Note 13 – Income Tax Provision

The provision for income taxes consisted of the following:

	Years ended March 31,
	2017			2016			2015
Current
Federal	$	136		$	73		$	(25	)
State		2			(33	)		(15	)
Foreign		7			9			9
Total		145			49			(31	)

Deferred
Federal		(9	)		420			644
State		5			111			117
Foreign		1			-			(1	)
Total		(3	)		531			760
Provision for income taxes	$	142		$	580		$	729

A reconciliation between the U.S. federal statutory tax rate and the effective tax rate is as follows:

	Years ended March 31,
	2017			2016			2015
Provision for income taxes at U.S. federal statutory tax rate		35.0	%		35.0	%		35.0	%
State and local taxes (net of federal tax benefit)		3.6	%		3.2	%		3.2	%
Other, net		(3.9	)%		0.2	%		(0.3	)%
Effective tax rate		34.7	%		38.4	%		37.9	%

The amounts in Other, net in the table above include benefits from fuel cell credits for fiscal 2017 and 2016, federal plug-in and electric vehicle credits for fiscal 2017, 2016, and 2015, and adjustments for the differences between the income tax accrued in the prior year as compared with the actual liability on the income tax returns as filed.

Note 13 – Income Tax Provision (Continued)

Our net deferred income tax liability consisted of the following deferred tax liabilities and assets:

	March 31,
	2017			2016
Liabilities:
Lease transactions	$	7,647		$	8,579
State taxes, net of federal tax benefit		640			642
Mark-to-market of investments in marketable securities and derivatives		267			316
Other		383			344
Deferred tax liabilities	$	8,937		$	9,881

Assets:
Provision for credit and residual value losses		593			431
Deferred costs and fees		306			292
Net operating loss and tax credit carryforwards		67			1,097
Other		66			67
Deferred tax assets		1,032			1,887
Valuation allowance		(21	)		(22	)
Net deferred tax assets	$	1,011		$	1,865
Net deferred income tax liability¹	$	7,926		$	8,016

¹ Balance includes deferred tax liabilities attributable to unrealized gains or losses included in accumulated other comprehensive income or loss, net of $15 million and $102 million at March 31, 2017 and 2016, respectively. The change in this deferred liability is not included in total deferred tax expense.

We have no deferred tax assets related to cumulative federal net operating loss carryforwards at March 31, 2017, compared to deferred tax assets related to our cumulative federal net operating loss carryforwards of $912 million available at March 31, 2016. The federal net operating loss carryforwards were utilized based on our determination of taxable income for the year ended March 31, 2017.

We have deferred tax assets for state tax net operating loss carryforwards of $59 million and $67 million at March 31, 2017 and 2016, respectively. The state tax net operating loss carryforwards will expire beginning in fiscal 2018 through fiscal 2036. We have no deferred tax assets for federal and state alternative fuel vehicle credits at March 31, 2017, compared to deferred tax assets for federal and state alternative fuel vehicle credits of $99 million at March 31, 2016.

The deferred tax assets related to state tax net operating loss and capital loss carryforwards are reduced by a valuation allowance of $21 million at March 31, 2017. The deferred tax assets related to state tax net operating loss carryforwards and state alternative minimum tax credits were reduced by a valuation allowance of $22 million at March 31, 2016. The determination of the valuation allowance is based on management’s estimate of future taxable income during the respective carryforward periods. Apart from the valuation allowance, we believe that the remaining deferred tax assets will be realized in full.

On October 1, 2015, TMCC sold its commercial finance business to TICF. Pursuant to the sale agreement with TICF, TMCC recognized a taxable gain that resulted in current federal and state income tax expense of $89 million in fiscal 2016.

Note 13 – Income Tax Provision (Continued)

We have made an assertion of permanent reinvestment of earnings from our foreign subsidiary; as a result, U.S. taxes have not been provided for unremitted earnings of our foreign subsidiary. At March 31, 2017 and 2016, these unremitted earnings totaled $220 million and $208 million, respectively. Determination of the amount of the deferred tax liability is not practicable, and accordingly no estimate of the unrecorded deferred tax liability is provided.

Although there are no foreseeable events causing repatriation of earnings, possible examples may include but are not limited to parent company capital needs or exiting the business in the foreign country.

Our share of the income tax payable or receivable in those states where we filed consolidated or combined returns with TMNA and its subsidiaries was not significant at March 31, 2017 and 2016, respectively. Additionally, our federal and state income tax payable or receivable from TMCC affiliated companies, including TFSIC, Toyota Financial Savings Bank (“TFSB”), and Toyota Financial Services Securities USA Corporation, was not significant at March 31, 2017 and 2016, respectively.

The guidance for the accounting and reporting for income taxes requires us to assess tax positions in cases where the interpretation of the tax law may be uncertain. Unrecognized tax benefits were not significant as of March 31, 2017, 2016 and 2015. We do not have any positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase or decrease within 12 months.

We accrue interest, if applicable, related to uncertain income tax positions in interest expense. Statutory penalties, if applicable, accrued with respect to uncertain income tax positions are recognized as an addition to the income tax liability. For each of fiscal 2017, 2016, and 2015, accrued interest was not significant and no penalties were accrued.

Tax-related Contingencies

As of March 31, 2017, we remain under IRS examination for fiscal 2017 and 2016. The IRS examination for fiscal 2015 was concluded in the second quarter of fiscal 2016.