Huntsman Corporation Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

INCOME TAXES

INCOME TAXES

12 Months Ended

Dec. 31, 2014

INCOME TAXES

INCOME TAXES

17. INCOME TAXES

The following is a summary of U.S. and non-U.S. provisions for current and deferred income taxes (dollars in millions):

Huntsman Corporation

	Year ended December 31,
	2014			2013			2012
Income tax expense (benefit):
U.S.
Current	$	55		$	75		$	156
Deferred		(4	)		79			17
Non-U.S.
Current		48			42			51
Deferred		(48	)		(71	)		(55	)

Total	$	51		$	125		$	169

Huntsman International

	Year ended December 31,
	2014			2013			2012
Income tax expense (benefit):
U.S.
Current	$	43		$	41		$	52
Deferred		(1	)		124			129
Non-U.S.
Current		48			42			51
Deferred		(47	)		(70	)		(53	)

Total	$	43		$	137		$	179

The following schedule reconciles the differences between the U.S. federal income taxes at the U.S. statutory rate to our provision for income taxes (dollars in millions):

Huntsman Corporation

	Year ended December 31,
	2014			2013			2012
Income from continuing operations before income taxes	$	404		$	279		$	547


Expected tax expense at U.S. statutory rate of 35%	$	142		$	98		$	192
Change resulting from:
State tax expense net of federal benefit		10			11			15
Non-U.S. tax rate differentials		(7	)		10			1
Effects of non-U.S. operations		3			1			(2	)
U.S. domestic manufacturing deduction		(14	)		(14	)		(16	)
Currency exchange gains and losses		(7	)		14			11
Effect of tax holidays		—			—			(12	)
U.S. foreign tax credits, net of associated income and taxes		(2	)		(86	)		(21	)
Tax benefit of losses with valuation allowances as a result of other comprehensive income		(7	)		(22	)		—
Tax authority audits and dispute resolutions		3			9			5
Change in valuation allowance		(76	)		100			(11	)
Other, net		6			4			7

Total income tax expense	$	51		$	125		$	169

Huntsman International

	Year ended December 31,
	2014			2013			2012
Income from continuing operations before income taxes	$	409		$	289		$	559


Expected tax expense at U.S. statutory rate of 35%	$	143		$	101		$	196
Change resulting from:
State tax expense net of federal benefit		10			11			15
Non-U.S. tax rate differentials		(7	)		10			1
Effects of non-U.S. operations		4			3			(1	)
U.S. domestic manufacturing deduction		(13	)		(14	)		(8	)
Currency exchange gains and losses		(7	)		14			11
Effect of tax holidays		—			—			(12	)
U.S. foreign tax credits, net of associated income and taxes		(2	)		(86	)		(21	)
Tax benefit of losses with valuation allowances as a result of other comprehensive income		(7	)		(22	)		—
Tax authority audits and dispute resolutions		3			9			5
Change in valuation allowance		(88	)		108			(14	)
Other, net		7			3			7

Total income tax expense	$	43		$	137		$	179

During 2012, we amended certain prior year U.S. federal income tax filings and claimed $31 million of additional U.S. foreign tax credits. Due to uncertainty regarding our ability to utilize these credits before they were to expire in 2015, we established a partial valuation allowance of $21 million against the incremental deferred tax asset.

During 2013, we repatriated a significant amount of foreign earnings to the U.S., which included bringing onshore certain U.S. foreign tax credits. The foreign tax credits brought onshore significantly exceeded the amount needed to offset the cash tax impact of the dividend. A full valuation allowance was placed on the remaining foreign tax credits since it was more likely than not that the credits would expire unused due to a shortage of foreign source income for income tax purposes. In early 2014, the amount of foreign tax credits brought onshore was adjusted downward by $10 million, to $104 million, which was fully offset by a valuation allowance.

After extensive research and analysis, in September 2014, we made certain elections and filed amended U.S. tax returns for tax years 2008 through 2012, along with our original U.S. tax return for tax year 2013. These new tax elections and amended tax returns allowed us to utilize U.S. foreign tax credits. The net result was $104 million of income tax benefit recognized during 2014 for the release of the associated valuation allowance, including a discrete income tax benefit of $94 million in the third quarter of 2014.

