17. Income Taxes
LyondellBasell Industries N.V. is tax resident in the United Kingdom pursuant to a mutual agreement procedure determination ruling between the Dutch and United Kingdom competent authorities and therefore subject solely to the United Kingdom corporate income tax system.
Through our subsidiaries, we have substantial operations world-wide and earn significant income in the United States. Taxes are primarily paid on the earnings generated in various jurisdictions, including the United States, The Netherlands, Germany, France, Italy and other countries. LyondellBasell Industries N.V. has little or no taxable income of its own because, as a holding company, it does not conduct any operations. Instead, the subsidiaries through which we operate incur tax obligations in the jurisdictions in which they operate.
We monitor income tax developments in countries where we conduct business. On December 22, 2017, the U.S. enacted “H.R.1”, also known as the “Tax Cuts and Jobs Act” (the “Tax Act”) with some provisions effective as early as 2017 while others are delayed until 2018. This change in U.S. tax law included a reduction in the federal corporate tax rate from 35% to 21% for years beginning after 2017, which resulted in the remeasurement of our U.S. net deferred income tax liabilities. Our 2017 income tax provision includes an $819 million income tax benefit related to the remeasurement of our U.S. net deferred income tax liabilities. Although the $819 million income tax benefit represents a reasonable estimate of the impact of the Tax Act on our Consolidated Financial Statements as of December 31, 2017, it should be considered provisional. The impact of the Tax Act may differ from this reasonable estimate due to additional guidance that may be issued, changes in assumptions made, and the finalization of certain U.S. income tax positions with the filing of our 2017 U.S. income tax return which will allow for the ability to conclude whether any further adjustments are necessary to our deferred tax assets and liabilities. Any adjustments to these provisional amounts will be reported as a component of income tax expense in the reporting period in which any such adjustments are identified which will be no later than the fourth quarter of 2018. We will continue to analyze the Tax Act to determine the full effects of the new law.
In September 2016, the United Kingdom enacted provisions (the so called “anti-hybrid provisions”), effective for years beginning January 1, 2017, that resulted in changes to our internal financing structure which did not materially impact our Consolidated Financial Statements. In addition, in October 2016 the U.S. Treasury issued final Section 385 debt-equity regulations that may impact our internal financings in future years. Pursuant to a recent Executive Order, the Treasury Department reviewed these regulations and determined to delay but retain these regulations, subject to further review after enactment of U.S. tax reform. There has been an increase in attention, both in the U.S. and globally, to the tax practices of multinational companies, including the European Union’s state aid investigations and proposals by the Organization for Economic Cooperation and Development with respect to base erosion and profit shifting. Such attention may result in additional legislative changes that could adversely affect our tax rate. Other than the recently enacted Tax Act, Management does not believe that recent changes in income tax laws will have a material impact on our Consolidated Financial Statements, although new or proposed changes to tax laws could affect our tax liabilities in the future.
The significant components of the provision for income taxes are as follows:
| Year Ended December 31, | |||||||||||
| Millions of dollars | 2017 | 2016 | 2015 | ||||||||
| Current: | |||||||||||
| U.S. federal | $ | 543 | $ | 421 | $ | 1,009 | |||||
| Non-U.S. | 595 | 557 | 468 | ||||||||
| State | 47 | 51 | 72 | ||||||||
| Total current | 1,185 | 1,029 | 1,549 | ||||||||
| Deferred: | |||||||||||
| U.S. federal | (637) | 339 | 66 | ||||||||
| Non-U.S. | 22 | 20 | 104 | ||||||||
| State | 28 | (2) | 11 | ||||||||
| Total deferred | (587) | 357 | 181 | ||||||||
| Provision for income taxes before tax effects | |||||||||||
| of other comprehensive income | 598 | 1,386 | 1,730 | ||||||||
| Tax effects of elements of other | |||||||||||
| comprehensive income: | |||||||||||
| Pension and postretirement liabilities | 29 | (21) | 4 | ||||||||
| Financial derivatives | (14) | (96) | 71 | ||||||||
| Foreign currency translation | (33) | (7) | (5) | ||||||||
| Unrealized gains (losses) from available-for-sale securities | (3) | 1 | (1) | ||||||||
| Total income tax expense | |||||||||||
| in comprehensive income | $ | 577 | $ | 1,263 | $ | 1,799 | |||||
Since the proportion of U.S. revenues, assets, operating income and associated tax provisions is significantly greater than any other single taxing jurisdiction within the worldwide group, the reconciliation of the differences between the provision for income taxes and the statutory rate is presented on the basis of the U.S. statutory federal income tax rate of 35% as opposed to the United Kingdom statutory rate of 20% to provide a more meaningful insight into those differences. Since the Tax Act lowered the U.S. statutory federal income tax rate to 21% for tax years beginning after 2017, the reconciliation uses the 35% rate in effect for the year ended December 31, 2017. Our effective tax rate for the year ended December 31, 2017 is 10.9%. This summary is shown below:
| Year Ended December 31, | |||||||||||
| Millions of dollars | 2017 | 2016 | 2015 | ||||||||
| Income before income taxes: | |||||||||||
| U.S. | $ | 2,438 | $ | 2,511 | $ | 3,691 | |||||
| Non-U.S. | 3,055 | 2,722 | 2,518 | ||||||||
| Total | $ | 5,493 | $ | 5,233 | $ | 6,209 | |||||
| Income tax at U.S. statutory rate | $ | 1,923 | $ | 1,832 | $ | 2,173 | |||||
| Increase (reduction) resulting from: | |||||||||||
| Non-U.S. income taxed at lower statutory rates | (164) | (159) | (130) | ||||||||
| Remeasurement of U.S. net deferred tax liability | (819) | - - | - - | ||||||||
| State income taxes, net of federal benefit | 40 | 24 | 59 | ||||||||
| Exempt income | (385) | (349) | (319) | ||||||||
| U.S. manufacturing deduction | (57) | (42) | (88) | ||||||||
| Other, net | 60 | 80 | 35 | ||||||||
| Income tax provision | $ | 598 | $ | 1,386 | $ | 1,730 | |||||
Our 2016 income tax provision included a charge of $135 million for non-cash out of period adjustments from prior years which is reflected in Other, net in the table above. $74 million of the charge relates to a correction for the tax effects on our cross-currency swaps with the remainder relating primarily to adjustments for deferred tax liabilities associated with some of our consolidated subsidiaries. Management concluded that these adjustments were immaterial to all periods presented.
