RESOLUTE FOREST PRODUCTS INC.

Note 15. Income Taxes

(Loss) income before income taxes by taxing jurisdiction for the years ended December 31, 2017, 2016 and 2015, was as follows:



(In millions)	2017			2016			2015
United States	$	(289	)	$	(227	)	$	(355	)
Foreign		295			170			99
	$	6		$	(57	)	$	(256	)

The income tax (provision) benefit for the years ended December 31, 2017, 2016 and 2015, was comprised of the following:



(In millions)	2017			2016			2015
U.S. Federal and State:
Current	$	—		$	—		$	4
Deferred		2			(11	)		32
		2			(11	)		36
Foreign:
Current		(4	)		(5	)		—
Deferred		(82	)		(3	)		(35	)
		(86	)		(8	)		(35	)
Total:
Current		(4	)		(5	)		4
Deferred		(80	)		(14	)		(3	)
	$	(84	)	$	(19	)	$	1

Tax Cuts and Jobs Act

On December 22, 2017, the TCJA was enacted into law which, among other changes, reduced the U.S. federal statutory income tax rate from 35% to 21%, and implemented a new system of taxation for non-U.S. earnings, including the imposition of a one-time transition tax on deemed repatriation of undistributed earnings of non-U.S. subsidiaries. We are required to recognize the effects of tax law changes in the period of enactment. On December 22, 2017, the United States Securities and Exchange Commission (the “SEC”) issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the TCJA, allowing us to account for the TCJA provisions under the following scenarios: (a) reflect the tax effects of the TCJA for which the accounting is complete, (b) report provisional amounts for those income tax effects of the TCJA where the accounting is incomplete but a reasonable estimate can be determined, or (c) not to report provisional amounts for any income tax effects of the TCJA for which a reasonable estimate cannot be determined until the reporting period that a reasonable estimate can be determined, and to continue to apply ASC 740 based on the provision of the tax laws that were in effect immediately prior to the enactment of the TCJA. The SEC provides that the accounting must be completed during the 12-month measurement period following the enactment of the TCJA.

Based on available information, we have provisionally estimated the impacts of the TCJA on our 2017 financial results, with the exception of the effects of the newly enacted GILTI regime as a reasonable estimate cannot be determined. Accordingly, we have provisionally decreased our net U.S. deferred income tax assets and related valuation allowance by $356 million and $359 million, respectively, in 2017, mainly to correspond to the lower U.S. federal statutory income tax rate.

The final impact of the TCJA may differ due to, among other things, changes in interpretations, the issuance of additional legislative guidance and clarification, and actions we may take as a result of the TCJA. During the measurement period, we will recognize any adjustments to our provisional amounts in the reporting period the adjustments are determined. Accordingly, we continue to evaluate its effects on our 2018 financial results.

The income tax (provision) benefit attributable to income (loss) before income taxes differs from the amounts computed by applying the U.S. federal statutory income tax rate of 35% for the years ended December 31, 2017, 2016 and 2015, as a result of the following:



(In millions)	2017			2016			2015
Income (loss) before income taxes	$	6		$	(57	)	$	(256	)
Income tax (provision) benefit:
Expected income tax (provision) benefit		(2	)		20			90
Changes resulting from:
Valuation allowance ⁽¹⁾		247			(99	)		(109	)
Enactment of change in tax rate ⁽²⁾		(368	)		—			—
Adjustments for unrecognized tax benefits ⁽³⁾		1			55			—
Foreign exchange		6			(9	)		(20	)
Research and development, and other tax incentives		1			—			1
State income taxes, net of federal income tax benefit		10			6			12
Foreign tax rate differences		23			11			8
Effect of change in tax rates ⁽⁴⁾		—			—			18
Other, net		(2	)		(3	)		1
	$	(84	)	$	(19	)	$	1


⁽¹⁾	During 2017, we recorded a decrease in our valuation allowance of $359 million, due to the enactment of the TCJA, offset by an increase of $112 million, primarily related to our U.S. operations where we recognize a valuation allowance against virtually all of our net deferred income tax assets.

During 2016 and 2015, we recorded a valuation allowance of $99 million and $109 million, respectively, mainly related to our U.S. operations where we recognized a full valuation allowance against our net deferred income tax assets.


⁽²⁾	During 2017, we recorded decreases to our net deferred income tax assets of $356 million due to the enactment of the TCJA, and $12 million due to a lower foreign income tax rate.


⁽³⁾	During 2016, we recorded tax benefits of $55 million, almost all of which related to the release of previously unrecognized tax benefits due to the lapse of the statute of limitations of the applicable jurisdictions.


⁽⁴⁾	During 2015, we recorded an income tax benefit of $18 million as a result of a change in tax rates on deferred income taxes, primarily due to an intercompany asset transfer in connection with an operating company realignment.

Deferred income taxes

At each reporting period, we assess whether it is more likely than not that the deferred income tax assets will be realized, based on the review of all available positive and negative evidence, including future reversals of existing taxable temporary differences, estimates of future taxable income, past operating results, and prudent and feasible tax planning strategies. The carrying value of our deferred income tax assets reflects our expected ability to generate sufficient future taxable income in certain tax jurisdictions to utilize these deferred income tax benefits.

