CF Industries Holdings, Inc.

Income Taxes

On December 22, 2017, the U.S. government enacted the Tax Cuts and Jobs Act (the "Tax Act" or "Tax Reform"). The impact of this new legislation is included in the period of enactment in accordance with U.S. GAAP. The most significant impact of this legislation to us is the revaluation of our deferred taxes as a result of the reduction in the federal tax rate from 35% to 21%, which is effective on January 1, 2018. The Tax Act also imposes a transition tax liability on our previously untaxed foreign earnings that is payable over an eight-year period beginning in 2018. The amount recorded in the period of enactment for the transition tax liability represents our current estimate of the provisions of the Tax Act and is a provisional amount based on amounts reasonably estimable. See further discussion below related to this estimate, which may be adjusted as more information becomes available prior to the end of the one-year measurement period in December 2018.

The components of (loss) earnings before income taxes and equity in earnings of non-operating affiliates are as follows:



	Year ended December 31,
	2017			2016			2015
	(in millions)
Domestic	$	(186	)	$	(43	)	$	1,031
Non-U.S.	61			(183		)	27
	$	(125	)	$	(226	)	$	1,058

The components of the income tax (benefit) provision are as follows:



	Year ended December 31,
	2017			2016			2015
	(in millions)
Current
Federal	$	(43	)	$	(795	)	$	258
Foreign	19			11			20
State	(6		)	(23		)	39
	(30		)	(807		)	317
Deferred
Federal	(44		)	761			76
Foreign	(3		)	(1		)	(13		)
State	(7		)	(21		)	16
	(54		)	739			79
Income tax (benefit) provision before Tax Reform	(84		)	(68		)	396

Tax Reform - Current
Federal	54			—			—
Foreign	—			—			—
State	3			—			—
	57			—			—
Tax Reform - Deferred
Federal	(548		)	—			—
Foreign	—			—			—
State	—			—			—
	(548		)	—			—
Income tax benefit - Tax Reform	(491		)	—			—
Income tax (benefit) provision	$	(575	)	$	(68	)	$	396

Our preliminary estimate of the transition tax liability resulting from the Tax Act could be impacted by further regulatory or other government guidance relating to provisions of existing laws or the Tax Act. If more information becomes available to cause our provisional amount to change, we will adjust our liability within the measurement period ending in December 2018.

Differences in the expected income tax (benefit) provision based on statutory rates applied to (loss) earnings before income taxes and the income tax (benefit) provision reflected in the consolidated statements of operations are summarized below:



	Year ended December 31,
	2017			2016			2015
	(in millions, except percentages)
(Loss) earnings before income taxes and equity in earnings of non-operating affiliates	$	(125	)	$	(226	)	$	1,058
Expected tax (benefit) provision at U.S. statutory rate of 35%	(44		)	(79		)	370
State income taxes, net of federal	(21		)	(33		)	32
Net earnings attributable to noncontrolling interests	(32		)	(42		)	(12		)
U.S. manufacturing profits deduction	6			39			(17		)
Foreign tax rate differential	(6		)	30			(17		)
U.S. tax on foreign earnings	1			(10		)	—
Valuation allowance	(3		)	50			16
Non-deductible capital costs	—			(17		)	18
Tax rate change	17			—			—
Other	(2		)	(6		)	6
U.S. enacted tax rate change (Tax Reform)	(552		)	—			—
Transition tax liability and other (Tax Reform)	61			—			—
Income tax (benefit) provision	$	(575	)	$	(68	)	$	396
Effective tax rate	457.2		%	30.0		%	37.4		%

Income tax (benefit) provision before Tax Reform⁽¹⁾	$	(84	)	$	(68	)	$	396
Effective tax rate before Tax Reform	67.0		%	30.0		%	37.4		%

⁽¹⁾Income tax (benefit) provision before Tax Reform reflects the income tax (benefit) provision less the Tax Reform impacts included in the table above consisting of U.S. enacted tax rate change (Tax Reform) and transition tax liability and other.

Our effective tax rate is impacted by earnings attributable to noncontrolling interests in CFN for 2017 and 2016 and TNCLP for 2017, 2016 and 2015, as our consolidated income tax (benefit) provision does not include a tax provision on the earnings attributable to the noncontrolling interests. As a result, earnings attributable to the noncontrolling interests of $92 million, $119 million and $34 million in 2017, 2016 and 2015, respectively, which are included in (loss) earnings before income taxes and equity in earnings of non-operating affiliates, impact the effective tax rate in all three years. See Note 16—Noncontrolling Interests for additional information.

