Our operations are conducted through various subsidiaries in a number of countries throughout the world. We have provided for income taxes based upon the tax laws and rates in the countries in which operations are conducted and income is earned.

 

Income (loss) from continuing operations before income taxes is comprised of the following:

 

The income tax (provision) benefit is summarized below:

 

The following table reconciles the applicable statutory income tax rates to our effective income tax rates for “Income tax (provision) benefit” as reflected in the Consolidated Statements of Operations.

 

During the year ended December 31, 2017, Tronox Limited, the public parent which is registered under the laws of the State of Western Australia, became managed and controlled in the U.K. The statutory tax rate in the U.K. at December 31, 2017 was 19%. During 2016 and 2015, Tronox Limited was managed and controlled in Australia which has a statutory tax rate of 30%.

 

On December 22, 2017, the U.S. enacted major tax reform legislation. Our deferred tax impact of that legislation has been included in the effective income tax rate table above as a separate line item. It is almost entirely offset in the Valuation allowances line. The gross deferred tax impacts were primarily from our large deferred tax assets being revalued from the previous U.S. statutory rate of 35% down to the newly enacted rate of 21%, compensation accruals and deferred interest amounts which are no longer expected to be deductible under the new legislation, and a change to the portion of an indefinite lived deferred tax liability we could realize based on the new net operating loss indefinite carryforward period and usage limitation.

 

The effective tax rate for 2017 differs from the United Kingdom statutory rate of 19% primarily due to U.S. tax reform legislation, valuation allowances, and rates different than the United Kingdom statutory rate of 19%. For 2016 and 2015 it differs from the Australian statutory rate of 30% primarily due to valuation allowances, rates different than the Australian statutory rate of 30%, and withholding tax accruals on interest income.

 

During the fourth quarter of 2016, we implemented various steps of an internal corporate restructuring plan to simplify our corporate structure and thereby improve operational, administrative, and commercial synergies within each of our operating segments (the “Corporate Reorganization”). As a result of the Corporate Reorganization, we reduced our cross jurisdictional financing arrangements and consequently reversed the deferred tax assets related to intercompany interest deductions. The related withholding tax amounts were also reversed as a result of the Corporate Reorganization. Additionally, we reduced our deferred tax assets related to loss carryforwards which will no longer be available to utilize. The changes to deferred taxes are offset by valuation allowances and result in no impact to the consolidated provision for income taxes for the year ended December 31, 2016. The net income impact of the Corporate Reorganization was a benefit of $137 million in the fourth quarter of 2016, reflecting the reversal of $139 million of withholding tax accruals, offset by a foreign currency loss of $2 million. For the year ended December 31, 2016, the net income impact was $107 million, reflecting a net reduction in withholding tax accruals of $110 million, offset by of a foreign currency loss of $3 million.

 

Changes in our state apportionment factors and state statutory rate changes caused our overall effective state tax rates to change. Due to the large deferred tax asset created by the Anadarko litigation settlement in 2014, these state rate changes have a material impact on deferred taxes for 2015, 2016 and 2017. These are reflected within the State rate changes line above. The changes to deferred tax are offset by valuation allowances.

 

During 2017, the statutory tax rates on income earned in Australia (30%), the United States (35%), South Africa (28%), and the Netherlands (25%) are higher than the United Kingdom statutory rate of 19%. The statutory tax rate on income earned in Switzerland (8%) and Jersey (0%) are lower than the United Kingdom statutory rate of 19%. Also, we continue to maintain a full valuation allowance in Australia, the Netherlands, and the U.S.

 

Net deferred tax assets (liabilities) at December 31, 2017 and 2016 were comprised of the following:

 

The net deferred tax liabilities reflected in the above table include deferred tax assets related to grantor trusts, which were established as Tronox Incorporated emerged from bankruptcy during 2011. The balances relate to the assets contributed to such grantor trusts by Tronox Incorporated and the proceeds from the resolution of previous litigation of $5.2 billion during 2014, which resulted in additional deferred tax assets of $2.0 billion. This increase was fully offset by valuation allowances. During 2016 and 2017, the U.S. net operating loss increased as the grantor trusts spent a portion of the funds received from the litigation.

 

Both the Grantor trusts amount and the Net operating loss and other carryforwards amount above were significantly reduced during 2017 as a result of the U.S. tax reform federal rate change from 35% down to 21%. The reduction to the Net operating loss and other carryforwards line was offset by current year tax losses and by additional net capital losses resulting from the final steps in completing our 2016 Corporate Reorganization.

 

There was a decrease to our valuation allowance of $532 million during 2017, a decrease of $218 million in 2016, and an increase of $229 million in 2015. The table below sets forth the changes, by jurisdiction:

 

The decrease to our valuation allowance in the United States in 2017 was primarily the result of the tax reform legislation impacts. The increase to our valuation allowances in both Australia and the United Kingdom during 2017 was to offset deferred tax assets generated from book losses and Corporate Reorganization net capital losses. The decrease to the valuation allowance in The Netherlands is due to $12 million NOL utilization, offset by the effect of foreign currency exchange rates changes between 2016 and 2017 of $11 million. The decrease to our valuation allowance in Australia during 2016 is primarily the result of the Corporate Reorganization. When we reduced our deferred tax assets related to intercompany interest deductions and loss carryforwards which will no longer be available to utilize, it caused a corresponding reduction to the valuation allowance and resulted in no impact to the consolidated provision for income taxes for the year ended December 31, 2016. The increase to our valuation allowance in the United States during 2016 is primarily the result of an increase to our net operating loss partially offset by a reduction to our deferred tax assets caused by a lower effective state income tax rate. The increases to our valuation allowance in Australia and the United States during 2015 are primarily the result of book losses during that year.

