Adient plc



16. Income Taxes

For fiscal 2017, the income tax provision (benefit) reflects Adient as an independent company incorporated under the laws of Ireland.

For fiscal 2016 and 2015, prior to the separation, the income tax provision (benefit) was calculated as if Adient filed separate income tax returns and was operating as a stand-alone business. Therefore, cash tax payments and items of current and deferred taxes may not be reflective of the actual tax balances of Adient subsequent to the separation. Adient's operations have historically been included in the former Parent’s U.S. federal and state tax returns and non-U.S. tax returns.

Consolidated income (loss) before income taxes and noncontrolling interests for the years ended September 30, 2017, 2016 and 2015 is as follows:



	Year Ended September 30,
(in millions)	2017			2016		2015
Ireland	$	(6	)	$	—	$	—
United States	122			330		493
Other Foreign	945			47		451
Income before income taxes and noncontrolling interests	$	1,061		$	377	$	944

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



	Year Ended September 30,
(in millions)	2017			2016			2015
Current
Ireland	$	—		$	—		$	—
US - Federal and State	14			1,548			268
Other Foreign	137			863			201
	151			2,411			469
Deferred
Ireland	(2		)	—			—
US - Federal and State	13			(295		)	(89		)
Other Foreign	(63		)	(277		)	38
	(52		)	(572		)	(51		)

Income tax provision	$	99		$	1,839		$	418

The significant components of Adient's income tax provision are summarized in the following tables. These amounts do not include the impact of income tax expense related to our nonconsolidated partially-owned affiliates, which is netted against equity income on the consolidated statements of income.

The reconciliation between the Irish statutory income tax rate, and Adient’s effective tax rate is as follows:



	Year Ended September 30,
(in millions)	2017
Tax expense at Ireland statutory rate	$	133
State income taxes, net of federal benefit	(10		)
Foreign tax rate differential	(67		)
Notional interest deduction	(28		)
Credits and incentives	(13		)
Gain on previously-held interest	(19		)
Repatriation of foreign earnings	30
Foreign exchange	(11		)
Impact of enacted tax rate changes	10
Change in uncertain tax positions	50
Change in valuation allowance	21
Other	3
Income tax provision	$	99

The effective rate is lower than the statutory rate of 12.5% primarily due to benefits from global tax planning, notional interest deductions, foreign tax rate differentials, and foreign exchange, partially offset with a first quarter fiscal 2017 tax law change in Hungary, repatriation of foreign earnings, and changes in uncertain tax positions and valuation allowances. No items included in the other category are individually, or when appropriately aggregated, significant.

The foreign tax rate differential benefit is primarily driven by the pretax book income of nonconsolidated partially-owned affiliates whose corresponding income tax expense is netted against equity income on the consolidated statements of income. Excluding nonconsolidated partially-owned affiliates, foreign tax rate differentials have a $21 million favorable impact on the effective tax rate as a result of losses earned in jurisdictions where the statutory rate is greater than 12.5%.

The reconciliation between the U.S. federal income tax rate, and Adient’s effective tax rate was as follows:



	Year Ended September 30,
(in millions)	2016			2015
Tax expense at the U.S. federal statutory rate	$	136		$	336
State income taxes, net of federal benefit	—			15
Foreign income tax expense at different rates and foreign losses without tax benefits	(92		)	(13		)
U.S. tax on foreign income	(207		)	(252		)
U.S. credits and incentives	(7		)	(6		)
Impacts of transactions and business divestitures	1,988			356
Reserve and valuation allowance adjustments	14			(13		)
Other	7			(5		)
Income tax provision	$	1,839		$	418

The effective rate is above the U.S. statutory rate for fiscal 2016 primarily due to the tax consequences surrounding the separation, the jurisdictional mix of restructuring and impairment costs, partially offset by the benefits of continuing global tax planning initiatives and foreign tax rate differentials. The effective rate is above the U.S. statutory rate for fiscal 2015 primarily due to the tax consequences of business divestitures partially offset by the benefits of U.S. tax on foreign income, foreign tax rate differentials and continuing global tax planning initiatives.

