Entity information:
INCOME TAXES
Earnings from continuing operations before provision for income taxes consist of the following:
 
 
 
 
 
 
Earnings from Continuing Operations before Provision for Income Taxes
(in millions)
Year Ended September 30,
2017
 
2016
 
2015
United States
$
1,647

 
$
1,479

 
$
2,047

International
565

 
511

 
456

Pre-tax earnings from continuing operations
$
2,212

 
$
1,990

 
$
2,503

 
 
 
 
 
 

The provision for income taxes from continuing operations consists of the following:
 
 
 
 
 
 
Provision for Income Taxes from Continuing Operations
(in millions)
Year Ended September 30,
2017
 
2016
 
2015
Current provision for income taxes:
 
 
 
 
 
Federal
$
312

 
$
112

 
$
404

State and local
43

 
31

 
65

International
112

 
122

 
114

Total current provision for income taxes
467

 
265

 
583

Deferred provision for income taxes
(174
)
 
254

 
(82
)
Provision for income taxes
$
293

 
$
519

 
$
501

 
 
 
 
 
 


A reconciliation of the effective income tax rate on continuing operations to the U.S. federal statutory income tax rate is as follows:
 
 
 
 
 
 
 
Year Ended September 30,
Effective Tax Rate
2017
 
2016
 
2015
U.S. federal statutory income tax rate
35.0
 %
 
35.0
 %
 
35.0
 %
State and local taxes, net of federal benefit
1.4

 
1.7

 
1.8

Effect of international operations
(5.5
)
 
(4.4
)
 
(2.9
)
Qualified production activities deduction
(3.0
)
 
(1.0
)
 
(3.0
)
Change in valuation allowance
(1.4
)
 
(1.1
)
 
(2.7
)
Tax accounting method change
—

 
(2.7
)
 
—

Foreign tax credits of repatriated non-U.S. earnings
—

 
(0.4
)
 
(7.4
)
Foreign tax credits on distribution of securities
(12.6
)
 
—

 
—

All other, net
(0.7
)
 
(1.0
)
 
(0.8
)
Effective tax rate, continuing operations
13.2
 %
 
26.1
 %
 
20.0
 %
 
 
 
 
 
 

We recognized a net discrete tax benefit of $340 million in 2017, $102 million in 2016 and $258 million in 2015, which served to reduce the provision for income taxes for those periods. The benefit in 2017 is principally related to the recognition of foreign tax credits realized during the fourth fiscal quarter of 2017 on the distribution to Viacom’s U.S. group of certain securities, the reversal of a valuation allowance on capital loss carryforwards in connection with the sale of our investment in EPIX and the release of tax reserves with respect to certain effectively settled tax positions. Total discrete tax benefits also include the impact of the gains on asset sales, restructuring and programming charges, the net loss on debt extinguishment and investment impairment.
The benefit in 2016 was principally related to a tax accounting method change granted by the Internal Revenue Service (“IRS”), the release of tax reserves with respect to certain effectively settled tax positions and the recognition of capital loss carryforwards, partially offset by a reduction in qualified production activity tax benefits as a result of retroactively reenacted legislation.
During 2015, we reorganized certain non-U.S. subsidiaries in order to facilitate a more efficient movement of non-U.S. cash and to support the expansion of key areas for growth internationally. The benefit in 2015 was principally related to excess foreign tax credits attributable to a taxable repatriation of non-U.S. earnings from reorganized entities and the release of tax reserves with respect to certain effectively settled tax positions.
The tax effects of the items recorded as deferred tax assets and liabilities are:
 
 
 
 
Deferred Taxes
(in millions)
September 30,
2017
 
2016
Deferred tax assets:
 
 
 
Accrued liabilities
$
205

 
$
193

Postretirement and other employee benefits
348

 
452

Tax credit and loss carryforwards
259

 
223

All other
124

 
184

Total deferred tax assets
936

 
1,052

Valuation allowance
(156
)
 
(195
)
Total deferred tax assets, net
$
780

 
$
857

Deferred tax liabilities:
 
 
 
Property, equipment and intangible assets
$
(619
)
 
$
(525
)
Unbilled revenue
(117
)
 
(127
)
Financing obligations
(113
)
 
