Entity information:
Income Taxes
Enactment of the U.S. Tax Cuts and Jobs Act
On December 22, 2017, the U.S. Tax Cuts and Jobs Act (the “Tax Act”) was enacted into law. The Tax Act contains broad and complex provisions including, but not limited to: (i) the reduction of corporate income tax rate from 35% to 21%, (ii) requiring companies to pay a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries, (iii) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries, (iv) modifying limitation on excessive employee remuneration, (v) requiring current inclusion in U.S. federal taxable income of certain earnings of controlled foreign corporations, (vi) repeal of corporate alternative minimum tax (“AMT”) and changing how AMT credits can be realized, (vii) creating the Base Erosion Anti-abuse Tax ("BEAT"), a new minimum tax, (viii) creating a new limitation on deductible interest expense, (ix) changing rules related to uses and limitations of net operating loss carryforwards and foreign tax credits created in tax years beginning after December 31, 2017, and (x) eliminating the deduction for income attributable to domestic production activities.
As required under U.S. GAAP, the effects of tax law changes are recognized in the period of enactment. Accordingly, the Company has recorded incremental income tax expense in the amount of $874 million associated with the Tax Act during the year ended December 31, 2017, which is summarized as follows:
Year ended December 31, 2017
 
Financial Statement Location
Valuation allowance on foreign tax credit carryforward
$
471

Deferred tax expense
Re-measurement of U.S. deferred tax balances at 21%
366

Deferred tax expense
Transition tax on repatriation of foreign earnings
16

Current tax expense
Uncertain tax positions on foreign operations
21

Current tax expense
Total
$
874

 

In addition to the provisional amounts recognized within current and deferred tax expense during the year ended December 31, 2017, the Company also recorded significant changes within the statement of financial position as of December 31, 2017 as a result of the Tax Act including: (i) the reclassification of $270 million of stranded tax effects within Accumulated other comprehensive loss to Retained earnings, primarily associated with our U.S. post-retirement plans and (ii) the presentation of $101 million of credits associated with previous payments under AMT from deferred tax assets to other non-current assets.
In response to the enactment of the Tax Act in late 2017, the U.S. Securities and Exchange Commission issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address situations where the accounting is incomplete for certain income tax effects of the Tax Act upon issuance of an entity’s financial statements for the reporting period in which the Tax Act was enacted. Under SAB 118, a company may record provisional amounts during a measurement period for specific income tax effects of the Tax Act for which the accounting is incomplete but a reasonable estimate can be determined, and when unable to determine a reasonable estimate for any income tax effects, report provisional amounts in the first reporting period in which a reasonable estimate can be determined. The Company has recorded the impact of the tax effects of the Tax Act, relying on estimates where the accounting is incomplete as of December 31, 2017. As guidance and technical corrections are issued in the upcoming quarters, the Company will record updates to its original provisional estimates.
The Act reduces the corporate tax rate to 21 percent, effective January 1, 2018. Accordingly, we have recorded a provisional decrease of $366 million to deferred tax assets for the year ended December 31, 2017. 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 Tax Act, including, but not limited to, our calculation of subsequent payments and economic performance analyses. The analyses will continue throughout 2018 and will be completed when the Company files its income tax returns in late 2018.
The Tax Act creates a new requirement that certain income earned by controlled foreign corporations must be included currently in the gross income of the U.S. shareholder under the Global Intangible Low-Taxed Income ("GILTI") provision. Because of the complexity of the new GILTI tax rules, the Company is continuing to evaluate this provision of the Tax Act and the application within the Company’s financial statements. Under U.S. GAAP, the Company may make an accounting policy choice to: (i) record 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 (ii) factor such amounts into its measurement of deferred taxes (the “deferred method”). The Company’s selection of an accounting policy with respect to the new GILTI tax rules will depend, in part, on analyzing its global income to determine whether it expects to have future U.S. inclusions in taxable income related to GILTI and, if so, what the impact is expected to be. Because whether the Company expects to have future U.S. inclusions in taxable income related to GILTI depends on not only its current structure and estimated future results of global operations but also its intent and ability to modify its structure and/or business, it is not yet able to reasonably estimate the effect of this provision of the Tax Act. Therefore, the Company has not made any adjustments related to potential GILTI tax in its financial statements and has not made a policy decision regarding how to record the tax effects of GILTI as of December 31, 2017. The Company will continue to analyze the impact of GILTI as more guidance is issued and a decision will be made during 2018 on whether to treat the GILTI as a period cost or a deferred tax item.
The Tax Act includes a transition tax on the deemed distribution of previously untaxed accumulated and current earnings and profits of certain of foreign subsidiaries. To determine the amount of the transition tax, the Company must determine, in addition to other factors, the amount of post-1986 earnings and profits of relevant subsidiaries, as well as the amount of non-U.S. income taxes paid on such earnings. An estimate of the transition tax of $16 million has been recorded as of December 31, 2017. This amount is the net impact after considering the utilization of existing foreign tax credit carryforwards against the deemed repatriation liability of $60 million and the benefit of $44 million from additional tax credits generated from actual distributions made during 2017 in anticipation of the tax reform. The Company is continuing to gather additional information to more precisely compute the amount of the transition tax, any related impacts to the deferred tax liability on unremitted earnings of foreign subsidiaries that are not reinvested indefinitely, and the state income tax impact of the deemed distributions.
Provisions under the Tax Act drive significant changes to the Company’s ability to utilize foreign tax credit carryforwards to offset taxable income from foreign sourced operations. Prior to the enactment of the Tax Act, the Company planned to put in place certain tax planning strategies which would maximize its ability to utilize foreign tax credits against U.S. corporate income tax. As a result of the Tax Act, such strategies are no longer prudent or feasible. The Company has recorded a valuation allowance of $471 million against its U.S. foreign tax credit carryforwards, representing a reasonable estimate of its inability to utilize remaining tax credits under the Tax Act. The valuation allowance estimate is effected by various aspects of the Tax Act, such as the deemed repatriation of deferred foreign income, GILTI inclusions, and new foreign tax credit limitations. Therefore, this estimate is subject to change as the IRS and Treasury clarify the application of these provisions under the Tax Act and the Company evaluates its structure for foreign operations in light of the changes made by the Tax Act and considers tax planning opportunities which may be available and management is willing to implement.