 

At December 31, 2017, we maintain full valuation allowances related to the total net deferred tax assets in Australia, the United States, and the Netherlands, as we cannot objectively assert that these deferred tax assets are more likely than not to be realized. It is reasonably possible that a portion of these valuation allowances could be reversed within the next year due to increased book profitability levels and our pending acquisition of the Cristal TiO₂ Business. Future provisions for income taxes will include no tax benefits with respect to losses incurred and tax expense only to the extent of current state tax payments until the valuation allowances are eliminated. Additionally, we have valuation allowances against specific tax assets in South Africa and the United Kingdom.

 

These conclusions were reached by the application of ASC 740, Income Taxes, and require that all available positive and negative evidence be weighted to determine whether a valuation allowance should be recorded. The more significant evidential matter in Australia, the United States, the Netherlands, and the United Kingdom relates to recent book losses and the lack of sufficient projected taxable income. The more significant evidential matter for South Africa relates to capital losses and assets that cannot be depleted or depreciated for tax purposes.

 

An ownership change occurred during 2012, as a result of the Exxaro Transaction. These ownership changes resulted in a limitation under IRC Sections 382 and 383 related to U.S. net operating losses. We do not expect that the application of these net limitations related to the 2012 ownership change will have any material effect on our U.S. federal income tax liabilities. The Company did not have any transactions during 2017 that triggered an ownership change under IRC Sections 382 and 383.

 

The Company’s ability to use any net operating losses and section 163(j) interest expense carryforwards (which are now subject to Section 382 limitations per the new recently enacted U.S. major tax reform legislation) generated by it could be substantially limited if the Company were to experience another ownership change as defined under IRC Section 382. In general, an ownership change would occur if the Company’s “5-percent shareholders,” as defined under IRC Section 382, including certain groups of persons treated as “5-percent shareholders,” collectively increased their ownership in the Company by more than 50 percentage points over a rolling three-year period. If an ownership change does occur during 2018, the resulting impact could be a limitation of up to $5.2 billion composed of both U.S. net operating losses and interest limitation carryforwards. There would be minimal impact on the $2.5 billion future Grantor Trust deductions from an IRC Sections 382 change.

 

The deferred tax assets generated by tax loss carryforwards in Australia, the United States, and the Netherlands have been fully offset by valuation allowances. The expiration of these carryforwards at December 31, 2017 is shown below. The Australian and South African tax loss carryforwards do not expire.

 

At December 31, 2017, Tronox Limited had foreign subsidiaries with undistributed earnings. Although we would not be subject to income tax on these earnings, amounts totaling $150 million could be subject to withholding tax if distributed. We have made no provision for deferred taxes for Tronox Limited related to these undistributed earnings because they are considered to be indefinitely reinvested outside of the parents’ taxing jurisdictions.

 

The noncurrent liabilities section of our Consolidated Balance Sheet does not reflect any reserves for uncertain tax positions for either 2017 or 2016.

 

Our Australian returns are closed through 2011. However, under Australian tax laws, transfer pricing issues have no limitation period. Our U.S. returns are closed for years through 2012, with the exception of an amendment filed for the 2007 tax year. Our Netherlands returns are closed through 2014. Our South African returns are closed through 2012.

 

We believe that we have made adequate provision for income taxes that may be payable with respect to years open for examination; however, the ultimate outcome is not presently known and, accordingly, additional provisions may be necessary and/or reclassifications of noncurrent tax liabilities to current may occur in the future.

 

On December 22, 2017 the U.S. government enacted the Tax Cuts and Jobs Act (H.R. 1), which creates sweeping tax reform, and the SEC issued Staff Accounting Bulletin 118 (SAB 118), which provides guidance on accounting for tax effects of H.R. 1 under ASC 740. As listed above these acts passed late in the Company’s fiscal year significantly impacted the effective tax rate disclosure for the year ended December 31, 2017.

 

H.R. 1 includes a number of broad and complex changes to the U.S. tax code. The most significant of these changes to the Company is the reduction of the federal corporate tax rate from 35% down to 21%. This change represents the most substantial portion of the amount presented in the effective tax rate as U.S. federal tax reform. The effect of this rate change on the U.S. deferred tax assets and liabilities as well as their associated valuation allowance is considered to be complete. Other provisions of this tax reform have been reasonably estimated but are not yet deemed complete.

 

SAB 118 provides for a measurement period to complete the accounting for income taxes from H.R. 1 that should not extend beyond one year from the enactment date, or December 22, 2018. To the extent that the Company’s accounting for the income tax effects of any provisions in H.R. 1 is incomplete, a reasonable estimate was determinable and this provisional estimate is included in the financial statements. While we are able to make reasonable estimates of the impacts of H.R. 1 on the year ended December 31, 2017, the final impacts may differ from these estimates, due to, among other things, changes in our interpretations and assumptions, additional guidance that may be issued by the IRS or state taxing authorities, and actions not yet taken.