18.  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

 

Huntsman International

 

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

 

Huntsman International

 

We operate in many 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. During 2018, the average statutory rate for countries with pre-tax income was higher than the average statutory rate for countries with pre-tax losses, resulting in a net expense of $29 million, as compared to the 21% U.S. statutory rate reflected in the reconciliation above. During 2017 and 2016, the average statutory rate for countries with pre-tax income was lower than the average statutory rate for countries with pre-tax losses, almost all of which had statutory rates lower than the U.S. of 35%, resulting in net benefits as compared to the U.S. statutory rate of $64 million and $32 million, respectively, reflected in the reconciliation above. In 2018, the $29 million net expense relates primarily to our operations in China, Germany, India and Luxembourg. In 2017, the $64 million net benefit relates primarily to our Polyurethanes business in The Netherlands, China and the U.K., as well as our Advanced Materials business in Switzerland and our Corporate function in Luxembourg. In 2016, the $32 million net benefit relates primarily to our Polyurethanes business in The Netherlands and China and our Advanced Materials business in Switzerland.

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 gains and losses will impact our effective tax rate. For 2018, 2017 and 2016, this resulted in a $10 million tax benefit, a $15 million tax expense and a $5 million tax benefit, respectively.

The U.S. Tax Cuts and Jobs Act (the “U.S. Tax Reform Act”) established new tax laws that affected 2018, including, but not limited to, (1) a reduction of the U.S. federal corporate tax rate; (2) the creation of the base erosion anti-abuse tax (BEAT); (3) a general elimination of U.S. federal income taxes on dividends from foreign subsidiaries; (4) a new provision designed to tax global intangible low-taxed income (“GILTI”); (5) a new limitation on deductible interest expense; and (6) the repeal of the domestic production activity deduction. We have included the effects of these provisions in 2018.

Our accounting for the enactment of the U.S. Tax Reform Act is complete for the year ended December 31, 2018. We recorded total tax benefit of $20 million over 2017 and 2018 related to enactment of the U.S. Tax Reform Act. As a result of the U.S. Tax Reform Act, we recorded net tax benefits of $135 million (a provisional tax benefit of $137 million in 2017 offset by a final tax expense of $2 million in 2018) due to a remeasurement of deferred U.S. tax assets and liabilities, and net tax expense of $115 million (a provisional tax expense of $85 million in 2017, a $29 million final federal tax expense in 2018 and a $1 million state tax expense in 2018) due to the transition tax on deemed repatriation of deferred foreign income.

 

Under U.S. GAAP regarding the new GILTI tax rules, we are allowed to make an accounting policy choice of either (1) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred (the “period cost method”) or (2) factoring such amounts into our measurement of deferred taxes (the “deferred method”). We have selected the “period cost method” as our accounting policy related to the new GILTI tax rules.

 

The stated purpose of the GILTI rules is to generate additional U.S. tax related to shifting income to non-U.S. jurisdictions which incur less than a blended 13.125% non-U.S. tax rate. Our non-U.S. income is subject to a blended rate greater than 13.125% and so we would have expected no GILTI tax impact. In practice, the GILTI regulations result in additional tax liability as a result of expense allocations which limit the ability to utilize foreign tax credits against the GILTI inclusion. For 2018 we have incurred $16 million of tax expense resulting from these expense allocations.

 

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

Huntsman Corporation

 

Huntsman International

 

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

Huntsman Corporation

 

Huntsman International

 

We have gross NOLs of $1,449 million in various non‑U.S. jurisdictions. While the majority of the non‑U.S. NOLs have no expiration date, $330 million have a limited life (of which $259 million are subject to a valuation allowance) and $156 million are scheduled to expire in 2019 (of which $138 million are subject to a valuation allowance). We had $91 million of  NOLs expire unused in 2018, all of which were subject to a valuation allowance.

Included in the $1,449 million of gross non‑U.S. NOLs is $670 million attributable to our Luxembourg entities. As of December 31, 2018, due to the uncertainty surrounding the realization of the benefits of these losses, there is a valuation allowance of $102 million against these net tax‑effected NOLs of $174 million.

