DOW CHEMICAL CO /DE/

INCOME TAXES

On December 22, 2017, the Tax Cuts and Jobs Act (“The Act”) was enacted. The Act reduces the U.S. federal corporate income tax rate from 35 percent to 21 percent, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously deferred, creates new provisions related to foreign sourced earnings, eliminates the domestic manufacturing deduction and moves to a territorial system. At December 31, 2017, the Company had not completed its accounting for the tax effects of The Act; however, as described below, the Company made a reasonable estimate of the effects on its existing deferred tax balances and the one-time transition tax. In accordance with Staff Accounting Bulletin 118 ("SAB 118"), income tax effects of The Act may be refined upon obtaining, preparing, or analyzing additional information during the measurement period and such changes could be material. During the measurement period, provisional amounts may also be adjusted for the effects, if any, of interpretative guidance issued after December 31, 2017, by U.S. regulatory and standard-setting bodies.

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As a result of The Act, the Company remeasured its U.S. federal deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21 percent. However, the Company is still analyzing certain aspects of The Act and refining its calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. The provisional amount recorded related to the remeasurement of the Company’s deferred tax balance was $50 million, recorded as a charge to “Provision for income taxes.”

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The Act requires a mandatory deemed repatriation of post-1986 undistributed foreign earnings and profits (“E&P”), which results in a one-time transition tax. As a result, the Company recorded a provisional amount for the transition tax liability for its foreign subsidiaries of $865 million, recorded as a charge to “Provision for income taxes.” The Company has not yet completed its calculation of the total post-1986 foreign E&P for its foreign subsidiaries as E&P will not be finalized until the DowDuPont federal income tax return is filed. Further, the transition tax is based in part on the amount of those earnings held in cash and other specified assets, which is a defined term under The Act.

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For tax years beginning after December 31, 2017, The Act introduces new provisions for U.S. taxation of certain global intangible low-taxed income (“GILTI”). Due to its complexity and a current lack of guidance as to how to calculate the tax, the Company is not yet able to determine a reasonable estimate for the impact of the incremental tax liability. When additional guidance is available, the Company will make a policy election for how the additional liability will be recorded in the period in which it is incurred or recognized for the basis differences that would be expected to reverse in future years.



Geographic Allocation of Income and Provision for Income Taxes
In millions	2017			2016			2015
Income (Loss) Before Income Taxes
Domestic ^{1, 2}	$	(1,973	)	$	485		$	5,313
Foreign ¹	4,772			3,928			4,617
Income Before Income Taxes	$	2,799		$	4,413		$	9,930
Current tax expense (benefit)
Federal	$	(308	)	$	91		$	583
State and local	—			21			38
Foreign	1,579			1,156			1,221
Total current tax expense	$	1,271		$	1,268		$	1,842
Deferred tax expense (benefit)
Federal ³	$	1,027		$	(1,255	)	$	358
State and local	56			(10		)	(8		)
Foreign	(150		)	6			(45		)
Total deferred tax expense (benefit)	$	933		$	(1,259	)	$	305
Provision for income taxes	$	2,204		$	9		$	2,147
Net Income	$	595		$	4,404		$	7,783


1.	In 2017, the domestic component of "Income Before Income Taxes" included approximately $308 million ($2.1 billion and $3.5 billion in 2016 and 2015, respectively) and the foreign component contained $562 million (zero and $1.1 billion in 2016 and 2015, respectively) of income from portfolio actions. See Notes 4, 5 and 7 for additional information.

In 2017, the domestic component of "Income Before Income Taxes" included approximately $2.7 billion of expense related to a goodwill impairment, non-qualified pension plan change in control charges and litigation settlements. In 2016, the domestic component of "Income Before Income Taxes" included approximately $2.6 billion of expenses related to the urethane matters class action lawsuit and opt-out cases settlements, asbestos-related charge and charges for environmental matters. See Notes 13, 16 and 19 for additional information.


3.	The 2017 amount reflects the tax impact of The Act which accelerated the utilization of tax credits and required remeasurement of all U.S. deferred tax assets and liabilities. The 2016 amount reflects the tax impact of accrued one-time items and reduced domestic income which limited the utilization of tax credits.



Reconciliation to U.S. Statutory Rate	2017		2016		2015
Statutory U.S. federal income tax rate	35.0	%	35.0	%	35.0	%
Equity earnings effect	(4.2	)	(1.2	)	(1.8	)
Foreign income taxed at rates other than 35%¹	(15.9	)	(7.0	)	(4.0	)
U.S. tax effect of foreign earnings and dividends	(1.6	)	(4.6	)	1.3
Unrecognized tax benefits	1.1		(0.8	)	0.8
Acquisitions, divestitures and ownership restructuring activities ²	11.7		(21.2	)	(9.5	)
Impact of U.S. tax reform	32.7		—		—
State and local income taxes ³	3.2		0.2		0.6
Goodwill impairment	19.2		—		—
Excess tax benefits from stock compensation	(3.5	)	—		—
Other - net ³	1.0		(0.2	)	(0.8	)
Effective Tax Rate	78.7	%	0.2	%	21.6	%


1.	Includes the impact of valuation allowances in foreign jurisdictions.


2.	See Notes 4, 5 and 7 for additional information.


3.	Prior year was adjusted to conform with the current year presentation.



Deferred Tax Balances at Dec 31	2017					2016
In millions	Assets			Liabilities		Assets			Liabilities
Property	$	508		$	2,474	$	307		$	2,860
Tax loss and credit carryforwards	1,734			—		2,450			—
Postretirement benefit obligations	2,442			136		3,715			75
Other accruals and reserves	1,251			146		1,964			883
Intangibles	176			1,010		128			1,536
Inventory	35			171		50			197
Investments	272			158		179			119
Other – net	420			414		737			643
Subtotal	$	6,838		$	4,509	$	9,530		$	6,313
Valuation allowances	(1,371		)	—		(1,061		)	—
Total	$	5,467		$	4,509	$	8,469		$	6,313