Included in the non-U.S. deferred tax expense are income tax benefits of $7 million in 2014 and $22 million in 2013 for losses from continuing operations for certain jurisdictions with valuation allowances to the extent that income was recorded in other comprehensive income in that same jurisdiction. The benefit in 2014 was largely attributable to the U.K and the benefit in 2013 was largely attributable to Switzerland. In both years, foreign currency gains and changes in pension related items resulted in income in other comprehensive income where we have a full valuation allowance against the net deferred tax asset. An offsetting income tax expense was recognized in accumulated other comprehensive loss.

We operate in over 40 non-U.S. tax jurisdictions with no specific country earning a predominant amount of our off-shore earnings. The vast majority of these countries have income tax rates that are lower than the U.S. statutory rate. The average statutory rate for countries with pre-tax losses was greater than the average statutory rate for countries with pre-tax income, resulting in a net benefit as compared to the U.S. statutory rate. For the year ended December 31, 2014, the tax rate differential resulted in lower tax expense of $7 million, reflected in the reconciliation above.

In certain non-U.S. tax jurisdictions, our U.S. GAAP functional currency is different than the local tax currency. As a result, foreign exchange will always result in an impact to tax expense. For 2014, this resulted in a $7 million tax benefit, as reflected in the reconciliation above.

During 2012, we were granted a tax holiday for the period from January 1, 2012 through December 31, 2016 with respect to certain income from Pigments products manufactured in Malaysia. We are required to make certain investments in order to enjoy the benefits of the tax holiday and we intend to make these investments.

The components of income (loss) from continuing operations before income taxes were as follows (dollars in millions):

Huntsman Corporation

	Year ended December 31,
	2014			2013			2012
U.S.	$	435		$	419		$	482
Non-U.S.		(31	)		(140	)		65

Total	$	404		$	279		$	547

Huntsman International

	Year ended December 31,
	2014			2013			2012
U.S.	$	436		$	429		$	494
Non-U.S.		(27	)		(140	)		65

Total	$	409		$	289		$	559

Components of deferred income tax assets and liabilities were as follows (dollars in millions):

Huntsman Corporation

	December 31,
	2014			2013
Deferred income tax assets:
Net operating loss carryforwards	$	875		$	853
Pension and other employee compensation		313			197
Property, plant and equipment		109			72
Intangible assets		46			22
Foreign tax credits		17			114
Other, net		100			106

Total	$	1,460		$	1,364


Deferred income tax liabilities:
Property, plant and equipment	$	(540	)	$	(543	)
Pension and other employee compensation		(2	)		(6	)
Other, net		(103	)		(61	)

Total	$	(645	)	$	(610	)


Net deferred tax asset before valuation allowance	$	815		$	754
Valuation allowance—net operating losses and other		(702	)		(700	)
Valuation allowance—foreign tax credits		—			(114	)

Net deferred tax asset	$	113		$	(60	)


Current deferred tax asset	$	62		$	53
Current deferred tax liability		(51	)		(43	)
Non-current deferred tax asset		435			243
Non-current deferred tax liability		(333	)		(313	)

Net deferred tax asset	$	113		$	(60	)

Huntsman International

	December 31,
	2014			2013
Deferred income tax assets:
Net operating loss and AMT credit carryforwards	$	874		$	853
Pension and other employee compensation		311			196
Property, plant and equipment		118			72
Intangible assets		46			22
Foreign tax credits		17			125
Other, net		100			105

Total	$	1,466		$	1,373


Deferred income tax liabilities:
Property, plant and equipment	$	(535	)	$	(524	)
Pension and other employee compensation		(2	)		(6	)
Other, net		(103	)		(62	)

Total	$	(640	)	$	(592	)


Net deferred tax asset before valuation allowance	$	826		$	781
Valuation allowance—net operating losses and other		(707	)		(707	)
Valuation allowance—foreign tax credits		—			(125	)

Net deferred tax asset	$	119		$	(51	)


Current deferred tax asset	$	62		$	53
Current deferred tax liability		(52	)		(44	)
Non-current deferred tax asset		435			243
Non-current deferred tax liability		(326	)		(303	)

Net deferred tax asset	$	119		$	(51	)

We have gross NOLs of $3,411 million in various non-U.S. jurisdictions. While the majority of the non-U.S. NOLs have no expiration date, $1,174 million have a limited life (of which $910 million are subject to a valuation allowance) and $124 million are scheduled to expire in 2015 (all of which are subject to a valuation allowance). We had $14 million of gross NOLs expire unused in 2014 (all of which were subject to a valuation allowance).

