Entity information:
NOTE 15—INCOME TAXES:
a.Income before income taxes:
Year ended December 31,
201720162015
(U.S. $ in millions)
Parent Company and its Israeli subsidiaries$1,451$1,516$1,932
Non-Israeli subsidiaries(19,830)(692)420
$(18,379)$824$2,352

b.Income taxes:
Year ended December 31,
201720162015
(U.S. $ in millions)
In Israel$96$209$149
Outside Israel(2,029)312485
$(1,933)$521$634

Current$373$481$298
Deferred(2,306)40336
$(1,933)$521$634

201720162015
(U.S. $ in millions)
Income (loss) before income taxes$(18,379)$824$2,352
Statutory tax rate in Israel24.0%25.0%26.5%
Theoretical provision for income taxes$(4,411)$206$623
Increase (decrease) in effective tax rate due to:
The Parent Company and its Israeli subsidiaries -
Mainly tax benefits arising from reduced tax rates under benefit programs(253)(212)(337)
Non-Israeli subsidiaries, including impairments (*)3,817546447
U.S. Tax Cuts and Jobs Act effect(1,061)
Increase (decrease) in other uncertain tax positions—net(25)(19)(99)
Effective consolidated income taxes$(1,933)$521$634
* Income before income taxes includes goodwill impairment in non-Israeli subsidiaries that did not have a corresponding tax effect.

The effective tax rate is the result of a variety of factors, including the geographic mix and type of products sold during the year, different effective tax rates applicable to non-Israeli subsidiaries that have tax rates above Teva’s average tax rates, the impact of impairment, restructuring and legal settlement charges and adjustments to valuation allowances on deferred tax assets on such subsidiaries.

c.Deferred income taxes:
December 31,
20172016
Long-term deferred tax assets (liabilities)—net:(U.S. $ in millions)
Inventory related(*)$40$46
Sales reserves and allowances201311
Provision for legal settlements171232
Intangible assets (**) (3,132)(5,569)
Carryforward losses and deductions and credits (***) 1,4851,922
Property, plant and equipment(231)(312)
Provisions for employee related obligations142108
Other125163
(1,199)(3,099)
Valuation allowance—in respect of carryforward losses and deductions that may not be utilized (**)(1,504)(1,689)
$(2,703)$(4,788)
*Following the implementation of ASU 2016-16, the 2016 deferred taxes associated with the intra-entity transfers of inventory have been reclassified and presented under Prepaid expenses.
**The decrease in deferred tax liability is mainly due to impairment, amortization and changes in statutory tax rate following the enactment of Tax Cuts and Jobs Act.
***The amounts are shown after reduction for unrecognized tax benefits of $26 million and $23 million as of December 31, 2017 and 2016, respectively.
This amount represents the tax effect of gross carryforward losses and deductions with the following expirations: 2018-2020 — $277 million; 2021-2027 — $465 million; 2028 and thereafter — $167 million. The remaining balance—$602 million—can be utilized with no expiration date.

The deferred income taxes are reflected in the balance sheets among:
December 31,
20172016
(U.S. $ in millions)
Long-term assets—deferred income taxes574625
Long-term liabilities—deferred income taxes(3,277)(5,413)
$(2,703)$(4,788)
Balances are presented under long term deferred taxes, due to the implementation of ASU 2015-17. The 2016 deferred taxes associated with intra-entity transfers of inventory have been reclassified and presented under Prepaid expenses.

Deferred taxes have not been provided for tax-exempt profits earned by the Company from Approved Enterprises through December 31, 2013 (except to the extent released due to payments made in 2013 under Amendment 69 of the Investment Law, as described below), as the Company intends to permanently reinvest these profits and does not currently foresee a need to distribute dividends out of these earnings. For the same reason, deferred taxes have not been provided for distributions of income from the Company’s foreign subsidiaries. See note 15f.

