EMERSON ELECTRIC CO

INCOME TAXES

Pretax earnings from continuing operations consist of the following:



	2015		2016	2017
United States	$	2,688	1,312	1,350
Non-U.S.	1,119		1,004	985
Total pretax earnings	$	3,807	2,316	2,335

The principal components of income tax expense follow:



	2015			2016		2017
Current:
Federal	$	831		394		351
State and local	86			11		40
Non-U.S.	398			305		311

Deferred:
Federal	12			2		7
State and local	(1		)	4		4
Non-U.S.	(59		)	(19	)	(53	)
Income tax expense	$	1,267		697		660

Reconciliations of the U.S. federal statutory income tax rate to the Company's effective tax rate follow:



	2015		2016		2017
Federal statutory rate	35.0	%	35.0	%	35.0	%
State and local taxes, net of federal tax benefit	0.7		0.5		1.2
Non-U.S. rate differential	(2.4	)	(2.9	)	(3.6	)
Non-U.S. tax holidays	(0.9	)	(1.1	)	(1.0	)
U.S. manufacturing deduction	(1.2	)	(1.8	)	(1.7	)
Gains on divestitures	1.8		—		—
Non-U.S. subsidiary restructuring	—		—		(1.8	)
Other	0.3		0.4		0.2
Effective income tax rate	33.3	%	30.1	%	28.3	%

Non-U.S. tax holidays reduce tax rates in certain foreign jurisdictions and are expected to expire over the next five years.

Following are changes in unrecognized tax benefits before considering recoverability of any cross-jurisdictional tax credits (federal, state and non-U.S.) and temporary differences. The amount of unrecognized tax benefits is not expected to change significantly within the next 12 months.



	2016			2017
Unrecognized tax benefits, beginning	$	84		86
Additions for current year tax positions	12			54
Additions for prior year tax positions	16			4
Reductions for prior year tax positions	(13		)	(6	)
Acquisitions and divestitures	—			9
Reductions for settlements with tax authorities	(4		)	(4	)
Reductions for expiration of statutes of limitations	(9		)	(11	)
Unrecognized tax benefits, ending	$	86		132

If none of the unrecognized tax benefits shown is ultimately paid, the tax provision and the calculation of the effective tax rate would be favorably impacted by $100, which is net of cross-jurisdictional tax credits and temporary differences. The Company accrues interest and penalties related to income taxes in income tax expense. Total interest and penalties recognized were $(1), $2 and $(4) in 2017, 2016 and 2015, respectively. As of September 30, 2017 and 2016, total accrued interest and penalties were $16 and $21, respectively.

The U.S. is the major jurisdiction for which the Company files income tax returns. U.S. federal tax returns are closed through 2013. The status of state and non-U.S. tax examinations varies due to the numerous legal entities and jurisdictions in which the Company operates.

The principal items that gave rise to deferred income tax assets and liabilities follow:



	2016			2017
Deferred tax assets:
Net operating losses and tax credits	$	164		444
Accrued liabilities	277			319
Postretirement and postemployment benefits	82			70
Employee compensation and benefits	206			173
Pensions	271			72
Other	158			196
Total	$	1,158		1,274

Valuation allowances	$	(132	)	(309	)

Deferred tax liabilities:
Intangibles	$	(510	)	(753	)
Property, plant and equipment	(239		)	(265	)
Undistributed non-U.S. earnings	(9		)	(249	)
Other	(42		)	(37	)
Total	$	(800	)	(1,304	)

Net deferred income tax asset (liability)	$	226		(339	)

As of September 30, 2017, all deferred tax assets and liabilities were presented as noncurrent. As of September 30, 2016, current deferred tax assets, net were $400 and noncurrent deferred tax liabilities, net were $174. Total income taxes paid were approximately $1,420, $950 and $1,590 in 2017, 2016 and 2015, respectively. Approximately one-third of the $444 of net operating losses and tax credits can be carried forward indefinitely, one-third expire in ten years, and the remainder expire over varying periods.