Entity information:
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 (“transition tax”) on earnings of foreign subsidiaries that were previously tax 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 has 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"), during the measurement period, income tax effects of the Act may be refined upon obtaining, preparing, or analyzing additional information, and such changes could be material. During the measurement period, provisional amounts may be also be adjusted for the effects, if any, of interpretative guidance issued after December 31, 2017, by U.S. regulatory and standard-setting bodies.

•
As a result of The Act, the company remeasured its U.S. federal deferred income 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 income tax balance was $(2,716) million and was recorded as a benefit to the provision for income taxes on continuing operations.

•
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 has recorded a provisional amount for the transition tax liability for its foreign subsidiaries of $715 million, recorded as a charge to the provision for income taxes on continuing operations. 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 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.

•
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 on whether 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
Successor
Predecessor
 
(In millions)
For the Period September 1 through December 31, 2017
For the Period January 1 through August 31, 2017
Year Ended 2016
Year Ended 2015
 
 
(Loss) Income from continuing operations before income taxes
 
 
 
 
 
Domestic
$
(811
)
$
409

$
1,415

$
1,301

 
Foreign
(775
)
1,382

1,308

721

 
(Loss) Income from continuing operations before income taxes
$
(1,586
)
$
1,791

$
2,723

$
2,022

 
Current tax expense (benefit)
 
 
 
 
 
Federal
$
216

$
(563
)
$
4

$
155

 
State and local
22

(11
)
9

2

 
Foreign
187

282

539

420

 
Total current tax expense (benefit)
$
425

$
(292
)
$
552

$
577

 
Deferred tax (benefit) expense
 
 
 
 
 
Federal
$
(2,790
)
$
476

$
22

$
135

 
State and local
(48
)
(8
)
(29
)
4

 
Foreign
(260
)
(27
)
96

(141
)
 
Total deferred tax (benefit) expense
$
(3,098
)
$
441

$
89

$
(2
)
 
(Benefit from) Provision for income taxes on continuing operations
(2,673
)
149

641

575

 
Net Income from continuing operations
$
1,087

$
1,642

$
2,082

$
1,447



International pre-tax (loss) earnings from continuing operations was $(775) million, $1,382 million, $1,308 million, and $721 million for the period September 1 through December 31, 2017, the period January 1 through August 31, 2017, and the years ended December 31, 2016 and 2015, respectively. In connection with the Merger, pre-tax earnings from continuing operations for the period September 1 through December 31, 2017 includes depreciation and amortization associated with the fair value that was allocated to the company’s tangible and intangible assets as well as costs of $1,469 million recognized in cost of goods sold related to the fair value step-up of inventories (See Note 3 and 10 for further information).

The U.S. pre-tax earnings from continuing operations for the period January 1 through August 31, 2017 includes transaction costs associated with the Merger and restructuring and asset related charges (which are mostly incurred in the US). These decreases were partially offset by the gain on the sale of the company's food safety diagnostics business in the first quarter 2017.

The increase in pre-tax earnings from continuing operations from 2015 to 2016 is primarily driven by the gain on the sale of DuPont (Shenzhen) Manufacturing Limited in 2016 in addition to the absence of 2015 restructuring and asset related charges - net.

 
Reconciliation to U.S. Statutory Rate
Successor
Predecessor
 
 
For the Period September 1 through December 31, 2017
For the Period January 1 through August 31, 2017
Year Ended 2016
Year Ended 2015
 
 
Statutory U.S. federal income tax rate
35.0
 %
35.0
 %
35.0
 %
35.0
 %
 
Equity earning effect
0.9

(0.5
)
(0.8
)
(0.7
)
 
Lower effective tax rates on international operations - net
(9.5
)
(11.4
)
(9.2
)
(9.7
)
 
Acquisitions, divestitures and ownership restructuring activities 1, 2
15.8

5.2

1.9

(0.2
)
 
U.S. research and development credit
0.4

(0.8
)
(0.7
)
(1.5
)
 
Exchange gains/losses 3
(1.8
)
(12.9
)
1.9

10.2

 
Impact of U.S. Tax Reform
126.1







 
Excess tax benefits from stock compensation4
0.1

(1.7
)




 
Tax settlements and expiration of statute of limitations5
—

(3.8
)
(1.1
)
(1.5
)
 
Other - net
1.5

(0.8
)
(3.5
)
(3.2
)
 
