|12 Months Ended|
Dec. 31, 2017
17. INCOME TAXES
The following is a summary of U.S. and non‑U.S. provisions for current and deferred income taxes (dollars in millions):
The following schedule reconciles the differences between the U.S. federal income taxes at the U.S. statutory rate to our provision for income taxes (dollars in millions):
We operate in many non-U.S. tax jurisdictions with no specific country earning a predominant amount of our off-shore earnings. The vast majority of these countries have income tax rates that are lower than the U.S. statutory rate. During 2017, 2016 and 2015, the average statutory rate for countries with pre-tax income was lower than the average statutory rate for countries with pre-tax losses, almost all of which had statutory rates lower than the U.S., resulting in net benefits as compared to the U.S. statutory rate of $64 million, $32 million and $2 million, respectively, reflected in the reconciliation above. In 2017, the $64 million net benefit relates primarily to our Polyurethanes business in The Netherlands, China and the U.K., as well as our Advanced Materials business in Switzerland and our Corporate function in Luxembourg. In 2016, the $32 million net benefit relates primarily to our Polyurethanes business in The Netherlands and China and our Advanced Materials business in Switzerland.
In certain non-U.S. tax jurisdictions, our U.S. GAAP functional currency is different than the local tax currency. As a result, foreign exchange gains and losses will impact our effective tax rate. For 2017, this resulted in a $15 million tax expense and for 2016, this resulted in a $5 million tax benefit. For 2015, this resulted in a $23 million tax benefit ($38 million, net of $15 million of contingent liabilities and valuation allowances).
During 2015, we declared a dividend from our non-U.S. operations to the U.S. which included bringing onshore certain U.S. foreign tax credits. The foreign tax credits brought onshore exceeded the amount needed to offset the cash tax impact of the dividend, as well as enough to allow us to carry $14 million of foreign tax credits back to a prior year and claim a refund.
The components of income (loss) from continuing operations before income taxes were as follows (dollars in millions):
Components of deferred income tax assets and liabilities were as follows (dollars in millions):
We have gross NOLs of $1,615 million in various non‑U.S. jurisdictions. While the majority of the non‑U.S. NOLs have no expiration date, $479 million have a limited life (of which $461 million are subject to a valuation allowance) and $133 million are scheduled to expire in 2018 (all of which are subject to a valuation allowance). We had no NOLs expire unused in 2017.
Included in the $1,615 million of gross non‑U.S. NOLs is $707 million attributable to our Luxembourg entities. As of December 31, 2017, due to the uncertainty surrounding the realization of the benefits of these losses, there is a valuation allowance of $144 million against these net tax‑effected NOLs of $184 million.
We evaluate deferred tax assets to determine whether it is more likely than not that they will be realized. Valuation allowances are reviewed each period on a tax jurisdiction by jurisdiction basis to analyze whether there is sufficient positive or negative evidence to support a change in judgment about the realizability of the related deferred tax assets. These conclusions require significant judgment. In evaluating the objective evidence that historical results provide, we consider the cyclicality of businesses and cumulative income or losses during the applicable period. Cumulative losses incurred over the period limits our ability to consider other subjective evidence such as our projections for the future. Our judgments regarding valuation allowances are also influenced by the costs and risks associated with any tax planning idea associated with utilizing a deferred tax asset.
During 2017, we released valuation allowances of $22 million. In Italy, we released valuation allowances of $7 million on certain net deferred assets of our Polyurethanes business. On March 1, 2017 and April 1, 2017, we de-merged the Italian legal entities containing our Polyurethanes business from our combined Italian tax group. The historical and expected continued profitability of those Polyurethanes businesses resulted in the release of the associated valuation allowance. In Luxembourg, we released valuation allowances of $15 million as a result of changes in estimated future taxable income resulting from increased intercompany receivables and, therefore, increased income in Luxembourg, our primary treasury center outside of the U.S.
During 2016, we established valuation allowances of $12 million and released valuation allowances of $19 million. In Italy we established $9 million of valuation allowances on certain net deferred tax assets as a result of the sale of our European surfactants business, and in China we established $3 million of valuation allowances as a result of the closure of our Qingdao, China plant. We released valuation allowances of $12 million in Spain as a result of cumulative profitability and $7 million in The Netherlands as a result of tax planning to utilize losses that would have otherwise expired.
