INCOME TAXES
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| Years ended December 31, |
| 2017 | | 2016 | | 2015 |
Components of Income (Loss) Before Taxes | ($ in millions) |
Domestic | $ | 53.3 |
| | $ | (23.3 | ) | | $ | (66.9 | ) |
Foreign | 63.9 |
| | (10.9 | ) | | 73.6 |
|
Income (loss) before taxes | $ | 117.2 |
| | $ | (34.2 | ) | | $ | 6.7 |
|
Components of Income Tax (Benefit) Provision | | | | | |
Current (benefit) expense: | | | | | |
Federal | $ | (4.0 | ) | | $ | (11.6 | ) | | $ | (16.6 | ) |
State | 3.0 |
| | 0.9 |
| | 1.2 |
|
Foreign | 24.1 |
| | 15.7 |
| | 14.4 |
|
| 23.1 |
| | 5.0 |
| | (1.0 | ) |
Deferred (benefit) expense: | | | | | |
Federal | $ | (549.6 | ) | | $ | (10.1 | ) | | $ | 8.9 |
|
State | 14.6 |
| | (5.1 | ) | | (2.4 | ) |
Foreign | 79.6 |
| | (20.1 | ) | | 2.6 |
|
| (455.4 | ) | | (35.3 | ) | | 9.1 |
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Income tax (benefit) provision | $ | (432.3 | ) | | $ | (30.3 | ) | | $ | 8.1 |
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The following table accounts for the difference between the actual tax provision and the amounts obtained by applying the statutory U.S. federal income tax rate of 35% to the income (loss) before taxes.
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| Years ended December 31, |
Effective Tax Rate Reconciliation (Percent) | 2017 | | 2016 | | 2015 |
Statutory federal tax rate | 35.0 | % | | 35.0 | % | | 35.0 | % |
State income taxes, net | (1.2 | ) | | 8.0 |
| | (38.2 | ) |
Foreign rate differential | (7.7 | ) | | (25.1 | ) | | (129.8 | ) |
U.S. tax on foreign earnings | (70.8 | ) | | 24.4 |
| | 128.6 |
|
Salt depletion | (16.1 | ) | | 45.4 |
| | (38.8 | ) |
Non-deductible transaction costs | — |
| | — |
| | 133.1 |
|
Change in valuation allowance | 76.0 |
| | (0.7 | ) | | 27.9 |
|
Remeasurement of U.S. state deferred taxes | 10.2 |
| | 9.4 |
| | 7.6 |
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Change in tax contingencies | (7.7 | ) | | (9.7 | ) | | 5.0 |
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U.S. Tax Cuts and Jobs Act | (373.5 | ) | | — |
| | — |
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Share-based payments | (5.7 | ) | | — |
| | — |
|
Dividends paid to Contributing Employee Ownership Plan | (0.6 | ) | | 2.8 |
| | (11.1 | ) |
Return to provision | (0.6 | ) | | 5.3 |
| | (4.2 | ) |
U.S. Federal tax credits | (4.2 | ) | | 0.6 |
| | (3.1 | ) |
Other, net | (2.0 | ) | | (6.8 | ) | | 8.9 |
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Effective tax rate | (368.9 | )% | | 88.6 | % | | 120.9 | % |
The effective tax rate for 2017 was favorably impacted by (1) the 2017 Tax Act, (2) an agreement with the Internal Revenue Service (IRS) on prior period tax examinations, (3) stock based compensation, (4) U.S. federal tax credits, (5) changes to prior year tax positions and (6) a reduction to the deferred tax liability on unremitted foreign earnings. The effective tax rate was also unfavorably impacted by a net increase in the valuation allowance, primarily related to foreign net operating losses and remeasurement of deferred taxes due to an increase in our state effective tax rates. These factors resulted in a net $452.3 million tax benefit of which $437.9 million was a provisional benefit from the 2017 Tax Act.
The effective tax rate for 2016 was favorably impacted by provision to return adjustments, primarily related to salt depletion and non-deductible acquisition costs, and the remeasurement of deferred taxes due to a decrease in our state effective tax rates. The effective tax rate was also unfavorably impacted a change in prior year uncertain tax positions. These factors resulted in a net $3.9 million tax benefit.
The tax rate for 2015 was unfavorably impacted by non-deductible acquisition costs, which was partially offset by a benefit for salt depletion deductions. The net impact of these factors was a net $6.3 million tax expense.
The 2017 Tax Act was enacted on December 22, 2017 and included a broad range of provisions impacting the taxation of businesses. Included within the provisions, the 2017 Tax Act reduces the U.S. federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on unremitted earnings of foreign subsidiaries that were previously tax deferred and transitions the U.S. from a worldwide tax system to a modified territorial tax system.