Year ended December 31,
201720162015
(U.S. $ in millions)
Balance at the beginning of the year$734$648$713
Increase (decrease) related to prior year tax positions, net5623(6)
Increase related to current year tax positions267143
Decrease related to settlements with tax authorities and lapse of applicable statutes of limitations(56)(103)(99)
Liabilities assumed in acquisitions273101-
Other1(6)(3)
Balance at the end of the year$1,034$734$648

Uncertain tax positions, mainly of a long-term nature, included accrued potential penalties and interest of $112 million, $83 million and $101 million as of December 31, 2017, 2016 and 2015, respectively. The total amount of interest and penalties reflected in the consolidated statements of income was a net increase of $29 million for the year ended December 31, 2017, a net decrease of $18 million for the year ended December 31, 2016 and a net increase of $14 million for the year ended December 31, 2015. Substantially all the above uncertain tax benefits, if recognized, would reduce Teva's annual effective tax rate. Teva does not expect uncertain tax positions to change significantly over the next 12 months, except in the case of settlements with tax authorities, the likelihood and timing of which is difficult to estimate.

e. Tax assessments:

Teva files income tax returns in various jurisdictions with varying statutes of limitations. The Parent Company and its subsidiaries in Israel have received final tax assessments through tax year 2007.

In 2013, Teva settled the 2005-2007 income tax assessment with the Israeli tax authorities, paying $213 million. No further taxes are due in relation to these years. Certain guidelines which were set pursuant to the agreement reached in relation to the 2005-2007 assessment have been implemented in the audit of tax years 2008-2011, and are reflected in the provisions.

The Israeli tax authorities issued tax assessment decrees for 2008-2012, challenging the Company's positions on several issues. Teva has protested the 2008-2012 decrees. The Company believes it has adequately provided for these items and that any adverse results would have an immaterial impact on Teva's financial statements.

The Company’s subsidiaries in North America and Europe have received final tax assessments mainly through tax year 2008.

f. Basis of taxation:

The Company and its subsidiaries are subject to tax in many jurisdictions, and a certain degree of estimation is required in recording the assets and liabilities related to income taxes. The Company believes that its accruals for tax liabilities are adequate for all open years. The Company considers various factors in making these assessments, including past history, recent interpretations of tax law, and the specifics of each matter. Because tax regulations are subject to interpretation and tax litigation is inherently uncertain, these assessments can involve a series of complex judgments regarding future events.

Incentives Applicable until 2013

Under the incentives regime applicable to the Company until 2013, industrial projects of Teva and certain of its Israeli subsidiaries were eligible for “Approved Enterprise” status.

Most of the projects in Israel have been granted Approved Enterprise status under the "alternative" tax benefit track which offered tax exemption on undistributed income for a period of two to ten years, depending on the location of the enterprise. Upon distribution of such exempt income, the distributing company is subject to corporate tax at the rate ordinarily applicable to the Approved Enterprise’s income.

Amendment 69 to the Investment Law

Pursuant to Amendment 69 to the Investment Law (“Amendment 69”), a company that elected by November 11, 2013 to pay a corporate tax rate as set forth in that amendment (rather than the tax rate applicable to Approved Enterprise income) with respect to undistributed exempt income accumulated by the company up until December 31, 2011 is entitled to distribute a dividend from such income without being required to pay additional corporate tax with respect to such dividend. A company that has so elected must make certain qualified investments in Israel over the five-year period commencing in 2013. Teva invested the entire required amount in 2013.

During 2013, Teva applied the provisions of Amendment 69 to certain exempt profits Teva accrued prior to 2012. Consequently, Teva paid $577 million in corporate tax on exempt income of $9.4 billion. Part of this income was distributed as dividends during 2013-2017, while the remainder is available to be distributed as dividends in future years with no additional corporate tax liability.