During 2015, we established valuation allowances of $21 million and released valuation allowances of $3 million. In the U.S., we established $14 million of valuation allowance on U.S. foreign tax credits due to the application of specific foreign tax credit limitations and in The Netherlands we established $7 million of valuation allowance on losses which are scheduled to expire after 2016.
Uncertainties regarding expected future income in certain jurisdictions could affect the realization of deferred tax assets in those jurisdictions and result in additional valuation allowances in future periods, or, in the case of unexpected pre-tax earnings, the release of valuation allowances in future periods.
The following is a summary of changes in the valuation allowance (dollars in millions):
The following is a reconciliation of our unrecognized tax benefits (dollars in millions):
As of December 31, 2017 and 2016, the amount of unrecognized tax benefits which, if recognized, would affect the effective tax rate is $19 million and $9 million, respectively.
During 2017, we concluded and settled tax examinations in various jurisdictions, including, but not limited to, China and the U.S. (various states). During 2016, we concluded and settled tax examinations in various non-U.S. jurisdictions including, but not limited to, China, Germany, Indonesia, The Netherlands, Spain and the U.K. During 2015, we concluded and effectively settled tax examinations in the U.S. (both federal and various states) and various non-U.S. jurisdictions, including, but not limited to, China and France.
During 2017, for unrecognized tax benefits that impact tax expense, we recorded a net increase in unrecognized tax benefits with a corresponding income tax expense (not including interest and penalty expense) of $9 million. During 2016 and 2015, we recorded a net increase in unrecognized tax benefits with a corresponding income tax expense (not including interest and penalty expense) of $2 million and $1 million, respectively. Additional decreases in unrecognized tax benefits were offset by cash settlements or by a decrease in net deferred tax assets and, therefore, did not affect income tax expense.
In accordance with our accounting policy, we continue to recognize interest and penalties accrued related to unrecognized tax benefits in income tax expense.
We conduct business globally and, as a result, we file income tax returns in U.S. federal, various U.S. state and various non‑U.S. jurisdictions. The following table summarizes the tax years that remain subject to examination by major tax jurisdictions:
Certain of our U.S. and non-U.S. income tax returns are currently under various stages of audit by applicable tax authorities and the amounts ultimately agreed upon in resolution of the issues raised may differ materially from the amounts accrued.
We estimate that it is reasonably possible that certain of our non-U.S. unrecognized tax benefits could change within 12 months of the reporting date with a resulting decrease in the unrecognized tax benefits within a reasonably possible range of nil to $9 million. For the 12‑month period from the reporting date, we would expect that a substantial portion of the decrease in our unrecognized tax benefits would result in a corresponding benefit to our income tax expense.
On December 22, 2017, the U.S. government enacted the U.S. Tax Reform Act. The U.S. Tax Reform Act makes broad and complex changes to the U.S. tax code that will affect 2017, including, but not limited to, requiring a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries which is payable over eight years. Because of the complexity of these new laws, we are continuing to evaluate the application of ASC 740 to the U.S. Tax Reform Act and have, therefore, recorded only provisional amounts.
The SEC staff issued SAB 118, which provides guidance on accounting for the tax effects of the U.S. Tax Reform Act. SAB 118 provides a measurement period that should not extend beyond one year from the U.S. Tax Reform Act enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the U.S. Tax Reform Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the U.S. Tax Reform Act is incomplete but it is able to determine a reasonable estimate, it should record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the U.S. Tax Reform Act.
For various reasons that are discussed more fully below, we have not completed our accounting for the income tax effects of certain elements of the U.S. Tax Reform Act. If we were able to make reasonable estimates of the effects of elements for which our analysis is not yet complete, we recorded provisional adjustments. If we were not yet able to make reasonable estimates of the impact of certain elements, we have not recorded any adjustments related to those elements and have continued accounting for them in accordance with ASC 740 on the basis of the tax laws in effect before the U.S. Tax Reform Act.
The U.S. Tax Reform Act establishes new tax laws that will affect 2018, including, but not limited to, (1) reduction of the U.S. federal corporate tax rate; (2) the creation of the base erosion anti-abuse tax (BEAT), a new minimum tax; (3) a general elimination of U.S. federal income taxes on dividends from foreign subsidiaries; (4) a new provision designed to tax global intangible low-taxed income (“GILTI”); (5) a new limitation on deductible interest expense; and (6) the repeal of the domestic production activity deduction.