The deferred tax effects of tax loss and credit carryforwards (“tax attributes”) and the tax effects of temporary differences between the tax basis of assets and liabilities and their reported amounts in the Consolidated Financial Statements, reduced by a valuation allowance where appropriate, are presented below. The 2017 impact of re-measurement of the U.S. net deferred tax liability resulting from the U.S. enactment of the Tax Act is included in the various components of deferred income taxes.
| December 31, | |||||||||
| Millions of dollars | 2017 | 2016 | |||||||
| Deferred tax liabilities: | |||||||||
| Accelerated tax depreciation | $ | 1,523 | $ | 1,910 | |||||
| Investment in joint venture partnerships | 214 | 304 | |||||||
| Intangible assets | 48 | 140 | |||||||
| Inventory | 266 | 379 | |||||||
| Other liabilities | 26 | 41 | |||||||
| Total deferred tax liabilities | 2,077 | 2,774 | |||||||
| Deferred tax assets: | |||||||||
| Tax attributes | 196 | 255 | |||||||
| Employee benefit plans | 315 | 404 | |||||||
| Other assets | 97 | 72 | |||||||
| Total deferred tax assets | 608 | 731 | |||||||
| Deferred tax asset valuation allowances | (96) | (96) | |||||||
| Net deferred tax assets | 512 | 635 | |||||||
| Net deferred tax liabilities | $ | 1,565 | $ | 2,139 | |||||
| December 31, | |||||||||
| Millions of dollars | 2017 | 2016 | |||||||
| Balance sheet classifications: | |||||||||
| Deferred tax assets - long-term | $ | 90 | $ | 192 | |||||
| Deferred tax liability - long-term | 1,655 | 2,331 | |||||||
| Net deferred tax liabilities | $ | 1,565 | $ | 2,139 | |||||
At December 31, 2017 and 2016, we had total tax attributes available in the amount of $784 million and $968 million, respectively, for which a deferred tax asset was recognized at December 31, 2017 and 2016 of $196 million and $255 million, respectively.
The scheduled expiration of the tax attributes and the related deferred tax assets, before valuation allowance, as of December 31, 2017 are as follows:
| Deferred Tax | ||||||||
| Tax | on Tax | |||||||
| Millions of dollars | Attributes | Attributes | ||||||
| 2018 | $ | 26 | $ | 6 | ||||
| 2019 | 35 | 9 | ||||||
| 2020 | - - | - - | ||||||
| 2021 | 29 | 2 | ||||||
| 2022 | 15 | 1 | ||||||
| Thereafter | 147 | 33 | ||||||
| Indefinite | 532 | 145 | ||||||
| $ | 784 | $ | 196 | |||||
The tax attributes are primarily related to operations in France, Canada, the United Kingdom, Spain, The Netherlands and the United States. The related deferred tax assets by primary jurisdictions are shown below:
| December 31, | |||||||||||
| Millions of dollars | 2017 | 2016 | 2015 | ||||||||
| France | $ | 92 | $ | 140 | $ | 197 | |||||
| Canada | 31 | 29 | 31 | ||||||||
| United Kingdom | 17 | 16 | 17 | ||||||||
| Spain | 32 | 33 | 38 | ||||||||
| The Netherlands | 13 | 19 | 23 | ||||||||
| United States | 10 | 16 | 15 | ||||||||
| Other | 1 | 2 | 1 | ||||||||
| $ | 196 | $ | 255 | $ | 322 | ||||||
To fully realize these net deferred tax assets, we will need to generate sufficient future taxable income in the countries where these tax attributes exist during the periods in which the attributes can be utilized. Based upon projections of future taxable income over the periods in which the attributes can be utilized and/or temporary differences can be reversed, management believes it is more likely than not that only $101 million of these deferred tax assets at December 31, 2017 will be realized.