The SEC issued SAB 118, which provides guidance on accounting for the tax effects of the 2017 Tax Act. SAB 118 provides a measurement period of up to one year from the 2017 Tax Act’s enactment date for companies to complete the accounting under ASC 740 “Income Taxes” (ASC 740). In accordance with SAB 118, to the extent that a company's accounting for certain income tax effects of the 2017 Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the 2017 Tax Act.
At December 31, 2017, we have not completed our accounting for the tax effects of the 2017 Tax Act. The impact of the 2017 Tax Act is expected to require further adjustments in 2018 due to anticipated additional guidance from the U.S. Department of the Treasury, changes in our assumptions, completion of 2017 U.S. and foreign tax returns and further information and interpretations that become available. However, we have made and recorded reasonable estimates of significant items including: (1) the effects on our existing deferred tax balances, (2) the remeasurement of deferred taxes on foreign unremitted earnings and (3) the one-time transition tax. We will make adjustments to these provisional estimates as new information becomes available during the one year measurement period. Our analyses of the 2017 Tax Act will continue throughout 2018 and will be completed when we file all U.S. and foreign tax returns.
In connection with our initial analysis of the 2017 Tax Act, we recognized a provisional deferred tax benefit of $437.9 million. The impact of the 2017 Tax Act includes: (1) a provisional $315.8 million deferred tax benefit to reflect the reduction of the U.S. corporate tax rate from 35% to 21% and (2) a provisional $122.1 million deferred tax benefit to reflect an estimated reduction of $162.6 million in our deferred tax liability on unremitted foreign earnings partially offset by an estimate of the one-time transition tax of $40.5 million. We expect to utilize existing U.S. federal net operating loss carryforwards and foreign tax credits to fully offset the cash tax impact of the one-time transition tax liability.
A provision of the 2017 Tax Act establishes a minimum tax on certain foreign earnings (i.e. global intangible low-taxed income or GILTI). We have not yet completed our analysis of the GILTI tax rules and are still evaluating whether to make a policy election to treat the GILTI tax as a period expense or to provide U.S. deferred taxes on certain foreign differences between the financial statement and tax basis of foreign assets and liabilities. At December 31, 2017, we did not record a deferred tax liability for these differences. We will continue to analyze the impact of GILTI as more guidance is issued and a decision will be made during 2018 on whether to treat the GILTI as a period cost or a deferred tax item.
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| December 31, |
Components of Deferred Tax Assets and Liabilities | 2017 | | 2016 |
| ($ in millions) |
Deferred tax assets: | |
Pension and postretirement benefits | $ | 147.3 |
| | $ | 226.1 |
|
Environmental reserves | 33.2 |
| | 54.5 |
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Asset retirement obligations | 14.0 |
| | 22.0 |
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Accrued liabilities | 37.6 |
| | 53.0 |
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Tax credits | 37.1 |
| | 13.2 |
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Net operating losses | 53.3 |
| | 105.3 |
|
Capital loss carryforward | 2.1 |
| | 2.8 |
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Other miscellaneous items | 11.2 |
| | — |
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Total deferred tax assets | 335.8 |
| | 476.9 |
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Valuation allowance | (121.4 | ) | | (29.0 | ) |
Net deferred tax assets | 214.4 |
| | 447.9 |
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Deferred tax liabilities: | | | |
Property, plant and equipment | 550.3 |
| | 875.5 |
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Intangible amortization | 67.3 |
| | 137.3 |
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Inventory and prepaids | 1.0 |
| | 13.6 |
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Partnerships | 67.5 |
| | 106.3 |
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Taxes on unremitted earnings | 3.1 |
| | 223.6 |
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Other miscellaneous items | — |
| | 4.6 |
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Total deferred tax liabilities | 689.2 |
| | 1,360.9 |
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Net deferred tax liability | $ | (474.8 | ) | | $ | (913.0 | ) |
Realization of the net deferred tax assets, irrespective of indefinite-lived deferred tax liabilities, is dependent on future reversals of existing taxable temporary differences and adequate future taxable income, exclusive of reversing temporary differences and carryforwards. Although realization is not assured, we believe that it is more likely than not that the net deferred tax assets will be realized.
At December 31, 2017, we had a U.S. net operating loss carryforward (NOL) of approximately $1.0 million (representing $0.2 million of deferred tax assets) that will expire after 2019, if not utilized. The utilization is limited to $0.5 million in 2018 and 2019 under Section 382 of the U.S. Internal Revenue Code.
At December 31, 2017, we had deferred state tax benefits of $19.9 million relating to state NOLs, which are available to offset future state taxable income through 2037.
At December 31, 2017, we had deferred state tax benefits of $15.9 million relating to state tax credits, which are available to offset future state tax liabilities through 2032.