(114
)
Film & TV production expenditures
(185
)
 
(429
)
Total deferred tax liabilities
(1,034
)
 
(1,195
)
Deferred taxes, net
$
(254
)
 
$
(338
)
 
 
 
 

We have recorded valuation allowances for certain deferred tax assets, which are primarily related to net operating losses in foreign jurisdictions, as sufficient uncertainty exists regarding the future realization of these assets.
We have $120 million of U.S. foreign tax credit carryforwards at September 30, 2017. The utilization of these carryforwards as an available offset to future tax is subject to limitations under current U.S. federal income tax laws. These carryforwards begin to expire in fiscal year 2027. In addition, we have $267 million of tax losses in various international jurisdictions that are primarily from countries with unlimited carry forward periods and $431 million of tax losses that expire in the fiscal years 2018 through 2037. The pre-valuation allowance deferred tax asset amount related to these U.S. and international carryforwards is $259 million.
The net deferred tax assets and deferred tax liabilities included in the Consolidated Balance Sheets were as follows:
 
 
 
 
 
Deferred Tax Assets / (Liabilities)
(in millions)
 
September 30,
 
2017
 
2016
Deferred tax assets
 
$
40

 
$
43

Deferred tax liabilities
 
(294
)
 
(381
)
Deferred taxes, net
 
$
(254
)
 
$
(338
)
 
 
 
 
 

Deferred tax assets are included within Other assets in the Consolidated Balance Sheets.
As of September 30, 2017, we have not made any provision for U.S. income taxes on approximately $827 million of unremitted earnings of our international subsidiaries since these earnings are indefinitely reinvested outside the U.S. If these earnings were to be remitted in the future, the related U.S. income tax liability may be reduced by any foreign income taxes previously paid on these earnings. Under current U.S. tax laws, repatriating unremitted earnings could result in incremental taxes of 15% -20% on the repatriated earnings depending on the territory. To the extent that any tax reform legislation were to lower the U.S. federal statutory income tax rate from its current 35%, there could be a corresponding reduction in the estimate of incremental taxes that would result from repatriating unremitted earnings.
A reconciliation of the beginning and ending amounts of unrecognized tax benefits, excluding interest and penalties, is as follows:
 
 
 
 
 
 
Unrecognized Tax Benefits
(in millions)
Year Ended September 30,
2017
 
2016
 
2015
Balance at beginning of the period
$
164

 
$
179

 
$
185

Gross additions based on tax positions related to the current year
36

 
21

 
60

Gross additions for tax positions of prior years
6

 
13

 
8

Gross reductions for tax positions of prior years
(14
)
 
(23
)
 
(63
)
Settlements
(8
)
 
(1
)
 
(1
)
Expiration of the statute of limitation
(25
)
 
(25
)
 
(10
)
Balance at end of the period
$
159

 
$
164

 
$
179

 
 
 
 
 
 

The total amount of unrecognized tax benefits at September 30, 2017, if recognized, would favorably affect the effective tax rate.
As discussed in Note 2, we recognize interest and penalties accrued related to unrecognized tax benefits as a component of the Provision for income taxes in the Consolidated Statements of Earnings. We recognized interest and penalties of $9 million in 2017, $11 million in 2016 and $8 million in 2015. We had accruals of $34 million and $37 million related to interest and penalties recorded as a component of Other liabilities – noncurrent in the Consolidated Balance Sheets at September 30, 2017 and 2016, respectively.
We and our subsidiaries file income tax returns with the IRS and various state and international jurisdictions. The IRS began its examination of our 2014 and 2015 U.S. consolidated federal income tax returns in fiscal 2017. Tax authorities are also conducting examinations of Viacom subsidiaries in various international and state and local jurisdictions. Due to potential resolution of unrecognized tax positions involving multiple tax periods and jurisdictions, it is reasonably possible that a reduction of up to $60 million of unrecognized income tax benefits may occur within 12 months, some of which, depending on the nature of the settlement, may affect our income tax provision and therefore benefit the resulting effective tax rate. The majority of these uncertain tax positions, when recognized in the financial statements, would be recorded in the Consolidated Statements of Earnings as part of the Provision for income taxes. The actual amount could vary significantly depending on the ultimate timing and nature of any settlements.