Following the assessment of our ability to realize the deferred income tax assets of our U.S. operations, we concluded that existing negative evidence outweighed positive evidence. As a result, we recognize a valuation allowance against virtually all of our net U.S. deferred income tax assets. The cumulative loss of our U.S. operations limited our ability to consider other subjective positive evidence. A valuation allowance does not reduce our underlying tax attributes, nor hinders our ability to use them in the future.

The weight of positive evidence, which included a review of historical cumulative earnings and our forecasted future earnings, resulted in the conclusion by management that no significant valuation allowances were required for our deferred income tax assets in Canada, as they were determined to be more likely than not to be realized.

Deferred income taxes as of December 31, 2017 and 2016, were comprised of the following:



(In millions)	2017			2016
Fixed assets	$	(4	)	$	(44	)
Other liabilities		(23	)		(21	)
Deferred income tax liabilities		(27	)		(65	)
Fixed assets		506			520
Pension and OPEB plans		330			392
Operating loss carryforwards		619			838
Capital loss carryforwards		12			11
Undeducted research and development expenditures		196			185
Tax credit carryforwards		119			107
Other assets		72			49
Deferred income tax assets		1,854			2,102
Valuation allowance		(764	)		(1,000	)
Net deferred income tax assets	$	1,063		$	1,037
Amounts recognized in our Consolidated Balance Sheets consisted of:
Deferred income tax assets	$	1,076		$	1,039
Deferred income tax liabilities		(13	)		(2	)
Net deferred income tax assets	$	1,063		$	1,037

The balance of tax attributes and their dates of expiration as of December 31, 2017, were as follows:



(In millions)	Related Deferred Income Tax Asset				Year of Expiration
Operating loss carryforwards:
U.S. federal operating loss carryforwards of $2,218	$	466	⁽¹	⁾	2022 – 2037
U.S. state operating loss carryforwards of $1,868		95	⁽¹	⁾	2021 – 2037
Canadian federal and provincial (excluding Quebec) operating loss carryforwards of $73		18			2030 – 2037
Other operating loss carryforwards		40			2019 – 2027
	$	619
Capital loss carryforwards:
Canadian net capital loss carryforwards of $43		12			Indefinite
	$	12
Undeducted research and development expenditures:
Canadian federal and provincial (excluding Quebec) undeducted research and development expenditures of $694	$	116			Indefinite
Quebec undeducted research and development expenditures of $837		80			Indefinite
	$	196
Tax credit carryforwards:
Canadian research and development tax credit carryforwards	$	96			2021 – 2037
U.S. state and other tax credit carryforwards		23	⁽¹	⁾	2018 – 2032
	$	119


⁽¹⁾	As of December 31, 2017, we had a valuation allowance against virtually all of our U.S. operations net deferred income tax assets.

Our U.S. federal net operating loss carryforwards are subject to the U.S. Internal Revenue Code of 1986, § 382, as amended, (“IRC § 382”) limitation, resulting from a previous ownership change. We do not expect that IRC § 382 would limit the utilization of our available U.S. federal net operating loss carryforwards prior to their expiration.

We do not provide for the additional U.S. and foreign income taxes that would become payable upon remittance of undistributed earnings of foreign subsidiaries as we are evaluating the reinvestment of such earnings for the provision of the TCJA. In addition, we do not expect to be impacted by the one-time transition tax on deemed repatriation of undistributed earnings.

Deferred tax charge

On January 1, 2017, we adopted ASU 2016-16, “Intra-Entity Transfers of Assets Other Than Inventory,” which eliminates the deferral of the tax effects of intra-entity asset transfers other than inventory until the transferred assets are sold to a third party or recovered through use. Accordingly, the deferred tax charge recognized in 2015 as a result of a gain on an intercompany asset transfer in connection with an operating company realignment was eliminated, resulting in a decrease in “Other assets” of $35 million and an increase in deferred tax assets of $32 million, with a cumulative-effect adjustment of $3 million to “Deficit” in our Consolidated Balance Sheet as of January 1, 2017.

Unrecognized tax benefits

The following table summarizes the activity related to our gross unrecognized tax benefits for the years ended December 31, 2017 and 2016:



(In millions)	2017			2016
Beginning of year	$	44		$	97
Increase (decrease) in unrecognized tax benefits resulting from:
Enactment of change in tax rate ⁽¹⁾		(15	)		—
Positions taken in the current period		—			1
Expirations of statute limitations ⁽²⁾		—			(55	)
Settlements with taxing authorities		(1	)		(1	)
Change in foreign exchange rate		—			2
End of year	$	28		$	44


⁽¹⁾	During 2017, previously unrecognized tax benefits decreased by $15 million due to the enactment of the TCJA.


⁽²⁾	During 2016, we released $55 million of previously unrecognized tax benefits due to the lapse of the statute of limitations of the applicable jurisdictions.

We recognize accrued interest and penalties on unrecognized tax benefits as components of the income tax provision. The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate is $2 million.

In the normal course of business, we are subject to audits from federal, state, provincial and other tax authorities. U.S. federal tax returns for 2014 and subsequent years, as well as Canadian tax returns for 2013 and subsequent years, remain subject to examination by tax authorities.

We do not expect a significant change to the amount of unrecognized tax benefits over the next 12 months. However, any adjustments arising from certain ongoing examinations by taxing authorities could alter the timing or amount of taxable income or deductions, or the allocation of income among tax jurisdictions, and these adjustments could differ from the amount accrued. We believe that taxes accrued in our Consolidated Balance Sheets fairly represent the amount of income taxes to be settled or realized in the future.