Effective tax rate
168.5
 %
8.3
 %
23.5
 %
28.4
 %
1.
See Notes 3 and 4 for additional information.
2.
Includes a net tax benefit of $261 million related to an internal legal entity restructuring associated with the Intended Business Separations.
3.
Principally reflects the impact of foreign exchange gains and losses on net monetary assets for which no corresponding tax impact is realized. Further information about the company's foreign currency hedging program is included in Note 6 and Note 18 under the heading Foreign Currency Risk.
4.
Reflects the impact of the adoption of Accounting Standards Update ("ASU") 2016-09, which resulted in the recognition of excess tax benefits related to equity compensation in the (benefit from) provision for income taxes on continuing operations. See Note 2 for additional information.
5.
The period January 1 through August 31, 2017 includes a tax benefit of $53 million for accrued interest reversals (recorded in sundry income - net).

Deferred Tax Balances at December 31
2017 (Successor)
2016 (Predecessor)
(In millions)
Assets
Liabilities
Assets
Liabilities
Property
$
—

$
1,160

$
—

$
742

Tax loss and credit carryforwards
1,690

—

1,808

—

Accrued employee benefits
1,988

68

4,529

410

Other accruals and reserves
333

39

617

222

Intangibles
284

6,286

210

1,345

Inventory
130

597

163

138

Long-term debt
109

—

—

—

Investments
23

453

126

230

Unrealized exchange gains/losses
—

71

—

346

Other – net
260

121

257

86

Subtotal
$
4,817

$
8,795

$
7,710

$
3,519

Valuation allowances
(1,378
)
—

(1,308
)
—

Total
$
3,439

$
8,795

$
6,402

$
3,519

Net Deferred Tax (Liability) Asset
$
(5,356
)
 
$
2,883

 


Operating Loss and Tax Credit Carryforwards
Deferred Tax Asset
(In millions)
2017 (Successor)
2016 (Predecessor)
Operating loss carryforwards
 
 
Expire within 5 years
$
42

$
41

Expire after 5 years or indefinite expiration
1,483

1,482

Total operating loss carryforwards
$
1,525

$
1,523

Tax credit carryforwards
 
 
Expire within 5 years
$
10

$
10

Expire after 5 years or indefinite expiration
155

275

Total tax credit carryforwards
$
165

$
285

Total Operating Loss and Tax Credit Carryforwards
$
1,690

$
1,808



Total Gross Unrecognized Tax Benefits
Successor
Predecessor
 
For the Period September 1 through December 31, 2017
For the Period January 1 through August 31, 2017
Year Ended 2016
Year Ended 2015
(In millions)
Total unrecognized tax benefits as of beginning of period
$
436

$
348

$
558

$
735

Decreases related to positions taken on items from prior years
(2
)
(19
)
(41
)
(98
)
Increases related to positions taken on items from prior years
9

3

32

13

Increases related to positions taken in the current year
19

19

32

32

Settlement of uncertain tax positions with tax authorities
1

(6
)
(205
)
(58
)
Decreases due to expiration of statutes of limitations
(5
)
(81
)
(30
)
(30
)
Exchange loss (gain)
1

1

2

(36
)
Total unrecognized tax benefits as of end of period
$
459

$
265

$
348

$
558

Total unrecognized tax benefits that, if recognized, would impact the effective tax rate
$
76

$
188

$
253

$
386

Total amount of interest and penalties (benefit) recognized in Provision for income taxes on continuing operations
$
1

$
(27
)
$
10

$
(14
)
Total accrual for interest and penalties associated with unrecognized tax benefits
$
25

$
22

$
71

$
88



Each year the company files hundreds of 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. It is reasonably possible that changes to the company’s global unrecognized tax benefits could be significant; however, due to the uncertainty regarding the timing of completion of audits and possible outcomes, a current estimate of the range of increases or decreases that may occur within the next twelve months cannot be made.

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,
Earliest Open Year
Jurisdiction
Brazil
2012
Canada
2011
China
2014
Denmark
2003
Germany
2006
India
2001
The Netherlands
2014
Switzerland
2012
United States:
 
Federal income tax
2012
State and local income tax
2004


Undistributed earnings of foreign subsidiaries and related companies that are deemed to be permanently invested amounted to $15,408 million at December 31, 2017, $17,380 million at December 31, 2016 and $16,053 million at December 31, 2015. The Act imposed U.S. tax on all foreign unrepatriated earnings. These undistributed earnings are still subject to certain taxes upon repatriation, primarily foreign withholding taxes. It is not practicable to calculate the unrecognized deferred tax liability on undistributed earnings.

DuPont and its 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.  DuPont and Dow 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.