INCOME TAXES

12 Months Ended

Dec. 31, 2017

Note 5. Income Taxes

Income before taxes
			Years Ended December 31,
			2017		2016		2015
	U.S.	$	2,825	$	2,976	$	3,361
	Non-U.S.		4,077		3,471		3,225
		$	6,902	$	6,447	$	6,586

Tax expense (benefit)
			Years Ended December 31,
			2017		2016		2015
	Tax expense (benefit) consists of
	Current:
	U.S. Federal	$	2,061	$	869	$	786
	U.S. State		62		97		78
	Non-U.S.		787		559		560
		$	2,910	$	1,525	$	1,424
	Deferred:
	U.S. Federal	$	39	$	38	$	196
	U.S. State		132		17		49
	Non-U.S.		2,123		21		70
			2,294		76		315
		$	5,204	$	1,601	$	1,739

	Years Ended December 31,
	2017		2016		2015
The U.S. federal statutory income tax rate is reconciled to our effective income tax rate as follows:
U.S. federal statutory income tax rate	35.0	%	35.0	%	35.0	%
Taxes on non-U.S. earnings below U.S. tax rate⁽¹⁾	(12.9)		(8.0)		(8.0)
U.S. state income taxes⁽¹⁾	1.4		1.1		1.2
Manufacturing incentives	(0.7)		(0.7)		(1.5)
Employee stock ownership plan dividend tax benefit	(0.4)		(0.5)		(0.4)
Tax credits	(0.9)		(0.7)		(1.0)
Reserves for tax contingencies	1.6		1.2		0.7
Employee share-based payments	(2.9)		(2.0)		-
U.S. Tax Cuts and Jobs Act enactment	54.4		-		-
All other items—net	0.8		(0.6)		0.4
	75.4	%	24.8	%	26.4	%
(1) Net of changes in valuation allowance

The effective tax rate increased by 50.6 percentage points in 2017 compared to 2016. The increase was primarily attributable to the provisional impact of U.S. tax reform (see “The Tax Cuts and Jobs Act” further below), partially offset by increased tax benefits from foreign tax credits and for employee share-based payments. The Company’s non-U.S. effective tax rate was 71.4%, an increase of approximately 54.7 percentage points compared to 2016. The year-over-year increase in the non-U.S. effective tax rate was primarily driven by the Company’s change in assertion regarding foreign unremitted earnings, increased expense for reserves in various jurisdictions and increased withholding taxes, partially offset by higher earnings in low tax rate jurisdictions.

The effective tax rate decreased by 1.6 percentage points in 2016 compared to 2015. The decrease was primarily attributable to excess tax benefits from employee share-based payments arising from adoption of the FASB’s amended guidance related to employee share-based payment accounting, partially offset by increased tax reserves in various jurisdictions and lower tax benefits from manufacturing incentives. The Company’s non-U.S effective tax rate was 16.7%, a decrease of approximately 2.8 percentage points compared to 2015. The year-over-year decrease in the non-U.S. effective tax rate was primarily driven by higher earnings in lower tax rate jurisdictions and a decrease in the tax impact of restructuring and divestitures. The effective tax rate was lower than the U.S. federal statutory rate of 35% primarily due to overall non-U.S. earnings taxed at lower rates.

Deferred tax assets (liabilities)

The tax effects of temporary differences and tax carryforwards which give rise to future income tax benefits and payables are as follows:

	December 31,
Deferred tax assets:	2017		2016
Pension	$	-	$	411
Postretirement benefits other than pensions		177		262
Asbestos and environmental		325		471
Employee compensation and benefits		218		418
Other accruals and reserves		376		765
Net operating and capital losses		632		669
Tax credit carryforwards		510		206
Gross deferred tax assets		2,238		3,202
Valuation allowance		(663)		(621)
Total deferred tax assets	$	1,575	$	2,581

Deferred tax liabilities:
Pension……………………………………………….	$	(40)	$	-
Property, plant and equipment		(439)		(560)
Intangibles		(1,326)		(1,843)
Unremitted earnings of foreign subsidiaries		(2,151)		(43)
Other asset basis differences		(210)		(231)
Other		(67)		(43)
Total deferred tax liabilities		(4,233)		(2,720)
Net deferred tax liability	$	(2,658)	$	(139)

As discussed further below under “The Tax Cuts and Jobs Act,” the Company no longer intends to reinvest the historical earnings of its foreign subsidiaries as of December 31, 2017 and has recorded a provisional deferred tax liability mainly comprised of non-U.S. withholding taxes of approximately $2.1 billion.