Components of Income Tax Expense
Components of earnings (loss) from continuing operations before income taxes are as follows:
Years ended December 31
2017
 
2016
 
2015
United States
$
959

 
$
651

 
$
725

Other nations
117

 
193

 
192

 
$
1,076

 
$
844

 
$
917


Components of income tax expense (benefit) are as follows:
Years ended December 31
2017
 
2016
 
2015
United States
$
43

 
$
20

 
$
71

Other nations
75

 
31

 
30

States (U.S.)
9

 
18

 
13

Current income tax expense
127

 
69

 
114

United States
1,078

 
180

 
154

Other nations
(8
)
 
36

 
(13
)
States (U.S.)
30

 
(3
)
 
19

Deferred income tax expense
1,100

 
213

 
160

Total income tax expense (benefit)
$
1,227

 
$
282

 
$
274



Differences between income tax expense (benefit) computed at the U.S. federal statutory tax rate of 35% and income tax expense (benefit) as reflected in the consolidated statements of operations are as follows:
Years ended December 31
2017
 
2016
 
2015
Income tax expense (benefit) at statutory rate
$
377

35.0
 %
 
$
295

35.0
 %
 
$
321

35.0
 %
Non-U.S. tax on non-U.S. earnings
(28
)
(2.6
)%
 
(25
)
(3.0
)%
 
(46
)
(5.0
)%
State income taxes, net of federal benefit
39

3.6
 %
 
26

3.1
 %
 
24

2.6
 %
Reserve for uncertain tax positions
3

0.3
 %
 
(13
)
(1.6
)%
 
1

0.1
 %
Other provisions
(7
)
(0.6
)%
 
(2
)
(0.4
)%
 
14

1.6
 %
Valuation allowances
(8
)
(0.7
)%
 
(7
)
(0.8
)%
 
(9
)
(1.0
)%
Section 199 deduction
(18
)
(1.7
)%
 
(15
)
(1.7
)%
 
(19
)
(2.1
)%
U.S. tax on undistributed non-U.S. earnings
20

1.9
 %
 
25

3.0
 %
 
(7
)
(0.8
)%
Research credits
(4
)
(0.4
)%
 
(2
)
(0.2
)%
 
(5
)
(0.5
)%
Loss on sale of investment
(21
)
(2.0
)%
 
—

—
 %
 
—

—
 %
U.S. tax reform
874

81.2
 %
 
—

—
 %
 
—

—
 %
 
$
1,227

114.0
 %
 
$
282

33.4
 %
 
$
274

29.9
 %

Income tax expense for the year ended December 31, 2017 was $1.2 billion, an increase of $945 million, driven by $874 million of non-recurring charges during the year related to the enactment of the Tax Act which drove an effective tax rate in excess of the current U.S. federal statutory rate of 35%.
Deferred tax balances that were recorded within Accumulated other comprehensive loss in the Company’s consolidated balance sheets, rather than Income tax expense, are a result of retirement benefit adjustments, currency translation adjustments, and fair value adjustments to available-for-sale securities. The adjustments were benefits of $49 million, $87 million, and $62 million for the years ended December 31, 2017, 2016, and 2015, respectively.
The Company evaluates its permanent reinvestment assertions with respect to foreign earnings at each reporting period and generally, except for certain earnings that the Company intends to reinvest indefinitely due to the capital requirements of the foreign subsidiaries or due to local country restrictions, accrues for the U.S. federal and foreign income tax applicable to the earnings. As a result of the Tax Act, dividends from foreign subsidiaries are now exempt, and the U.S. tax accrual for undistributed foreign earnings is limited primarily to foreign withholding taxes and inherent capital gains that would result from distribution of foreign earnings which are not permanently reinvested.