Deferred taxes are classified in the consolidated statements of financial position as follows:



	September 30,
(in millions)	2017			2016
Other noncurrent assets	$	1,025		$	613
Other noncurrent liabilities	(389		)	(22		)
Net deferred tax asset	$	636		$	591

Temporary differences and carryforwards which gave rise to deferred tax assets and liabilities included:



	September 30,
(in millions)	2017			2016
Deferred tax assets
Accrued expenses and reserves	$	83		$	431
Employee and retiree benefits	58			95
Net operating loss and other credit carryforwards	340			288
Property, plant and equipment	3			—
Intangible assets	463			—
Research and development	9			9
Joint ventures and partnerships	—			265
Other	13			11
	969			1,099
Valuation allowances	(223		)	(267		)
	746			832
Deferred tax liabilities
Property, plant and equipment	—			23
Unremitted earnings of foreign subsidiaries	95			108
Intangible assets	—			110
Joint ventures and partnerships	15			—
	110			241
Net deferred tax asset	$	636		$	591

The fiscal 2016 accrued expenses and reserves line item has been revised to correctly present the deferred tax liability related to unremitted earnings of foreign subsidiaries in the table above.

At September 30, 2017, Adient had available net operating loss carryforwards of approximately $1,407 million which are available to reduce future tax liabilities. Net operating loss carryforwards of $809 million will expire at various dates between 2018 and 2037, with the remainder having an indefinite carryforward period, and $468 million are offset by a valuation allowance.

Adient reviews the realizability of its deferred tax assets on a quarterly basis, or whenever events or changes in circumstances indicate that a review is required. In determining the requirement for a valuation allowance, the historical and projected financial results of the legal entity or combined group recording the net deferred tax asset are considered, along with any other positive or negative evidence. Since future financial results may differ from previous estimates, periodic adjustments to Adient's valuation allowances may be necessary.

As a result of Adient's fiscal 2017 analysis of the realizability of its worldwide deferred tax assets, and after considering tax planning initiatives and other positive and negative evidence, Adient determined that no material changes to valuation allowances were required. Adient continues to record valuation allowances on certain deferred tax assets in Brazil, Czech Republic, Mexico, Poland, Spain and other jurisdictions as it remains more likely than not that they will not be utilized.

As a result of Adient's fiscal 2016 analysis of the realizability of its worldwide deferred tax assets, and after considering tax planning initiatives and other positive and negative evidence, Adient determined that it was more likely than not that deferred tax assets within Germany and Slovakia would be realized. Therefore, Adient released $83 million and $5 million, respectively, of net valuation allowances as income tax benefit in the fourth quarter of fiscal 2016. In addition as a result of Adient's fiscal 2016 analysis, Adient determined that it was more likely than not that deferred tax assets within the United Kingdom would not be realized and recorded $12 million of net valuation allowances as income tax expense in the fourth quarter of fiscal 2016.

As a result of Adient's fiscal 2015 analysis of the realizability of its worldwide deferred tax assets, and after considering tax planning initiatives and other positive and negative evidence, Adient determined that it was more likely than not that deferred tax assets within South Africa would be realized. Therefore, Adient released $13 million of net valuation allowances as income tax benefit in the fiscal year ended September 30, 2015.

Adient is subject to income taxes in Ireland, the U.S. and other foreign jurisdictions. The following table provides the earliest open tax year by major jurisdiction for which Adient could be subject to income tax examination by the tax authorities:



Tax Jurisdiction		Earliest Year Open
Brazil		2012
China		2011
Czech Republic		2008
France		2013
Germany		2013
Hong Kong		2011
Japan		2012
Luxembourg		2012
Mexico		2012
Poland		2008
United Kingdom		2011
United States		2017

Adient regularly assesses the likelihood of an adverse outcome resulting from examinations to determine the adequacy of its tax reserves. For the year ended September 30, 2017, Adient believes that it is more likely than not that the tax positions it has taken will be sustained upon the resolution of its audits resulting in no material impact on its consolidated financial statements. However, the final determination with respect to tax audits and any related litigation could be materially different from Adient’s estimates.

Prior to separation, Adient and the former Parent entered into a tax matters agreement that governs the parties' respective rights and obligations with respect to certain tax attributes, including uncertain tax positions. As a result of the final tax matters agreement, Adient's unrecognized tax benefits decreased approximately $471 million from September 30, 2016.

For the years ended September 30, 2017, 2016 and 2015, Adient had gross tax effected unrecognized tax benefits of $193 million, $596 million, and $390 million, respectively. Substantially all of Adient’s unrecognized tax benefits, if recognized, would impact the effective tax rate. Total net accrued interest for the years ended September 30, 2017, 2016 and 2015, was approximately $3 million, $11 million and $10 million, respectively (net of tax benefit). Adient recognizes interest and penalties related to unrecognized tax benefits as a component of income tax expense.