Incentives Applicable starting 2014: The Incentives Regime – Amendment 68 to the Investment Law

Under Amendment 68 to the Investment Law, which Teva started applying in 2014, upon an irrevocable election made by a company, a uniform corporate tax rate will apply to all qualifying industrial income of such company (“Preferred Enterprise”), as opposed to the previous law’s incentives, which were limited to income from Approved Enterprises during the benefits period. Under the law, when the election is made, the uniform tax rate for 2014 until 2016 was 9% in areas in Israel designated as Development Zone A and 16% elsewhere in Israel. The uniform tax rate for Development Zone A, as of January 1, 2017, is 7.5% (as part of changes enacted in Amendment 73, as described below). The profits of these “Preferred Enterprise” will be freely distributable as dividends, subject to a 20% or lower withholding tax, under an applicable tax treaty. Certain “Special Preferred Enterprises” that meet more stringent criteria (significant investment, R&D or employment thresholds) will enjoy further reduced tax rates of 5% in Zone A and 8% elsewhere. In order to be classified as a “Special Preferred Enterprises,” the approval of three governmental authorities in Israel is required.

The New Technological Enterprise Incentives Regime – Amendment 73 to the Investment Law

Starting 2017, part of the Company taxable income in Israel is entitled to a preferred 6% tax rate under Amendment 73 to the Investment Law.

The new incentives regime applies to "Preferred Technological Enterprises" that meet certain conditions, including, inter alia:

A "Special Preferred Technological Enterprise" is an enterprise that meets, inter alia conditions 1 and 2 above, and in addition has total annual consolidated revenues above NIS 10 billion (approximately $2.5 billion).

Preferred Technological Enterprises are subject to a corporate tax rate of 7.5% on their income derived from intellectual property in areas in Israel designated as zona A and 12% elsewhere, while Special Preferred Technological Enterprises are subject to 6% on such income. The withholding tax on dividends from these enterprises is 4% to foreign companies (or a lower rate under a tax treaty, if applicable).

Income not eligible for Preferred Enterprise benefits is taxed at the regular corporate tax rate, which was 24% in 2017. Starting January 2018, the regular corporate tax rate in Israel was reduced to 23%.

The Parent Company and its Israeli subsidiaries elected to compute their taxable income in accordance with Income Tax Regulations (Rules for Accounting for Foreign Investors Companies and Certain Partnerships and Setting their Taxable Income), 1986. Accordingly, the taxable income or loss is calculated in U.S. dollars. Applying these regulations reduces the effect of U.S. dollar – NIS exchange rate on the Company’s Israeli taxable income.

Non-Israeli subsidiaries are taxed according to the tax laws in their respective country of residence. Certain manufacturing subsidiaries operate in several jurisdictions outside Israel, some of which benefit from tax incentives such as reduced tax rates, investment tax credits and accelerated deductions.

U.S. Tax reform

On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (the "Act"), which among other provisions, reduced the U.S. corporate tax rate from 35% to 21%, effective January 1, 2018. At December 31, 2017, the Company has not completed its accounting for the tax effects of enactment of the Act; however the Company has made reasonable estimates of the effects on its existing deferred tax balances and the one-time deemed repatriation tax for which provisional amounts have been recorded.

The Company re-measured certain of its U.S. deferred tax assets and liabilities, based on the rates at which they are expected to reverse in the future. The estimated tax benefit recorded related to the re-measurement of the deferred tax balance was $1.2 billion.

The one-time deemed repatriation tax is based on the post-1986 earnings and profits for which the Company has previously deferred from U.S. income taxes and is payable over 8 years. The Company recorded a provisional amount for its one-time deemed repatriation tax liability of Teva U.S. related to its foreign subsidiaries, resulting in an increase in income tax expense of $112 million.

The aforesaid provisional amounts are based on the Company's initial analysis of the Act as of December 31, 2017. Given the significant complexity of the Act, anticipated guidance from the U.S. Treasury about implementing the Act, the potential for additional guidance from the Securities and Exchange Commission or the Financial Accounting Standards Board related to the Act, as well as additional analysis and revisions to be conducted by the Company, these estimates may be adjusted during 2018.