The U.S. Tax Reform Act reduces the corporate tax rate to 21%, effective January 1, 2018. For our net deferred tax assets and liabilities, we have recorded a provisional decrease of $12 million and $149 million, respectively, with a corresponding provisional net deferred tax benefit of $137 million for the year ended December 31, 2017. The provisional $12 million decrease in net deferred tax assets, with a corresponding net deferred tax expense of $12 million, relates to our consolidated variable interest entity, Rubicon LLC, which is a 50%-owned joint venture. Therefore, $6 million of this provisional tax expense is offset in net income attributable to noncontrolling interests. While we are able to make a reasonable estimate of the impact of the reduction in corporate rate, it may be affected by other analyses related to the U.S. Tax Reform Act, including, but not limited to, our calculation of deemed repatriation of deferred foreign income, return to accrual adjustments including completion of computations and analysis of 2017 expenditures that qualify for immediate expensing, and the state tax effect of adjustments made to federal temporary differences.
The Deemed Repatriation Transition Tax is a tax on previously untaxed accumulated and current earnings and profits of certain of our foreign subsidiaries. To determine the amount of the transition tax, we must determine, in addition to other factors, the amount of post-1986 earnings and profits of the relevant subsidiaries, as well as the amount of non-U.S. income taxes paid on such earnings. We are able to make a reasonable estimate of the transition tax and recorded a provisional transition tax expense of $85 million. However, we are continuing to gather and analyze additional information to more precisely compute the amount of the transition tax. As required by U.S. GAAP, we have recognized the provisional $85 million of transition taxes in our income from continuing operations. Absent the Venator offering and certain tax related restructuring transactions, our provisional transition tax liability would have been $12 million. As required by U.S. GAAP, the impact of the U.S. Tax Reform Act is included in continuing operations, even for transactions associated with the Venator offering. Because of the complexity of the associated multistate tax considerations and limited specific guidance from state tax authorities, we have not determined or recorded any impact of the federal deemed repatriation of foreign earnings on our state tax expense or state deferred tax assets and liabilities.
Under U.S. GAAP, we are allowed to make an accounting policy choice of either (1) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred (the “period cost method”) or (2) factoring such amounts into our measurement of our deferred taxes (the “deferred method”). Our selection of an accounting policy with respect to the new GILTI tax rules will depend, in part, on analyzing our global income to determine whether we expect to have future U.S. inclusions in taxable income related to GILTI and, if so, what the impact is expected to be. Because whether we expect to have future U.S. inclusions in taxable income related to GILTI depends on not only our current structure and estimated future results of global operations but also our intent and ability to modify our structure and/or our business, we are not yet able to reasonably estimate the effect of this provision of the U.S. Tax Reform Act. Therefore, we have not made any adjustments related to potential GILTI tax in our financial statements and have not made a policy decision regarding whether to record deferred taxes on GILTI.
We must assess whether our valuation allowance analyses are affected by various aspects of the U.S. Tax Reform Act (e.g., deemed repatriation of deferred foreign income, GILTI inclusions, new categories of foreign tax credits). Since, as discussed, we have recorded provisional amounts related to certain portions of the U.S. Tax Reform Act, any corresponding determination of the need for or change in any valuation allowances is also provisional.
We must also assess whether our uncertain tax positions are affected by various aspects of the U.S Tax Reform Act (e.g., deemed repatriation of deferred foreign income, GILTI inclusions, new categories of foreign tax credits). Since, as discussed, we have not made any adjustments related to certain portions of the U.S. Tax Reform Act, and have recorded only provisional amounts related to other portions of the U.S. Tax Reform Act, we have not determined the need for or change in any unrecognized tax positions.
The U.S. Tax Reform Act includes a mandatory one-time tax on accumulated earnings of foreign subsidiaries, and as a result, all previously unremitted earnings for which no U.S. deferred tax liability had been accrued have now been subject to U.S. tax. For subsidiaries with local withholding taxes, we intend to continue to invest most or all of these earnings indefinitely within the local country and do not expect to incur any significant, additional taxes related to such amounts.
The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.
Reference 1: http://www.xbrl.org/2003/role/presentationRef