other	1,605		1,744		1,566
	$	2,307	$	2,057	$	1,973

The expense for income taxes is comprised of:
Income taxes:
Current–
U.S. Federal	$	90	$	80	$	102
Other national governments	385		369		264
U.S. state and local	52		26		45
	527		475		411
Deferred–
U.S. Federal	125		27		12
Other national governments	15		62		149
U.S. state and local	4		22		22
	144		111		183
Total income taxes	$	671	$	586	$	594

The significant components of deferred income tax assets and liabilities and their balance sheet classifications are as follows:



December 31,
(In millions of dollars)	2015		2014
Deferred tax assets:
Accrued expenses not currently deductible	$	586	$	572
Differences related to non-U.S. operations ^(a)	120		119
Accrued retirement benefits U.S.	630		638
Net operating losses ^(b)	70		57
Income currently recognized for tax	70		75
Foreign tax credit carryforwards	20		109
Other	49		84
	$	1,545	$	1,654



Deferred tax liabilities:
Differences related to non-U.S. operations	$	176	$	131
Depreciation and amortization	368		307
Accrued retirement & postretirement benefits - non-U.S. operations	94		41
Other	6		5
	$	644	$	484


(a)	Net of valuation allowances of $9 million in 2015 and $15 million in 2014.


(b)	Net of valuation allowances of $19 million in 2015 and $82 million in 2014.



December 31,
(In millions of dollars)	2015		2014
Balance sheet classifications:
Deferred tax assets	$	1,138	$	1,358
Other liabilities	$	237	$	188

U.S. Federal income taxes are not provided on the excess of the amount for financial reporting over the tax basis of investments in foreign subsidiaries that are essentially permanent in duration, which at December 31, 2015, the Company estimates, amounted to approximately $3.4 billion. The determination of the unrecognized deferred tax liability with respect to these investments is not practicable.

A reconciliation from the U.S. Federal statutory income tax rate to the Company’s effective income tax rate is shown below:



For the Years Ended December 31,	2015		2014		2013
U.S. Federal statutory rate	35.0	%	35.0	%	35.0	%
U.S. state and local income taxes—net of U.S. Federal income tax benefit	1.6		1.7		2.1
Differences related to non-U.S. operations	(8.0	)	(7.5	)	(6.0	)
Other	0.5		(0.7	)	(1.0	)
Effective tax rate	29.1	%	28.5	%	30.1	%

The Company’s consolidated tax rate was 29.1%, 28.5% and 30.1% in 2015, 2014 and 2013, respectively. The tax rate in each year reflects foreign operations, which are generally taxed at rates lower than the U.S. statutory tax rate.

Valuation allowances had a net decrease of $69 million in 2015, and net increases of $15 million and $10 million in 2014 and 2013, respectively. During the respective years, adjustments of the beginning of the year balances of valuation allowances decreased income tax expense by $14 million, $9 million and $3 million in 2015, 2014 and 2013, respectively. The decrease in the valuation allowance in 2015 also reflects the write down of a deferred tax asset along with its full valuation allowance because the Company cannot utilize a net operating loss. Approximately 80% of the Company’s net operating loss carryforwards expire from 2016 through 2035, and others are unlimited. The potential tax benefit from net operating loss carryforwards at the end of 2015 comprised federal, state and local, and non-U.S. tax benefits of $10 million, $55 million and $36 million, respectively, before reduction for valuation allowances. Foreign tax credit carryforwards expire in 2021 and 2022.

The realization of deferred tax assets depends on generating future taxable income during the periods in which the tax benefits are deductible or creditable. Tax liabilities are determined and assessed jurisdictionally by legal entity or filing group. Certain taxing jurisdictions allow or require combined or consolidated tax filings. The Company assessed the realizability of its deferred tax assets and considered all available evidence, including the existence of a recent history of losses, placing particular weight on evidence that could be objectively verified. A valuation allowance was recorded to reduce deferred tax assets to the amount that the Company believes is more likely than not to be realized.

Following is a reconciliation of the Company’s total gross unrecognized tax benefits for the years ended December 31, 2015, 2014 and 2013:



(In millions of dollars)	2015			2014			2013
Balance at January 1,	$	97		$	128		$	117
Additions, based on tax positions related to current year	3			13			16
Additions for tax positions of prior years	22			3			35
Reductions for tax positions of prior years	(10		)	(29		)	(7		)
Settlements	(20		)	(4		)	(3		)
Lapses in statutes of limitation	(18		)	(14		)	(30		)
Balance at December 31,	$	74		$	97		$	128

Of the total unrecognized tax benefits at December 31, 2015, 2014 and 2013, $53 million, $51 million and $71 million, respectively, represent the amount that, if recognized, would favorably affect the effective tax rate in any future periods. The total gross amount of accrued interest and penalties at December 31, 2015, 2014 and 2013, before any applicable federal benefit, was $8 million, $7 million and $10 million, respectively.

As discussed in Note 5, the Company has provided certain indemnities related to contingent tax liabilities as part of the disposals of Putnam and Kroll. At December 31, 2015, 2014 and 2013, $1 million, $2 million and $2 million, respectively, included in the table above, relates to Putnam and Kroll positions included in consolidated Company tax returns. Since the Company remains primarily liable to the taxing authorities for resolution of uncertain tax positions related to consolidated returns, these balances will remain as part of the Company’s consolidated liability for uncertain tax positions. Any future charges or credits related to these matters, including interest accrued, will be recorded in discontinued operations as incurred.

The Company is routinely examined by the jurisdictions in which it has significant operations. In the U.S. federal jurisdiction the Company participates in the Internal Revenue Service’s (IRS) Compliance Assurance Process (CAP), which is structured to conduct real-time compliance reviews. The IRS is currently examining the Company’s 2014 tax return and performing a pre-filing review of 2015. During 2015 the Company settled its federal tax audit with the IRS for the year 2013. In 2014, the Company settled its federal tax audit for the year 2012, and in 2013 settled the years 2007, and 2009 through 2011. The tax year 2008 was settled in a prior period. New York State and New York City have examinations underway for various entities covering the years 2007 through 2014. During 2015, Illinois completed its audit of years 2009 through 2010. Outside the United States, during calendar year 2015 examinations commenced in Germany for the years 2009 through 2012. There are ongoing examinations of certain subsidiaries in France for years 2011 to 2014, in Canada for years 2012 and 2013 and in the United Kingdom for years 2011 and 2012, as well as in other smaller jurisdictions. The Company regularly considers the likelihood of assessments in each of the taxing jurisdictions resulting from examinations. The Company has established liabilities for uncertain tax positions in relation to the potential assessments. The Company believes the resolution of tax matters will not have a material effect on the consolidated financial position of the Company, although a resolution of tax matters could have a material impact on the Company's net income or cash flows and on its effective tax rate in a particular future period. It is reasonably possible that the total amount of unrecognized tax benefits will decrease between zero and approximately $8 million within the next twelve months due to the settlement of audits and the expiration of statutes of limitation.