As a result of the Merger and subsequent change in the Company's ownership, certain net operating loss carryforwards available for the Company’s consolidated German tax group were derecognized. In addition, the sale of stock between two consolidated subsidiaries in 2014 created a gain that was initially deferred for tax purposes. This deferred gain became taxable as a result of activities executed in anticipation of the Intended Business Separations. As a result, in 2017, the Company decreased “Deferred income tax assets” in the consolidated balance sheets and recorded a charge to “Provision for income taxes” in the consolidated statements of income of $267 million.



Operating Loss and Tax Credit Carryforwards	2017		2016
In millions	Assets		Assets
Operating loss carryforwards
Expire within 5 years	$	246	$	176
Expire after 5 years or indefinite expiration	1,305		1,346
Total operating loss carryforwards	$	1,551	$	1,522
Tax credit carryforwards
Expire within 5 years	$	39	$	28
Expire after 5 years or indefinite expiration	144		900
Total Operating Loss and Tax Credit Carryforwards	$	183	$	928

Undistributed earnings of foreign subsidiaries and related companies that are deemed to be permanently invested amounted to $7,052 million at December 31, 2017 and $18,668 million at December 31, 2016. The Act imposed U.S. tax on all foreign unrepatriated earnings. These undistributed earnings are still subject to certain taxes upon repatriation, primarily where foreign withholding taxes apply. It is not practicable to calculate the unrecognized deferred tax liability on undistributed earnings.

The following table provides a reconciliation of the Company's unrecognized tax benefits:



Total Gross Unrecognized Tax Benefits
In millions	2017			2016			2015
Total unrecognized tax benefits at Jan 1	$	231		$	280		$	240
Decreases related to positions taken on items from prior years	(4		)	(12		)	(6		)
Increases related to positions taken on items from prior years ¹	37			153			92
Increases related to positions taken in the current year ²	10			135			10
Settlement of uncertain tax positions with tax authorities ¹	(12		)	(325		)	(56		)
Decreases due to expiration of statutes of limitations	(9		)	—			—
Total unrecognized tax benefits at Dec 31	$	253		$	231		$	280
Total unrecognized tax benefits that, if recognized, would impact the effective tax rate	$	243		$	223		$	206
Total amount of interest and penalties (benefit) recognized in "Provision for income taxes"	$	2		$	(55	)	$	80
Total accrual for interest and penalties recognized in the consolidated balance sheets	$	110		$	89		$	178


1.	The 2016 balance includes the impact of a settlement agreement related to a historical change in the legal ownership structure of a nonconsolidated affiliate discussed below.


2.	The 2016 balance includes $126 million assumed in the DCC Transaction.

On January 9, 2017, the U.S. Supreme Court denied certiorari in the Company’s tax treatment of partnerships and transactions associated with Chemtech, a wholly owned subsidiary. The Company has fully accrued the position and does not expect a future impact to “Provision for income taxes” in the consolidated statements of income as a result of the ruling.

In the fourth quarter of 2016, a settlement of $206 million was reached on a tax matter associated with a historical change in the legal ownership structure of a nonconsolidated affiliate. As a result of the settlement, the Company recorded a net decrease in uncertain tax positions of $67 million, included in “Other noncurrent obligations” in the consolidated balance sheets, and an unfavorable impact of $13 million to “Provision for income taxes” in the consolidated statements of income.

Dow and its consolidated subsidiaries are included in DowDuPont's consolidated federal income tax group and consolidated tax return. Generally, the consolidated tax liability of the DowDuPont U.S. tax group for each year will be apportioned among the members of the consolidated group based on each member’s separate taxable income. Dow and DuPont intend that, to the extent federal and/or state corporate income tax liabilities are reduced through the utilization of tax attributes of the other, settlement of any receivable and payable generated from the use of the other party’s sub-group attributes will be in accordance with a tax sharing agreement and/or tax matters agreement.

Each year, the Company files tax returns in the various national, state and local income taxing jurisdictions in which it operates. These tax returns are subject to examination and possible challenge by the tax authorities. Positions challenged by the tax authorities may be settled or appealed by the Company. As a result, there is an uncertainty in income taxes recognized in the Company’s financial statements in accordance with accounting for income taxes and accounting for uncertainty in income taxes. The impact on the Company’s results of operations is not expected to be material.

Tax years that remain subject to examination for the Company’s major tax jurisdictions are shown below:



Tax Years Subject to Examination by Major Tax Jurisdiction at Dec 31, 2017	Earliest Open Year
Jurisdiction	Earliest Open Year
Argentina	2010
Brazil	2007
Canada	2014
China	2007
Germany	2006
Italy	2013
The Netherlands	2015
Switzerland	2014
United States:
Federal income tax	2004
State and local income tax	2004

The reserve for non-income tax contingencies related to issues in the United States and foreign locations was $110 million at December 31, 2017 and $108 million at December 31, 2016. This is management’s best estimate of the potential liability for non-income tax contingencies. Inherent uncertainties exist in estimates of tax contingencies due to changes in tax law, both legislated and concluded through the various jurisdictions’ tax court systems. It is the opinion of the Company’s management that the possibility is remote that costs in excess of those accrued will have a material impact on the Company’s consolidated financial statements.