We recorded a tax receivable of approximately $22 million as a result of our intention to carryback the tax net operating loss for the year ended December 31, 2017 to prior tax years. As a result of the carryback, the income tax provision for the tax year ended December 31, 2017 includes the tax impact of the recaptured U.S. manufacturing profits deductions claimed in prior years that will not be deductible. The tax receivable from the net operating loss carryback has been reduced by an alternative minimum tax of $36 million in the carryback periods. The alternative minimum tax that would be incurred as a result of the carryback of the net operating loss will become a refundable tax credit as a result of the impact of the Tax Act. These refundable tax credits are available for tax years subsequent to the tax year ended December 31, 2017 and are recorded in our noncurrent tax receivable. The $22 million tax receivable for the net operating loss carryback is included in prepaid income taxes on our consolidated balance sheet as of December 31, 2017.

A federal income tax benefit of $145 million ($242 million before the impact of the Tax Act) was recorded for the amount of the net operating loss for the tax year ended December 31, 2017 that will carryforward to subsequent tax years. The net operating loss carryforward is approximately $692 million and is available until the tax year 2037.

State income taxes for the year ended December 31, 2017 and December 31, 2016 includes a tax benefit of $30 million and $46 million respectively, net of federal tax effect, for state net operating loss carryforwards.

State income taxes for the year ended December 31, 2016 were impacted by investment tax credits of $13 million, net of federal tax effect, related to capital assets placed in service at our production facilities in Oklahoma that are indefinitely available to offset income taxes in that jurisdiction in future years. Our effective state income tax rate was also reduced as a result of the changes to our legal entity structure effected in the first quarter of 2016 as part of our strategic venture with CHS. See Note 16—Noncontrolling Interests for additional information.

The income tax provision for the tax year ended December 31, 2016 includes the tax impact of the U.S. manufacturing profits deductions claimed in prior years that will not be deductible as a result of the carryback of the tax net operating loss for the year ended December 31, 2016.

Non-deductible capital costs for the tax year ended December 31, 2016 include certain transaction costs capitalized in the prior year that are now deductible as a result of the termination of the proposed combination with certain businesses of OCI N.V. (OCI).

The foreign tax rate differential is impacted by the inclusion of equity earnings from our equity method investment in PLNL, a foreign operating affiliate, which are included in pre-tax earnings on an after-tax basis and the tax effect of net operating losses of a foreign subsidiary of the Company for which a valuation allowance has been recorded. We determined the carrying value of our equity method investment in PLNL exceeded fair value and recognized an impairment of our equity method investment in PLNL of $134 million in the fourth quarter of 2016 and $62 million in the fourth quarter of 2015. The impairments are included in equity in earnings of operating affiliates. Our income tax provisions do not include a tax benefit for the impairment of our equity method investment as the impairment does not give rise to a tax deduction. See Note 7—Equity Method Investments for additional information.

Foreign subsidiaries of the Company have incurred capital losses of $116 million that are indefinitely available to offset capital gains in the applicable foreign jurisdictions. As the future realization of these carryforwards is not anticipated, a valuation allowance of $29 million was recorded in the year ended December 31, 2016.

The foreign tax rate differential for the tax year ended December 31, 2016 includes a $5 million deferred tax benefit for an enacted tax rate change.

Deferred tax assets and deferred tax liabilities are as follows:



	December 31,
	2017			2016
	(in millions)
Deferred tax assets:
Net operating loss and capital loss carryforwards	$	359		$	187
Retirement and other employee benefits	67			118
Unrealized loss on hedging derivatives	6			9
Intangible asset	5			34
Other	115			140
	552			488
Valuation allowance	(156		)	(159		)
	396			329
Deferred tax liabilities:
Depreciation and amortization	(256		)	(329		)
Investments in partnerships	(1,151		)	(1,582		)
Foreign earnings	(28		)	(28		)
Unrealized gain on hedging derivatives	—			(16		)
Other	(8		)	(4		)
	(1,443		)	(1,959		)
Net deferred tax liability	$	(1,047	)	$	(1,630	)

Investments in partnerships in the table above reflects the deferred tax liability for our investments in CFN and TNCLP. These amounts were previously presented in the corresponding deferred tax asset and liability amounts; therefore, the amounts representing the deferred tax liability for our investments in partnerships as of December 31, 2016 have been reclassified to the investments in partnerships to conform to the current year presentation.

