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 a 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 for each jurisdiction. 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 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 three months ended March 31, 2012, on a discrete basis, we changed our judgment about certain valuation allowances, primarily related to operations of the Textile Effects segment, resulting in a net $1 million expense for changes in valuation allowances related to certain net deferred tax assets in Guatemala, Indonesia and China, with no single change to a valuation allowance greater than $2 million. During the three months ended March 31, 2011, we released a valuation allowance of $5 million on certain net deferred tax assets in Luxembourg.

        During the three months ended March 31, 2012, we recorded a net increase in unrecognized tax benefits with a corresponding income tax expense of $1 million and during the three months ended March 31, 2011, we recorded a net decrease in unrecognized tax benefits with a corresponding income tax benefit of $1 million, resulting from the settlement of tax audits, the effective settlement of certain tax positions and the expiration of statutes of limitations, net of additions.

        During the three months ended March 31, 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. During the three months ended March 31, 2012, we recorded a discrete benefit of $3 million from de-recognition of a net deferred tax liability that will reverse during the holiday period. The amount of tax benefit to be realized from the tax holiday is directly dependent on the amount of future pre-tax income generated. We expect that the effects of the tax holiday will not be material to our provision for income taxes.

Huntsman Corporation

        Excluding the tax effects resulting from the net valuation allowance changes, the net unrecognized tax benefit items and the Malaysia tax holiday discussed above, we recorded income tax expense of $61 million and $28 million for the three months ended March 31, 2012 and 2011, respectively. Our tax expense is 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.

Huntsman International

        Excluding the tax effects resulting from the net valuation allowance changes, the net unrecognized tax benefit items and the Malaysia tax holiday discussed above, Huntsman International recorded income tax expense of $62 million and $28 million for the three months ended March 31, 2012 and 2011, respectively. Our tax expense is 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.