Undistributed earnings that the Company intends to reinvest indefinitely, and for which no U.S. income taxes have been provided, aggregate to $1.8 billion at December 31, 2017. However, the Company believes that the additional income tax charge with respect to such earnings, if distributed, would be immaterial. On a cash basis, these repatriations from the Company's non-U.S. subsidiaries could require the payment of additional taxes. The portion of earnings not reinvested indefinitely may be distributed without an additional charge given the U.S. federal and foreign income tax accrued on undistributed earnings.
Gross deferred tax assets were $2.1 billion and $3.1 billion at December 31, 2017 and 2016, respectively. Deferred tax assets, net of valuation allowances, were $1.5 billion at December 31, 2017 and $3.0 billion at December 31, 2016, respectively. Gross deferred tax liabilities were $546 million and $900 million at December 31, 2017 and 2016, respectively.
Significant components of deferred tax assets (liabilities) are as follows: 
December 31
2017
 
2016
Inventory
$
46

 
$
29

Accrued liabilities and allowances
74

 
136

Employee benefits
374

 
693

Capitalized items
18

 
169

Tax basis differences on investments
—

 
7

Depreciation tax basis differences on fixed assets
72

 
74

Undistributed non-U.S. earnings
(26
)
 
(27
)
Tax carryforwards
778

 
927

Business reorganization
16

 
36

Warranty and customer liabilities
21

 
21

Deferred revenue and costs
142

 
122

Valuation allowances
(604
)
 
(118
)
Deferred charges
—

 
37

Other
(3
)
 
(8
)
 
$
908

 
$
2,098


At December 31, 2017 and 2016, the Company had valuation allowances of $604 million and $118 million, respectively, against its deferred tax assets, including $90 million and $85 million, respectively, relating to deferred tax assets for non-U.S. subsidiaries. The Company’s U.S. valuation allowance increased $481 million during 2017 primarily related to the $471 million valuation allowance on foreign tax credits due to new limitations imposed on the utilization of such credits under the Tax Act. The Company believes that the remaining deferred tax assets are more-likely-than-not to be realizable based on estimates of future taxable income and the implementation of tax planning strategies.
Tax carryforwards are as follows: 
December 31, 2017
Gross
Tax Loss
 
Tax
Effected
 
Expiration
Period
United States:
 
 
 
 
 
U.S. tax losses
$
56

 
$
12

 
2022-2036
Foreign tax credits
—

 
471

 
2018-2023
General business credits
—

 
98

 
2026-2037
State tax losses
—

 
39

 
2018-2030
State tax credits
—

 
28

 
2018-2031
Non-U.S. Subsidiaries:
 
 
 
 
 
Japan tax losses
100

 
31

 
2018-2025
Germany tax losses
35

 
11

 
Unlimited
United Kingdom tax losses
88

 
16

 
Unlimited
Singapore tax losses
33

 
6

 
Unlimited
Other subsidiaries tax losses
129

 
31

 
Various
Spain tax credits
—

 
26

 
Various
Other subsidiaries tax credits
—

 
9

 
Various
 
 
 
$
778

 
 

The Company had unrecognized tax benefits of $76 million and $68 million at December 31, 2017 and December 31, 2016, respectively, of which approximately $30 million, if recognized, would affect the effective tax rate for both 2017 and 2016, net of resulting changes to valuation allowances.
A roll-forward of unrecognized tax benefits is as follows: 
 
2017
 
2016
Balance at January 1
$
68

 
$
88

Additions based on tax positions related to current year
10

 
—

Additions for tax positions of prior years
22

 
2

Reductions for tax positions of prior years
(1
)
 
(15
)
Settlements and agreements
(20
)
 
(3
)
Lapse of statute of limitations
(3
)
 
(4
)
Balance at December 31
$
76

 
$
68


The IRS has completed its examination of the Company's 2012 and 2013 tax years. The Company also has several state and non-U.S. audits pending. A summary of open tax years by major jurisdiction is presented below: 
Jurisdiction
Tax Years
United States
2008-2017
Australia
2014-2017
Brazil
2013-2017
Canada
2014-2017
China
2013-2017
Mexico
2012-2017
Germany
2011-2017
India
1997-2017
Israel
2012-2017
Poland
2014-2017
Malaysia
2010-2017
United Kingdom
2016-2017

Although the final resolution of the Company’s global tax disputes is uncertain, based on current information, in the opinion of the Company’s management, the ultimate disposition of these matters will not have a material adverse effect on the Company’s consolidated financial position, liquidity or results of operations. However, an unfavorable resolution of the Company’s global tax disputes could have a material adverse effect on the Company’s consolidated financial position, liquidity, or results of operations in the periods, and as of the dates, on which the matters are ultimately resolved.
Based on the potential outcome of the Company’s global tax examinations, the expiration of the statute of limitations for specific jurisdictions, or the continued ability to satisfy tax incentive obligations, it is reasonably possible that the unrecognized tax benefits will change within the next twelve months. The associated net tax impact on the effective tax rate, exclusive of valuation allowance changes, is estimated to be in the range of a $10 million tax charge to a $30 million tax benefit, with cash payments not to exceed $20 million.
At December 31, 2017, the Company had $31 million accrued for interest and $19 million accrued for penalties on unrecognized tax benefits. At December 31, 2016, the Company had $26 million and $18 million accrued for interest and penalties, respectively, on unrecognized tax benefits.