Income Taxes

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



For the Years Ended December 31,
(In millions of dollars)	2016		2015		2014
Income before income taxes:
U.S.	$	725	$	702	$	313
Other	1,755		1,605		1,744
	$	2,480	$	2,307	$	2,057

The expense for income taxes is comprised of:
Income taxes:
Current–
U.S. Federal	$	208	$	90	$	80
Other national governments	366		385		369
U.S. state and local	43		52		26
	617		527		475
Deferred–
U.S. Federal	26		125		27
Other national governments	32		15		62
U.S. state and local	10		4		22
	68		144		111
Total income taxes	$	685	$	671	$	586

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



December 31,
(In millions of dollars)	2016		2015
Deferred tax assets:
Accrued expenses not currently deductible	$	582	$	586
Differences related to non-U.S. operations ^(a)	127		120
Accrued U.S. retirement benefits	629		630
Net operating losses ^(b)	56		70
Income currently recognized for tax	71		70
Foreign tax credit carryforwards	—		20
Other	50		49
	$	1,515	$	1,545



Deferred tax liabilities:
Differences related to non-U.S. operations	$	217	$	176
Depreciation and amortization	377		368
Accrued retirement & postretirement benefits - non-U.S. operations	10		94
Other	14		6
	$	618	$	644


(a)	Net of valuation allowances of $3 million in 2016 and $9 million in 2015.


(b)	Net of valuation allowances of $17 million in 2016 and $19 million in 2015.



December 31,
(In millions of dollars)	2016		2015
Balance sheet classifications:
Deferred tax assets	$	1,097	$	1,138
Other liabilities	$	200	$	237

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, 2016, the Company estimates, amounted to approximately $4.4 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,	2016		2015		2014
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	1.5		1.6		1.7
Differences related to non-U.S. operations	(9.2	)	(8.0	)	(7.5	)
Other	0.3		0.5		(0.7	)
Effective tax rate	27.6	%	29.1	%	28.5	%

The Company’s consolidated effective tax rate was 27.6%, 29.1% and 28.5% in 2016, 2015 and 2014, 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 net decreases of $8 million and $69 million in 2016 and 2015, respectively, and an increase of $15 million in 2014. During the respective years, adjustments of the beginning of the year balances of valuation allowances decreased income tax expense by $7 million, $14 million and $9 million in 2016, 2015 and 2014, 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 77% of the Company’s net operating loss carryforwards expire from 2017 through 2036, and others are unlimited. The potential tax benefit from net operating loss carryforwards at the end of 2016 comprised federal, state and local, and non-U.S. tax benefits of $7 million, $48 million and $31 million, respectively, before reduction for valuation allowances.

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. The Company 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, 2016, 2015 and 2014:



(In millions of dollars)	2016			2015			2014
Balance at January 1,	$	74		$	97		$	128
Additions, based on tax positions related to current year	2			3			13
Additions for tax positions of prior years	6			22			3
Reductions for tax positions of prior years	(6		)	(10		)	(29		)
Settlements	(7		)	(20		)	(4		)
Lapses in statutes of limitation	(4		)	(18		)	(14		)
Balance at December 31,	$	65		$	74		$	97

Of the total unrecognized tax benefits at December 31, 2016, 2015 and 2014, $53 million, $53 million and $51 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, 2016, 2015 and 2014, before any applicable federal benefit, was $11 million, $8 million and $7 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, 2016, 2015 and 2014, $0 million, $1 million and $2 million, respectively, included in the table above, relates to Putnam and Kroll positions included in consolidated Company tax returns.

The Company is routinely examined by tax authorities in the jurisdictions in which it has significant operations. In the US 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 2015 tax return and performing a pre-filing review of 2016. During 2016 the Company settled its federal tax audit with the IRS for the year 2014. In 2015, the Company settled its federal tax audit for the year 2013, and in 2014 settled the year 2012.

New York State and New York City have examinations underway for various entities covering the years 2007 through 2014. During 2016, California initiated and concluded an audit of years 2013 and 2014. Outside the United States, there are ongoing examinations in Germany for the years 2009 through 2012 and in France for the years 2013 and 2014. France closed examinations of years 2011 and 2012 in 2016. Canada closed its examination of year 2012 in 2016 and commenced examinations for years 2013 and 2014. The United Kingdom closed its 2011 and 2012 examination in 2016 and commenced an examination of year 2014. 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 $7 million within the next twelve months due to the settlement of audits and the expiration of statutes of limitation.