A foreign subsidiary of the Company has net operating loss carryforwards of $383 million that are indefinitely available in the foreign jurisdiction. As the future realization of these carryforwards is not anticipated, a valuation allowance of $100 million has been recorded. Of this amount, $11 million and $17 million were recorded as valuation allowances in the years ended December 31, 2017 and 2016, respectively.

We consider the earnings of certain of our Canadian operating subsidiaries to not be permanently reinvested and we recognize a deferred tax liability for the future repatriation of these earnings, as they are earned. As of December 31, 2017, we have recorded a deferred income tax liability of approximately $28 million, which reflects the additional U.S. and foreign income taxes that would be due upon the repatriation of the accumulated earnings of our non-U.S. subsidiaries that are considered to not be permanently reinvested.

We file federal, provincial, state and local income tax returns principally in the United States, Canada and the United Kingdom, as well as in certain other foreign jurisdictions. In general, filed tax returns remain subject to examination by United States tax jurisdictions for years 1999 and thereafter, by Canadian tax jurisdictions for years 2006 and thereafter, and by United Kingdom tax jurisdictions for years 2015 and thereafter. Our income tax liability or transition tax expense could be impacted by the finalization of currently on-going U.S. or foreign income tax audits of prior tax years falling before the date of enactment of the Tax Act or audits by the U.S. or foreign taxing authorities, which change the amount of our total income allocable to and taxed in the United States or a foreign country.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:



	December 31,
	2017			2016
	(in millions)
Unrecognized tax benefits:
Beginning balance	$	134		$	155
Additions for tax positions taken during the current year	—			—
Additions for tax positions taken during prior years	—			2
Reductions related to lapsed statutes of limitations	(11		)	(7		)
Reductions related to settlements with tax jurisdictions	(1		)	(16		)
Ending balance	$	122		$	134

Unrecognized tax benefits decreased by $12 million in 2017 and $21 million in 2016. Our effective tax rate would be affected by $91 million if these unrecognized tax benefits were to be recognized in the future.

Interest expense and penalties of $2 million, $4 million, and $4 million were recorded for the years ended December 31, 2017, 2016 and 2015, respectively. Amounts recognized in our consolidated balance sheets for accrued interest and penalties related to income taxes of $29 million and $28 million are included in other liabilities as of December 31, 2017 and 2016, respectively.

On December 18, 2015, the Protecting Americans from Tax Hikes Act of 2015 (PATH Act) was signed into law and was applicable to tax years 2015 through 2019. One of the provisions of the PATH Act permitted companies to deduct 50% of their capital expenditures for federal income tax purposes in the year qualifying assets were placed into service. We recorded a federal tax receivable of approximately $816 million for the year ended December 31, 2016 as a result of our intention at that time to carryback the tax net operating loss that was principally the result of this tax law change. The tax receivable was primarily associated with completion of the new capacity expansion projects that were placed into service at our Donaldsonville, Louisiana and Port Neal, Iowa complexes during November and December of 2016. The tax receivable is included in prepaid income taxes on our consolidated balance sheet as of December 31, 2016 and was received in the second quarter of 2017.

During the third quarter of 2015, we acquired the remaining 50% equity interest in CF Fertilisers UK not previously owned by us and recognized a $94 million gain on the remeasurement to fair value of our initial 50% equity interest in CF Fertilisers UK. The earnings in CF Fertilisers UK have been permanently reinvested. Therefore, the recognition of the $94 million gain on the remeasurement of the historical equity investment does not include the recognition of tax expense on the gain. See Note 7—Equity Method Investments for additional information.

We recorded an income tax benefit of $12 million during the second quarter of 2015 for the pre-tax losses on the sale of equity method investments. The tax benefit related to the loss on the sale of our interests in Keytrade is included in equity in earnings of non-operating affiliates—net of taxes in our consolidated statements of operations. See Note 7—Equity Method Investments for additional information.