Our gross deferred tax assets include $794 million related to non-U.S. operations comprised principally of net operating losses, capital loss and tax credit carryforwards (mainly in Canada, France, Germany, Luxembourg and the United Kingdom) and deductible temporary differences. We maintain a valuation allowance of $660 million against a portion of the non-U.S. gross deferred tax assets. The change in the valuation allowance resulted in increases of $4 million, $69 million and $114 million to income tax expense in 2017, 2016 and 2015. In the event we determine that we will not be able to realize our net deferred tax assets in the future, we will reduce such amounts through an increase to income tax expense in the period such determination is made. Conversely, if we determine that we will be able to realize net deferred tax assets in excess of the carrying amounts, we will decrease the recorded valuation allowance through a reduction to income tax expense in the period that such determination is made.

As of December 31, 2017, our net operating loss, capital loss and tax credit carryforwards were as follows:

			Net Operating
	Expiration		and Capital Loss		Tax Credit
Jurisdiction	Period		Carryforwards		Carryforwards
U.S. Federal	2037	$	16	$	332
U.S. State	2037		508		24
Non-U.S.	2037		607		159
Non-U.S.	Indefinite		2,211		-
		$	3,342	$	515

Many jurisdictions impose limitations on the timing and utilization of net operating loss and tax credit carryforwards. In those instances, whereby there is an expected permanent limitation on the utilization of the net operating loss or tax credit carryforward, the deferred tax asset and amount of the carryforward have been reduced.

	2017		2016		2015
Change in unrecognized tax benefits:
Balance at beginning of year	$	877	$	765	$	659
Gross increases related to current period tax positions		94		96		56
Gross increases related to prior periods tax positions		153		88		175
Gross decreases related to prior periods tax positions		(91)		(33)		(72)
Decrease related to resolutions of audits with tax authorities		(76)		(3)		(11)
Expiration of the statute of limitations for the assessment of taxes		(54)		(10)		(13)
Foreign currency translation		44		(26)		(29)
Balance at end of year	$	947	$	877	$	765

As of December 31, 2017, 2016, and 2015 there were $947 million, $877 million and $765 million of unrecognized tax benefits that if recognized would be recorded as a component of Tax expense.

The following table summarizes tax years that remain subject to examination by major tax jurisdictions as of December 31, 2017:

	Open Tax Years
	Based on Originally Filed Returns
Jurisdiction	Examination in	Examination not yet
Jurisdiction	progress	initiated
U.S. Federal	2013 - 2016	2015 - 2017
U.S. State	2011 - 2016	2012 - 2017
Australia	N/A	2016 - 2017
Canada⁽¹⁾	2012 - 2014, 2016	2015 - 2017
China	2003 - 2017	N/A
France	2012 - 2017	2006 - 2011
Germany⁽¹⁾	2008 - 2015	2016 - 2017
India	1999 - 2015	2016 - 2017
Switzerland⁽¹⁾	2012 - 2016	2017
United Kingdom	2013 - 2015	2016 - 2017

(1) Includes provincial or similar local jurisdictions, as applicable.

Based on the outcome of these examinations, or as a result of the expiration of statute of limitations for specific jurisdictions, it is reasonably possible that certain unrecognized tax benefits for tax positions taken on previously filed tax returns will materially change from those recorded as liabilities in our financial statements. In addition, the outcome of these examinations may impact the valuation of certain deferred tax assets (such as net operating losses) in future periods.

Unrecognized tax benefits for examinations in progress were $487 million, $398 million and $349 million, as of December 31, 2017, 2016, and 2015. Estimated interest and penalties related to the underpayment of income taxes are classified as a component of Tax expense in the Consolidated Statement of Operations and totaled $28 million, $18 million and $11 million for the years ended December 31, 2017, 2016, and 2015. Accrued interest and penalties were $423 million, $395 million and $336 million, as of December 31, 2017, 2016, and 2015.

The Tax Cuts and Jobs Act

On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (“Tax Act”) that instituted fundamental changes to the taxation of multinational corporations. The Tax Act includes changes to the taxation of foreign earnings by implementing a dividend exemption system, expansion of the current anti-deferral rules, a minimum tax on low-taxed foreign earnings and new measures to deter base erosion. The Tax Act also includes a permanent reduction in the corporate tax rate to 21%, repeal of the corporate alternative minimum tax, expensing of capital investment, and limitation of the deduction for interest expense. Furthermore, as part of the transition to the new tax system, a one-time transition tax is imposed on a U.S. shareholder’s historical undistributed earnings of foreign affiliates. Although the Tax Act is generally effective January 1, 2018, GAAP requires recognition of the tax effects of new legislation during the reporting period that includes the enactment date, which was December 22, 2017.