At December 31, 2017, we had a capital loss carryforward of $8.7 million (representing $1.8 million of deferred tax assets) which are available to offset future consolidated capital gains that will expire in years 2018 through 2022, if not utilized.
At December 31, 2017, we had foreign tax credits of $18.6 million, which are available to offset federal tax liabilities through 2027 and U.S. federal credits of $7.4 million, which expire between 2034 and 2037.
At December 31, 2017, we had NOLs of approximately $210.4 million (representing $33.1 million of deferred tax assets) in various foreign jurisdictions. Of these, $17.4 million (representing $3.8 million of deferred tax assets) expire in various years from 2020 to 2027. The remaining $193.0 million (representing $29.3 million of deferred tax assets) do not expire.
As of December 31, 2017, we had recorded a valuation allowance of $121.4 million, compared to $29.0 million as of December 31, 2016. The increase of $92.4 million is primarily due to the recent history of cumulative losses within foreign jurisdictions and projections of future taxable income insufficient to overcome the loss history. We continue to have net deferred tax assets in several jurisdictions which we expect to realize, assuming, based on certain estimates and assumptions, sufficient taxable income can be generated to utilize these deferred tax benefits. If these estimates and related assumptions change in the future, we may be required to reduce the value of the deferred tax assets resulting in additional tax expense.
The activity of our deferred income tax valuation allowance was as follows:
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| December 31, |
| 2017 | | 2016 |
| ($ in millions) |
Beginning balance | $ | 29.0 |
| | $ | 29.3 |
|
Increases to valuation allowances | 94.5 |
| | 8.4 |
|
Acquisition activity | — |
| | (4.3 | ) |
U.S. Tax Cuts and Jobs Act | 2.2 |
| | — |
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Decreases to valuation allowances | (5.0 | ) | | (4.4 | ) |
Currency translation adjustment | 0.7 |
| | — |
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Ending balance | $ | 121.4 |
| | $ | 29.0 |
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As of December 31, 2017, we had $36.3 million of gross unrecognized tax benefits, which would have a net $35.5 million impact on the effective tax rate, if recognized. As of December 31, 2016, we had $38.4 million of gross unrecognized tax benefits, which would have a net $36.7 million impact on the effective tax rate, if recognized. The change for 2017 primarily relates to additional gross unrecognized benefits for current and prior year tax positions, as well as decreases for prior year tax positions. The change for 2016 primarily relates to additional gross unrecognized benefits for prior year tax positions, as well as the settlement of ongoing audits. The amounts of unrecognized tax benefits were as follows:
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| December 31, |
| 2017 | | 2016 |
| ($ in millions) |
Beginning balance | $ | 38.4 |
| | $ | 35.1 |
|
Increase for current year tax positions | 2.9 |
| | 1.7 |
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Increase for prior year tax positions | 5.4 |
| | 5.8 |
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Reductions due to statute of limitations | (0.1 | ) | | (0.3 | ) |
Decrease for prior year tax positions | (9.2 | ) | | (1.8 | ) |
Decrease due to tax settlements | (1.1 | ) | | (2.1 | ) |
Ending balance | $ | 36.3 |
| | $ | 38.4 |
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In May 2017, we reached an agreement in principle with the IRS regarding their examination of our U.S. income tax returns for 2008 and 2010 to 2012. The settlement resulted in a reduction of income tax expense of $9.5 million related primarily to favorable adjustments in uncertain tax positions for prior tax years.
We recognize interest and penalty expense related to unrecognized tax positions as a component of the income tax provision. As of December 31, 2017 and 2016, interest and penalties accrued were $1.2 million and $3.0 million, respectively. For 2017, 2016 and 2015, we recorded (benefit) expense related to interest and penalties of $(1.8) million, $(0.4) million and $0.2 million, respectively.
As of December 31, 2017, we believe it is reasonably possible that our total amount of unrecognized tax benefits will decrease by approximately $5.7 million over the next twelve months. The anticipated reduction primarily relates to settlements with tax authorities and the expiration of federal, state and foreign statutes of limitation.
We operate globally and file income tax returns in numerous jurisdictions. Our tax returns are subject to examination by various federal, state and local tax authorities. None of our U.S. federal income tax returns are currently under examination by the IRS. In connection with the Acquisition, DowDuPont retained liabilities relating to taxes to the extent arising prior to the Closing Date. We believe we have adequately provided for all tax positions; however, amounts asserted by taxing authorities could be greater than our accrued position. For our primary tax jurisdictions, the tax years that remain subject to examination are as follows:
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| Tax Years |
U.S. federal income tax | 2013 - 2016 |
U.S. state income tax | 2006 - 2016 |
Canadian federal income tax | 2012 - 2016 |
Brazil | 2014 - 2016 |
Germany | 2015 - 2016 |
China | 2014 - 2016 |
The Netherlands | 2014 - 2016 |