Included in the $3,411 million of gross non-U.S. NOLs is $877 million attributable to our Luxembourg entities. As of December 31, 2014, there is a valuation allowance of $209 million against these net tax-effected NOLs of $255 million. Due to the uncertainty surrounding the realization of the benefits of these losses, we have reduced the related deferred tax asset with a valuation allowance.

We evaluate deferred tax assets to determine whether it is more likely than not that they will be realized. Valuation allowances are reviewed each period on a tax jurisdiction by jurisdiction basis to analyze whether there is sufficient positive or negative evidence to support a change in judgment about the realizability of the related deferred tax assets. These conclusions require significant judgment. In evaluating the objective evidence that historical results provide, we consider the cyclicality of businesses and cumulative income or losses during the applicable period. Cumulative losses incurred over the period limits our ability to consider other subjective evidence such as our projections for the future. Our judgments regarding valuation allowances are also influenced by the costs and risks associated with any tax planning idea.

During 2014, we released valuation allowances of $111 million and established valuation allowances of $3 million. In the U.S. we released $94 million of valuation allowance on U.S. foreign tax credits as a result of making certain tax elections and filing amended U.S. tax returns and in Luxembourg we released a valuation allowance on $6 million of certain net deferred tax assets as a result of significant changes in estimated future taxable income resulting from increased intercompany receivables and, therefore, increased interest income in Luxembourg, our primary treasury center outside of the U.S. We established a valuation allowance of $3 million on certain net deferred tax assets in India as a result of closing operations in one legal entity which will more likely than not result in the loss of its net operating losses.

During 2013, we established valuation allowances of $95 million primarily on U.S. foreign tax credits as a result of insufficient foreign source income and we released valuation allowances on $16 million of certain net deferred tax assets as a result of significant changes in estimated future taxable income resulting from increased intercompany receivables and, therefore, increased interest income.

During 2012, we released valuation allowances of $24 million on a portion of our net deferred tax assets in China, in certain U.S. states and in Luxembourg, and we established valuation allowances of $23 million on certain net deferred tax assets in the U.S., India and Indonesia. Primarily as a result of a cumulative history of operating profits, we released the above noted valuation allowances in China and certain U.S. state tax jurisdictions. A partial valuation allowance release was recognized in Luxembourg for $12 million as a result of significant changes in estimated future taxable income resulting from increased intercompany debt and, therefore, increased interest income in Luxembourg.

Uncertainties regarding expected future income in certain jurisdictions could affect the realization of deferred tax assets in those jurisdictions and result in additional valuation allowances in future periods, or, in the case of the unexpected pre-tax earnings, the release of valuation allowances in future periods.

The following is a summary of changes in the valuation allowance (dollars in millions):

Huntsman Corporation

	2014			2013			2012
Valuation allowance as of January 1	$	814		$	736		$	756
Valuation allowance as of December 31		702			814			736

Net decrease		112			(78	)		20
Foreign currency movements		(49	)		16			7
(Decrease) increase to deferred tax assets with no impact on operating tax expense, including an offsetting (decrease) increase to valuation allowances		13			(38	)		(16	)

Change in valuation allowance per rate reconciliation	$	76		$	(100	)	$	11


Components of change in valuation allowance affecting tax expense:
Pre-tax losses in jurisdictions with valuation allowances resulting in no tax expense or benefit	$	(32	)	$	(21	)	$	10
Releases of valuation allowances in various jurisdictions		111			16			24
Establishments of valuation allowances in various jurisdictions		(3	)		(95	)		(23	)

Change in valuation allowance per rate reconciliation	$	76		$	(100	)	$	11

Huntsman International

	2014			2013			2012
Valuation allowance as of January 1	$	832		$	745		$	768
Valuation allowance as of December 31		707			832			745

Net decrease		125			(87	)		23
Foreign currency movements		(49	)		16			7
(Decrease) increase to deferred tax assets with no impact on operating tax expense, including an offsetting (decrease) increase to valuation allowances		12			(37	)		(16	)

Change in valuation allowance per rate reconciliation	$	88		$	(108	)	$	14


Components of change in valuation allowance affecting tax expense:
Pre-tax income (losses) in jurisdictions with valuation allowances resulting in no tax expense or benefit	$	(31	)	$	(18	)	$	13
Releases of valuation allowances in various jurisdictions		122			16			24
Establishments of valuation allowances in various jurisdictions		(3	)		(106	)		(23	)