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 associated with utilizing a deferred tax asset.

During 2018, we released valuation allowances of $132 million. We released significant valuation allowances on certain net deferred tax assets in Switzerland based upon the increased and sustained profitability in our Advanced Materials and Textile Effects businesses. Given Switzerland’s limited seven-year carryover of net operating losses (“NOLs”), we expect that some of our NOLs will expire unused. Therefore, we recorded a partial release of the valuation allowance of $80 million in the second quarter of 2018. In addition, based upon the separation of Venator from our U.K. combined group and the increased and sustained profitability in our Polyurethanes business in the U.K., we released significant valuation allowances on certain net deferred tax assets in the U.K. Because the U.K. places limitations on the utilization of certain NOLs and limitations on other deferred tax assets, we recorded a partial valuation allowance release of $15 million in the second quarter of 2018. We also released $24 million of significant valuation allowances on certain net deferred tax assets in Luxembourg in the third quarter of 2018 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. We also had miscellaneous non-significant valuation allowance releases totaling $13 million in 2018.

 

During 2017, we released valuation allowances of $22 million. In Italy, we released valuation allowances of $7 million on certain net deferred assets of our Polyurethanes business. On March 1, 2017 and April 1, 2017, we de-merged the Italian legal entities containing our Polyurethanes business from our combined Italian tax group. The historical and expected continued profitability of those Polyurethanes businesses resulted in the release of the associated valuation allowance. In Luxembourg, we released valuation allowances of $15 million 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 2016, we established valuation allowances of $12 million and released valuation allowances of $19 million. In Italy we established $9 million of valuation allowances on certain net deferred tax assets as a result of the sale of our European surfactants business, and in China we established $3 million of valuation allowances as a result of the closure of our Qingdao, China plant. We released valuation allowances of $12 million in Spain as a result of cumulative profitability and $7 million in The Netherlands as a result of tax planning to utilize losses that would have otherwise expired.

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 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

 

Huntsman International

 

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

 

As of December 31, 2018 and 2017, the amount of unrecognized tax benefits which, if recognized, would affect the effective tax rate is $23 million and $19 million, respectively.

During 2018 we concluded and settled tax examinations in various jurisdictions including but not limited to, Egypt and the U.S. (federal and various states). During 2017, we concluded and settled tax examinations in various jurisdictions, including, but not limited to, China and the U.S. (various states). During 2016, we concluded and settled tax examinations in various non-U.S. jurisdictions including, but not limited to, China, Germany, Indonesia, The Netherlands, Spain and the U.K.

During 2018 for unrecognized tax benefits that impact tax expense, we recorded a net increase in unrecognized tax benefits with a corresponding income tax expenses (not including interest and penalty expense) of $5 million. During 2017, for unrecognized tax benefits that impact tax expense, we recorded a net increase in unrecognized tax benefits with a corresponding income tax expense (not including interest and penalty expense) of $9 million. During 2016, we recorded a net increase in unrecognized tax benefits with a corresponding income tax expense (not including interest and penalty expense) of $2 million. 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.

 

 

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:

 

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 $7 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.

 

We have determined that our valuation allowance will not be impacted by the various aspects of the U.S. Tax Reform Act (e.g., deemed repatriation of deferred foreign income, GILTI inclusions, new categories of foreign tax credits), and therefore, we have made no related changes in any valuation allowance. Similarly, we have determined that our uncertain tax positions are not affected by the various aspects of the U.S Tax Reform Act (e.g., deemed repatriation of deferred foreign income, GILTI inclusions, new categories of foreign tax credits) and therefore, we have made no related recognition or change in any unrecognized tax positions.

 

The U.S. Tax Reform Act includes a mandatory one-time tax on accumulated earnings of foreign subsidiaries, and as a result, all previously unremitted earnings for which no U.S. deferred tax liability had been accrued have now been subject to U.S. tax. For subsidiaries with local withholding taxes, we intend to continue to invest most of these earnings indefinitely within the local country and do not expect to incur any significant, additional taxes related to such amounts.