Prior to the close of each reporting period, management considers the weight of all evidence, both positive and negative, to determine if a valuation allowance is necessary for each jurisdictions’ net deferred tax assets. We place greater weight on historical evidence over future predictions of our ability to utilize net deferred tax assets. We consider future reversals of existing taxable temporary differences, future taxable income exclusive of reversing temporary differences, and taxable income in prior carryback year(s) if carryback is permitted under applicable law, as well as available prudent and feasible tax planning strategies that would, if necessary, be implemented to ensure realization of the net deferred tax asset.
A summary of the valuation allowances by primary jurisdiction is shown below, reflecting the valuation allowances for all the net deferred tax assets, including deferred tax assets for tax attributes and other temporary differences.
| December 31, | |||||||||||
| Millions of dollars | 2017 | 2016 | 2015 | ||||||||
| France | $ | 25 | $ | 22 | $ | 27 | |||||
| Canada | 32 | 30 | 33 | ||||||||
| United Kingdom | 17 | 16 | 11 | ||||||||
| Spain | - - | - - | 19 | ||||||||
| The Netherlands | 12 | 12 | 20 | ||||||||
| United States | 10 | 16 | 14 | ||||||||
| Other | - - | - - | 1 | ||||||||
| $ | 96 | $ | 96 | $ | 125 | ||||||
During 2017, the valuation allowance decreased in the U.S. due to the remeasurement of our U.S. net deferred income tax liability. This reduction was offset by increases in the valuation allowances of other jurisdictions due primarily to currency translation adjustments.
During 2016, we released $19 million of our valuation allowance related to Spanish net deferred tax assets associated with operating losses, as Spanish operations were no longer in a three-year cumulative loss position and our projections indicated and management expected the operating losses to be fully utilized within the next nine years.
During 2015, the reduction in our valuation allowances were primarily attributable to currency translation adjustments.
French tax law provides for an indefinite carryforward of tax losses; however, losses allowed in any particular year may not exceed fifty percent of taxable income. With respect to our French operations, we have a total net deferred tax asset of $62 million, against which we retain a valuation allowance of $25 million for losses that we do not expect to realize a future benefit due to limitations imposed by French tax law. The remaining portion of the net deferred tax asset of $37 million, primarily related to French tax losses, is expected to be fully realized.
We continue to maintain a full valuation allowance against the net deferred tax asset in Canada. Given our operational structure in Canada and the relevant Canadian loss utilization rules, we do not expect to realize a future benefit related to the net deferred tax asset.
Deferred taxes on the unremitted earnings of certain equity joint ventures and subsidiaries of $51 million and $47 million at December 31, 2017 and 2016, respectively, have been provided.
Tax benefits totaling $544 million, $546 million and $521 million relating to uncertain tax positions, which are reflected in Other liabilities, were unrecognized as of December 31, 2017, 2016 and 2015, respectively. The following table presents a reconciliation of the beginning and ending amounts of unrecognized tax benefits:
| Year Ended December 31, | |||||||||||
| Millions of dollars | 2017 | 2016 | 2015 | ||||||||
| Balance, beginning of period | $ | 546 | $ | 521 | $ | 534 | |||||
| Additions for tax positions of current year | 15 | 16 | 9 | ||||||||
| Additions for tax positions of prior years | 3 | 11 | 5 | ||||||||
| Reductions for tax positions of prior years | (20) | (2) | (24) | ||||||||
| Settlements (payments/refunds) | - - | - - | (3) | ||||||||
| Balance, end of period | $ | 544 | $ | 546 | $ | 521 | |||||
The majority of the 2017, 2016 and 2015 balances, if recognized, will affect the effective tax rate. We operate in multiple jurisdictions throughout the world, and our tax returns are periodically audited or subjected to review by tax authorities. We are currently under examination in a number of tax jurisdictions. As a result, there is an uncertainty in income taxes recognized in our financial statements. We may settle or appeal positions challenged by the tax authorities. It is reasonably possible that, within the next twelve months, due to the settlement of uncertain tax positions with various tax authorities and the expiration of statutes of limitations, unrecognized tax benefits could decrease by up to approximately $110 million. We are no longer subject to any significant income tax examinations by tax authorities for the years prior to 2016 in the Netherlands, prior to 2013 in Italy, prior to 2010 in Germany, prior to 2009 in France, prior to 2016 in the United Kingdom, and prior to 2011 in the U.S., our principal tax jurisdictions.
We recognize interest accrued related to unrecognized tax benefits in income tax expense. Income tax expense included interest and penalties totaling $16 million in each of the years ended December 31, 2017 and 2016 and $5 million in the year ended December 31, 2015. We had accrued approximately $63 million, $47 million and $31 million for interest and penalties as of December 31, 2017, 2016 and 2015, respectively.