Owens Corning

INCOME TAXES

The following table summarizes our Earnings before taxes and Income tax expense (in millions):



	Twelve Months Ended December 31,
	2017		2016		2015
Earnings before taxes:
United States	$	342	$	281	$	214
Foreign	217		309		239
Total	$	559	$	590	$	453



Income tax expense:
Current
United States	$	(2	)	$	(7	)	$	2
State and local	5			4			1
Foreign	83			55			53
Total current	86			52			56
Deferred
United States	196			117			83
State and local	3			8			10
Foreign	(16		)	11			(29		)
Total deferred	183			136			64
Total income tax expense	$	269		$	188		$	120

The reconciliation between the United States federal statutory rate and the Company’s effective income tax rate from continuing operations is:



	Twelve Months Ended December 31,
	2017		2016		2015
United States federal statutory rate	35	%	35	%	35	%
State and local income taxes, net of federal tax benefit	2		2		2
Foreign tax rate differential	(5	)	(4	)	2
U.S. tax expense on foreign earnings/loss	49		2		4
Legislative tax rate changes	(9	)	1		—
Foreign tax credits	(29	)	—		—
Valuation allowance	3		(3	)	(16	)
Uncertain tax positions and settlements	1		1		—
Other, net	1		(2	)	—
Effective tax rate	48	%	32	%	27	%

The U.S. government enacted the Tax Act legislation on December 22, 2017. The Tax Act made broad and complex changes to the U.S. tax code, including but not limited to, a reduction to the U.S. federal corporate income tax rate from 35% to 21%; a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries (the "Transition Tax”); eliminating the corporate alternative minimum tax (AMT) and changing realization of AMT credits; changing rules related to uses and limitations of net operating loss (NOL) carryforwards created in tax years after December 31, 2017; changes to the limitations on available interest expense deductions; and changes to other existing deductions and business-related exclusions.

The SEC issued SAB 118, which provides guidance on the accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date to complete the accounting under ASC 740, "Income Taxes." In accordance with SAB 118, a company must account for those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in its 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 tax laws that were in effect immediately before the enactment of the Tax Act.

The Company’s accounting for the income tax effects of the Tax Act is incomplete. However, we were able to make reasonable estimates on certain effects of the Tax Act resulting in a total provisional charge to the financial statements of $82 million. The provisional charge includes reasonable estimates for the Transition Tax charge of $264 million, a benefit of $160 million from the generation of foreign tax credits (FTCs), a charge of $24 million for a valuation allowance established against the FTC generated, and a deferred tax benefit of $46 million for the impact to our net U.S. deferred taxes liabilities as a result of the reduction of the corporate tax rate to 21%. The Company’s provisional charge is based on reasonable and supportable assumptions and available inputs and underlying information as of December 31, 2017. Future guidance and interpretations from the Internal Revenue Service (IRS) may also impact our estimates and assumptions used for the provisional adjustments. We are continuing to gather additional information to more precisely compute the amount of the Transition Tax which may affect our analysis of FTCs generated and our deferred tax assets recorded at the reduced corporate tax rate of 21%. The Company was not yet able to make a reasonable estimate of the U.S. state tax effects of the Tax Act. Therefore, no provisional adjustments were recorded.

Effective January 1, 2018, the Tax Act creates a new requirement to include in U.S. income global intangible low-taxed income (GILTI) earned by controlled foreign corporations (CFCs). The GILTI must be included currently in the gross income of the CFCs’ U.S. shareholder. Because of the complexity of the new GILTI tax rules, we are continuing to evaluate this provision of the Tax Act and the application of ASC 740 related to it. Under U.S. GAAP, we are allowed to make an accounting policy choice of either (1) treating taxes due on future U.S. inclusions related to GILTI as a current-period expense when incurred (the “period cost method”) or (2) factoring such amounts into a company’s measurement of its deferred taxes (the “deferred method”). Our selection of an accounting policy depends on several factors including, but not limited to, analyzing global income and the GILTI impact, future results of global operations and our intent and ability to modify our current legal structure. Therefore, we have not made a policy decision regarding whether to record deferred taxes on GILTI and have not made any adjustments related to the potential GILTI tax included in our financial statements.

The Company's analysis whether to change its indefinite reinvestment assertion on account of the Tax Act is incomplete. Therefore, we continue to assert indefinite reinvestment in accordance with ASC 740 based on the laws before enactment of the Tax Act. As of December 31, 2017, the Company has not recorded a deferred tax liability of approximately $76 million for foreign withholding on approximately $2.1 billion of accumulated undistributed earnings of its foreign subsidiaries and affiliates as they are considered by management to be permanently reinvested.

