16. INCOME TAXES

 

We use the asset and liability method of accounting for income taxes. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial and tax reporting purposes. We evaluate deferred tax assets to determine whether it is more likely than not that they will be realized. Valuation allowances are reviewed on an individual tax 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 our businesses and cumulative income or losses during the applicable period. Cumulative losses incurred over the applicable period limits our ability to consider other subjective evidence such as our projections for the future. Changes in expected future income in applicable jurisdictions could affect the realization of deferred tax assets in those jurisdictions.

 

During the nine months ended September 30, 2017, we released a valuation allowance of $7 million on certain net deferred assets of our Polyurethanes business in Italy. On March 1, 2017 and April 1, 2017, we demerged the Italian legal entities containing our Polyurethanes business from our combined Italian tax group. The historical and expected continued profitability of that Polyurethanes business resulted in the release of the associated valuation allowance. During the same period, we also released a valuation allowance of $13 million on certain deferred tax assets in Luxembourg as a result of changes in estimated future taxable income resulting from increased intercompany receivables and, therefore, increased income in Luxembourg, our primary treasury center outside of the U.S.

 

During the nine months ended September 30, 2017 and 2016, for unrecognized tax benefits that impact tax expense, we recorded a net increase in unrecognized tax benefits and a corresponding income tax expense of $7 million and $3 million, respectively. Additional increases and decreases in unrecognized tax benefits were offset by cash settlements or decreases in net deferred tax assets and, therefore, did not affect income tax expense.

 

We recorded an additional income tax liability of approximately $45 million related to our tax gain on the Venator IPO proceeds, net of separation costs and IPO expenses.

 

Huntsman Corporation

 

We recorded income tax expense from continuing operations of $78 million and $65 million for the nine months ended September 30, 2017 and 2016, respectively. Our tax expense is significantly affected by the mix of income and losses in the tax jurisdictions in which we operate, as impacted by the presence of valuation allowances in certain tax jurisdictions. Our effective tax rate was 18% for the nine months ended September 30, 2017. Higher than expected earnings in countries with low tax rates or valuation allowances, and the release of certain valuation allowances in Italy and Luxenbourg, resulted in a lower effective tax rate through the third quarter of 2017.

 

Huntsman International

 

Huntsman International recorded income tax expense from continuing operations of $77 million and $65 million for the nine months ended September 30, 2017 and 2016, respectively. Our tax expense is significantly affected by the mix of income and losses in the tax jurisdictions in which we operate, as impacted by the presence of valuation allowances in certain tax jurisdictions. Our effective tax rate was 18% for the nine months ended September 30, 2017. Higher than expected earnings in countries with low tax rates and valuation allowances, and the release of certain valuation allowances in Italy and Luxenbourg, resulted in a lower effective tax rate through the third quarter of 2017.