As a result of the impacts of the Tax Act, the SEC provided guidance that allows the Company to record provisional amounts for those impacts, with the requirement that the accounting be completed in a period not to exceed one year from the date of enactment. As of December 31, 2017, the Company has not completed the accounting for the tax effects of the Tax Act. Therefore, we have recorded provisional amounts for the effects of the Tax Act. The primary impacts of the Tax Act relate to the re-measurement of deferred tax assets and liabilities resulting from the change in the corporate tax rate (“Corporate Tax Rate Change”); the one-time mandatory transition tax on undistributed earnings of foreign affiliates (“Mandatory Transition Tax”); and deferred taxes in connection with a change in the Company’s intent to permanently reinvest the historical undistributed earnings of its foreign affiliates (“Undistributed Foreign Earnings”).

Corporate Tax Rate Change – For the year ended December 31, 2017, we recorded a tax benefit of approximately $235 million due to the decrease in the corporate tax rate from 35% to 21%.

At the date of enactment, the Company had a deferred tax liability for the excess of its net book value over its tax basis of its U.S. assets and liabilities that will generate future taxable income in excess of book income. Due to the Tax Act, this additional taxable income will be subject to tax at a lower corporate tax rate, consequently reducing the Company’s deferred tax liability as of the date of enactment.

Mandatory Transition Tax – For the year ended December 31, 2017, we recorded a provisional tax charge of approximately $1.9 billion due to the imposition of the mandatory transition tax (“MTT”) on the deemed repatriation of undistributed foreign earnings.

The Tax Act imposes a one-time tax on undistributed and previously untaxed post-1986 foreign earnings and profits (E&P), as determined in accordance with U.S. tax principles, of certain foreign corporations owned by U.S. shareholders. In general, we have estimated $20 billion of E&P related to our foreign affiliates that is subject to the MTT. The MTT is imposed at a rate of 15.5% to the extent of the cash and cash equivalents that are held by the foreign affiliates at certain testing dates; the remaining E&P is taxed at a rate of 8.0%. In accordance with the Tax Act, the Company will elect to pay the MTT liability over a period of eight years, with the first installment of $144 million due in 2018; the remainder of the balance is recorded in Other liabilities (noncurrent). As of December 31, 2017, the Company has recorded a provisional amount because certain information related to the computation of E&P is not readily available, some of the testing dates to determine taxable amounts have not yet occurred, and there is limited information from federal and state taxing authorities regarding the application and interpretation of the recently enacted legislation. The Company will disclose the impact to the provisional amount in the reporting period in which the accounting is completed, which will not exceed one year from the date of enactment of the Tax Act.

Undistributed Foreign Earnings – For the year ended December 31, 2017, we recorded a provisional tax charge of approximately $2.1 billion due to the Company’s intent to no longer permanently reinvest the historical undistributed earnings of its foreign affiliates.

We previously considered substantially all the historical earnings in our non-U.S. subsidiaries to be permanently reinvested and, accordingly, recorded no deferred income taxes on such earnings. As a result of the fundamental changes to the taxation of multinational corporations created by the Tax Act, the Company no longer intends to permanently reinvest the historical undistributed earnings of its foreign affiliates, which amounted to approximately $20 billion as of December 31, 2017 (including current year earnings). GAAP requires recognition of a deferred tax liability in the reporting period in which its intent to no longer permanently reinvest its historical undistributed foreign earnings is made. Although no U.S. federal taxes will be imposed on such future distributions of foreign earnings, in many cases the cash transfer will be subject to foreign withholding and other local taxes. Accordingly, at December 31, 2017 the Company has included a provisional deferred tax liability, mostly related to non-U.S. withholding taxes. The Company has recorded a provisional amount because certain information related to the computation of E&P, distributable reserves and foreign exchange gains and losses is not readily available. The Company will disclose the impact to the provisional amount in the reporting period in which the accounting is completed, which will not exceed one year from the date of enactment of the Tax Act. The provisional amount is based on the Company’s current legal ownership structure which may change in the future. Any future tax impacts resulting from changes to the legal ownership structure will not be considered changes to the provisional amount and will be recorded in the reporting period in which a plan to modify the legal structure is adopted, which may exceed one year from the date of enactment of the Tax Act.

Global Intangible Low Taxed Income – In addition to the changes described above, the Tax Act imposes a U.S. tax on global intangible low taxed income (“GILTI”) that is earned by certain foreign affiliates owned by a U.S. shareholder. The computation of GILTI is still subject to interpretation and additional clarifying guidance is expected, but is generally intended to impose tax on the earnings of a foreign corporation that are deemed to exceed a certain threshold return relative to the underlying business investment. In accordance with guidance issued by FASB, the Company has made a policy election to treat future taxes related to GILTI as a current period expense in the reporting period in which the tax is incurred.