The cumulative temporary differences giving rise to the deferred tax assets and liabilities are as follows (in millions):



	December 31, 2017					December 31, 2016
	Deferred Tax Assets			Deferred Tax Liabilities		Deferred Tax Assets			Deferred Tax Liabilities
Other employee benefits	$	92		$	—	$	117		$	—
Pension plans	48			—		146			—
Operating loss and tax credit carryforwards	377			—		826			—
Depreciation	—			234		—			330
Amortization	—			314		—			384
Foreign tax credits	160			—		—			—
State and local taxes	3			—		5			—
Other	69			—		62			—
Subtotal	749			548		1,156			714
Valuation allowances	(94		)	—		(103		)	—
Total deferred taxes	$	655		$	548	$	1,053		$	714

The following table summarizes the amount and expiration dates of our deferred tax assets related to operating loss and credit carryforwards at December 31, 2017 (in millions):



	Expiration Dates	Amounts
U.S. federal loss carryforwards	2027 – 2032	$	160
U.S. state loss carryforwards (a)	2018 – 2034	67
Foreign loss and tax credit carryforwards	Indefinite	70
Foreign loss and tax credit carryforwards (a)	2018 – 2034	51
Other U.S. federal and state tax credits	2028 – 2034	29
Total operating loss and tax credit carryforwards		$	377
U.S foreign tax credits	2027	$	160


(a)	As of December 31, 2017, $8 million of U.S. state and $8 million of foreign deferred tax assets related to loss carryforwards are set to expire over the next three years.

At December 31, 2017, the Company had federal, state and foreign NOL carryforwards of $0.9 billion, $1.8 billion and $0.5 billion, respectively. In order to fully utilize our NOLs and U.S. FTCs, the Company will need to generate federal, state, and foreign earnings before taxes of approximately $2.0 billion, $2.1 billion, and $0.5 billion, respectively. Certain of these loss carryforwards are subject to limitation as a result of the changes of control that resulted from the Company’s emergence from bankruptcy in 2006 and the acquisition of certain foreign entities in 2007. However, the Company believes that these limitations on its loss carryforwards will not result in a forfeiture of any of the carryforwards.

On June 27, 2017, the Company acquired all the outstanding equity of Pittsburgh Corning Corporation (PCC). On the date of acquisition, PCC's tax attributes included a $296 million NOL carryover generated during the tax year 2016 and short tax year ending June 27, 2017. Section 382 of the Internal Revenue Code (IRC) limits the use of net operating loss tax attributes when a corporation experiences an "ownership change." The acquisition of PCC on June 27, 2017 qualifies as an "ownership change" under IRC Section 382 which limits the ability to use pre-ownership change losses to offset post-ownership change taxable income. The limits imposed under IRC Section 382 allows utilization of $192 million of PCC’s NOLs and is included in the Company’s total federal NOLs recorded as of December 31, 2017.

Deferred income taxes are provided for temporary differences between amounts of assets and liabilities for financial reporting purposes and the basis of such assets and liabilities as measured under enacted tax laws and regulations, as well as NOLs, tax credits and other carryforwards. A valuation allowance will be recorded to reduce deferred tax assets if, based on all available evidence, it is considered more likely than not that some portion or all of the recorded deferred tax assets will not be realized in future periods. To the extent the reversal of deferred tax liabilities is relied upon in our assessment of the realizability of deferred tax assets, they will reverse in the same period and jurisdiction as the temporary differences giving rise to the deferred tax assets. As of December 31, 2017, the Company had federal, state, and foreign net deferred tax assets before valuation allowances of $100 million, $24 million, and $77 million, respectively.

The valuation allowance of $94 million as of December 31, 2017 is related to tax assets of $24 million, $1 million and $69 million for U.S. federal FTCs and certain state and foreign jurisdictions, respectively. The realization of deferred tax assets depends on achieving a certain minimum level of future taxable income. Management currently believes that it is at least reasonably possible that the minimum level of taxable income will be met within the next 12 months to reduce the valuation allowance of certain foreign jurisdictions by a range of zero to $6 million. The valuation allowance of $103 million as of December 31, 2016 is related to tax assets of $13 million and $90 million for certain state and foreign jurisdictions, respectively.

The Company, or one of its subsidiaries, files income tax returns in the United States and other foreign jurisdictions. The Company is no longer subject to U.S. federal tax examinations for years before 2013 or state and foreign examinations for years before 2008. Due to the potential for resolution of federal, state and foreign examinations, and the expiration of various statutes of limitation, it is reasonably possible that the gross unrecognized tax benefits balance may change within the next 12 months by a range of zero to $6 million.

A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows (in millions):



	Twelve Months Ended December 31,
	2017			2016			2015
Balance at beginning of period	$	98		$	84		$	106
Tax positions related to the current year
Gross additions	1			1			1
Tax positions related to prior years
Gross additions	13			19			2
Gross reductions	(11		)	(5		)	(18		)
Settlements	(12		)	(1		)	(7		)
Impact of currency changes	1			—			—
Balance at end of period	$	90		$	98		$	84

The gross reduction of tax positions related to prior years includes the impact of adjusting our U.S. unrecognized tax benefits (UTBs) from the reduction of the U.S. federal corporate income tax rate from 35% to 21% as our U.S. UTBs are offset by our U.S. NOL position. If these UTBs were to be recognized as of December 31, 2017, the Company’s income tax expense would decrease by about $75 million.

The Company classifies all interest and penalties as income tax expense. As of December 31, 2017, 2016 and 2015, and for the periods then ended, the Company recognized $11 million, $11 million and $8 million respectively, in liabilities for tax related interest and penalties on its Consolidated Balance Sheets and $1 million, $(1) million and $3 million, respectively, of interest and penalty expense (income) on its Consolidated Statements of Earnings.