Change in valuation allowance per rate reconciliation	$	88		$	(108	)	$	14

The following is a reconciliation of our unrecognized tax benefits (dollars in millions):

	2014			2013
Unrecognized tax benefits as of January 1	$	96		$	57
Gross increases and decreases—tax positions taken during a prior period		(18	)		39
Gross increases and decreases—tax positions taken during the current period		1			11
Decreases related to settlements of amounts due to tax authorities		(5	)		(3	)
Reductions resulting from the lapse of statutes of limitation		(2	)		(7	)
Foreign currency movements		(4	)		(1	)

Unrecognized tax benefits as of December 31	$	68		$	96

As of December 31, 2014 and 2013, the amount of unrecognized tax benefits which, if recognized, would affect the effective tax rate is $36 million and $78 million, respectively.

During 2014, 2013, and 2012, for unrecognized tax benefits that impact tax expense, we recorded a net increase in unrecognized tax benefits with a corresponding income tax expense of $3 million, $9 million and $5 million, for each period. Additional decreases in unrecognized tax benefits were offset by cash settlements or by a decrease in net deferred tax assets and, therefore, did not affect income tax expense.

In accordance with our accounting policy, we continue to recognize interest and penalties accrued related to unrecognized tax benefits in income tax expense.

	Year ended December 31,
	2014		2013			2012
Interest expense included in tax expense	$	2	$	2		$	(1	)
Penalties expense included in tax expense		—		(1	)		—

	December 31,
	2014		2013
Accrued liability for interest	$	14	$	13
Accrued liability for penalties		—		—

We conduct business globally and, as a result, we file income tax returns in U.S. federal, various U.S. state and various non-U.S. jurisdictions. The following table summarizes the tax years that remain subject to examination by major tax jurisdictions:

Tax Jurisdiction		Open Tax Years
China		2004 and later
France		2002 and later
India		2004 and later
Italy		2010 and later
Malaysia		2003 and later
Switzerland		2008 and later
The Netherlands		2009 and later
United Kingdom		2012 and later
United States federal (except for foreign tax credits)		2009 and later

Certain of our U.S. and non-U.S. income tax returns are currently under various stages of audit by applicable tax authorities and the amounts ultimately agreed upon in resolution of the issues raised may differ materially from the amounts accrued.

We estimate that it is reasonably possible that certain of our non-U.S. unrecognized tax benefits could change within 12 months of the reporting date with a resulting decrease in the unrecognized tax benefits within a reasonably possible range of nil to $25 million. For the 12-month period from the reporting date, we would expect that a substantial portion of the decrease in our unrecognized tax benefits would result in a corresponding benefit to our income tax expense.

During 2014, we concluded and settled tax examinations in the U.S. (both federal and various states) and various non-U.S. jurisdictions including, but not limited to, China, France and Spain. During 2013, we concluded and settled tax examinations in the U.S. (both federal and various states) and various non-U.S. jurisdictions including, but not limited to, China, France and Italy. During 2012, we concluded and effectively settled tax examinations in the U.S. (both federal and various states) and various non-U.S. jurisdictions including, but not limited to, Hong Kong, Thailand and Japan.

For non-U.S. entities that were not treated as branches for U.S. tax purposes, we do not provide for income taxes on the undistributed earnings of these subsidiaries that are reinvested and, in the opinion of management, will continue to be reinvested indefinitely. We have material intercompany debt obligations owed by our non-U.S. subsidiaries to the U.S. We do not intend to repatriate earnings to the U.S. via dividend based on estimates of future domestic cash generation and our ability to return cash to the U.S. through payments of intercompany debt owned by our non-U.S. subsidiaries to the U.S. To the extent that cash is required in the U.S., rather than repatriate earnings to the U.S. via dividends, we will repay certain of our intercompany debt. If any earnings were repatriated via dividend, we may need to accrue and pay taxes on the distributions.

As discussed, we made a distribution of a portion of our earnings in 2013 when the amount of foreign tax credits associated with the distribution was greater than the amount of tax otherwise due. The undistributed earnings of foreign subsidiaries with positive earnings that are deemed to be permanently invested were approximately $307 million at December 31, 2014. It is not practicable to determine the unrecognized deferred tax liability on those earnings because of the significant assumptions necessary to compute the tax.

- Definition

The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.

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