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



	Year Ended September 30,
(in millions)	2017			2016			2015
Beginning balance	$	596		$	390		$	284
Additions for tax positions related to the current year	76			288			138
Additions for tax positions of prior years	5			—			—
Reductions for tax positions of prior years	(471		)	(65		)	(32		)
Settlements with taxing authorities	(7		)	(15		)	—
Statute closings	(6		)	(2		)	—
Ending balance	$	193		$	596		$	390

During the next twelve months, it is reasonably possible that tax audit resolutions or applicable statute of limitation lapses could reduce the unrecognized tax benefits and income tax expense. Adient does not anticipate that this will result in a material impact to its consolidated financial statements.

During July 2017, one of Adient's non-consolidated partially-owned affiliates, GAAS, became a consolidated entity. Refer to Note 2, "Acquisitions and Divestitures," of the notes to consolidated financial statements for additional information. Adient recorded a preliminary fair value allocation for the assets and liabilities of the entity based on their fair values, which included a $276 million intangible asset for customer relationships that has an estimate useful life of 20 years. Accordingly, Adient recorded a deferred tax liability of $69 million related to the intangible asset.

On September 22, 2017, Adient completed the acquisition of Futuris. Refer to Note 2, "Acquisitions and Divestitures," of the notes to consolidated financial statements for additional information. Adient recorded a preliminary allocation of the purchase price for assets acquired and liabilities assumed based on their fair values as of the acquisition date, which included a $165 million intangible asset for customer relationships that has an estimated useful life of 10 years. Accordingly, Adient recorded a deferred tax liability of $64 million related to the intangible asset. Adient also recognized $3 million of acquisition-related costs. The tax benefit associated with the acquisition-related costs was not material.

In fiscal 2017, Adient committed to a significant restructuring plan (2017 Plan) and recorded $46 million of restructuring and impairment costs in the consolidated statements of income. Refer to Note 14, "Significant Restructuring and Impairment Costs," of the notes to the consolidated financial statements for additional information. The restructuring costs generated a $7 million tax benefit, which was negatively impacted by geographic mix and Adient’s current tax position in these jurisdictions.

In fiscal 2016, Adient incurred total tax charges of $1,891 million for substantial business reorganizations related to the separation. Included in this amount is the tax charge of $85 million for changes in entity tax status and the charge of $778 million for Adient's change in assertion over permanently reinvested earnings. In addition, the former Parent completed its merger with Tyco, and as a result of the change in control, Adient incurred incremental tax expense of $89 million.

In fiscal 2015, Adient completed the YFAI global automotive interiors joint venture. Refer to Note 2, "Acquisitions and Divestitures," of the notes to consolidated financial statements for additional information. In connection with the divestiture of the business, Adient recorded a pretax gain on divestiture of $127 million, $20 million net of tax. The tax impact of the gain is due to the jurisdictional mix of gains and losses on the divestiture, which resulted in non-benefited expenses in certain countries and taxable gains in other countries. In addition, Adient provided income tax expense for repatriation of cash and other tax reserves associated with the YFAI global automotive interiors joint venture transaction, which resulted in a tax charge of $75 million and $218 million, respectively.

Adient has $14.1 billion of undistributed foreign earnings of which $1.1 billion is deemed permanently reinvested and no deferred taxes have been provided on such earnings. It is not practicable to determine the unrecognized deferred tax liability on these earnings because the actual tax liability, if any, is dependent on circumstances existing when remittance occurs.

Income taxes paid for the fiscal year ended September 30, 2017 were $148 million, of which $16 million were paid prior to the separation by the former Parent. For the fiscal years ended September 30, 2016 and 2015, because portions of Adient's operations were included in the former Parent's tax returns, payments to certain tax authorities were made by the former Parent, and not by Adient. These settlements were reflected as changes in the Parent’s net investment.

In fiscal 2017, Hungary passed the 2017 tax bill which reduced the corporate income tax rate to a flat 9% rate. As a result of the law change, Adient recorded income tax expense of $5 million related to the write down of deferred tax assets.

In fiscal 2017, the US Treasury and the IRS released final and temporary Section 385 regulations. These regulations address whether certain instruments between related parties are treated as debt or equity. Adient does not expect that the regulations will have a material impact on the consolidated financial statements.

In fiscal 2015, the "look-through rule," under subpart F of the U.S. Internal Revenue Code, expired for Adient. The "look-through rule" had provided an exception to the U.S. taxation of certain income generated by foreign subsidiaries. The rule was extended in December 2015 retroactive to the beginning of Adient’s 2016 fiscal year. The retroactive extension was signed into legislation and was made permanent through Adient's 2020 fiscal year.

During fiscal years 2017, 2016, and 2015, other tax legislation was adopted in various jurisdictions. These law changes did not have a material impact on Adient's consolidated financial statements.