of 35% to income before taxes: |
| | | | | | | | | |
| 2017 | 2016 | 2015 |
Income tax at the U.S. federal statutory rate | $ | 91.0 |
| $ | 70.6 |
| $ | 76.2 |
|
Adjustments: | | | |
State and local income taxes, net of federal tax benefit | 3.1 |
| 2.6 |
| 4.3 |
|
Tax on foreign remittances and U.S. tax on foreign income | 93.0 |
| 8.3 |
| 13.8 |
|
Foreign losses without current tax benefits | 8.9 |
| 6.4 |
| 5.3 |
|
Foreign earnings taxed at different rates including tax holidays | (18.0 | ) | (5.2 | ) | (14.9 | ) |
U.S. domestic manufacturing deduction | (3.9 | ) | (5.0 | ) | (4.5 | ) |
U.S. foreign tax credit | (104.2 | ) | (8.0 | ) | (22.4 | ) |
U.S. research tax credit | (1.5 | ) | (0.6 | ) | (1.1 | ) |
Accruals and settlements related to tax audits | (34.4 | ) | (8.1 | ) | (5.9 | ) |
Valuation allowance changes | (12.6 | ) | 0.2 |
| (34.7 | ) |
Deferred taxes related to branch operations | — |
| (1.3 | ) | 11.6 |
|
U.S. Tax Reform | 35.3 |
| — |
| — |
|
Other items, net | 0.9 |
| 0.6 |
| (1.4 | ) |
Provision for income taxes | $ | 57.6 |
| $ | 60.5 |
| $ | 26.3 |
|
Effective income tax rate | 22.2 | % | 30.0 | % | 12.1 | % |
U.S. Tax Reform was enacted on December 22, 2017 and reduced the U.S. federal corporate rate from 35% to 21%. It requires companies to pay a one-time net charge related to the taxation of unremitted foreign earnings and allows for immediate expensing of certain depreciable assets after September 27, 2017. In addition, U.S. Tax Reform also contains global intangible low-taxed income ("GILTI") provisions that impose a new tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. Changes in tax law are accounted for in the period of enactment and deferred tax assets and liabilities are measured at the enacted tax rate. Also on December 22, 2017, Staff Accounting Bulletin No. 118 ("SAB 118") was issued to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of U.S. Tax Reform. In accordance with SAB 118, the accounting for the tax effects of U.S. Tax Reform is not complete; however, reasonable estimates have been made for the one-time net charge related to the taxation of unremitted earnings and the remeasurement of U.S. deferred tax balances to reflect the new U.S. corporate income tax rate. Reasonable estimates have also been made for the effects of other provisions of U.S. Tax Reform, but they do not have a material impact on the Company’s consolidated financial statements.
Provisional estimates of $25.2 million for the one-time net charge related to the taxation of unremitted foreign earnings and $10.1 million related to the remeasurement of U.S. deferred tax balances to reflect the new U.S. corporate income tax rate were recognized as components of income tax expense in the current period. The Company’s provisional estimates may be affected as the Company obtains a more thorough understanding of the tax law and as additional analysis of U.S. Tax Reform is completed. A provisional estimate could not be made for the GILTI provisions, as the Company has not yet completed its assessment or elected an accounting policy to either recognize deferred taxes for basis differences expected to reverse as GILTI or to record GILTI as period costs if and when incurred. Additional information is necessary to prepare a more detailed analysis of the Company’s deferred tax assets and liabilities and historical foreign earnings, as well as potential correlative adjustments. Any subsequent adjustments to these amounts will be recorded to current tax expense in the quarter of 2018 when the analysis is complete.
No additional income tax provision has been made on any remaining undistributed foreign earnings not subject to the one-time net charge related to the taxation of unremitted foreign earnings or any additional outside basis difference as these amounts continue to be indefinitely reinvested in foreign operations. The Company is still evaluating whether to change its indefinite reinvestment assertion in light of U.S. Tax Reform and considers this conclusion to be incomplete. If the Company subsequently changes its assertion, it will account for the change in the quarter of 2018 when the analysis is complete. The amounts of undistributed foreign earnings were $479.6 million and $561.7 million at December 31, 2017 and December 31, 2016, respectively. It is not practicable to calculate the taxes that might be payable on such earnings indefinitely reinvested outside the United States.
The effect of temporary differences giving rise to deferred tax assets and liabilities at December 31, 2017 and 2016 was as follows:
|
| | | | | | |
| 2017 | 2016 |
Deferred tax assets: | | |
Accrued postretirement benefits cost | $ | 35.7 |
| $ | 56.8 |
|
Accrued pension cost | 53.4 |
| 63.3 |
|
Other employee benefit accruals | 6.4 |
| 11.5 |
|
Tax loss and credit carryforwards | 92.6 |
| 84.7 |
|
Other, net | 29.0 |
| 43.8 |
|
Valuation allowances | (79.4 | ) | (85.5 | ) |
| $ | 137.7 |
| $ | 174.6 |
|
Deferred tax liabilities - principally depreciation and amortization | (120.7 | ) | (127.0 | ) |
Net deferred tax assets | $ | 17.0 |
| $ | 47.6 |
|
The Company has U.S. federal and state tax credit and loss carryforwards with tax benefits totaling $2.5 million, portions of which will begin expiring in 2018 and continue until 2035. In addition, the Company has loss carryforwards in various non-U.S. jurisdictions with tax benefits totaling $90.1 million, portions of which will begin expiring in 2018 while others will be carried forward indefinitely. The Company has provided valuation allowances of $64.8 million against certain of these carryforwards. A majority of the non-U.S. loss carryforwards represent local country net operating losses for branches of the Company or entities treated as branches of the Company under U.S. tax law. Tax benefits have been recorded for these losses in the United States. Substantially all of the related local country net operating loss carryforwards are offset fully by valuation allowances. In addition to loss and credit carryforwards, the Company has provided valuation allowances of $14.6 million against other deferred tax assets.
As of December 31, 2017, the Company had $14.0 million of total gross unrecognized tax benefits, all of which would favorably impact the Company’s effective income tax rate in any future period if such benefits were recognized. As of December 31, 2017, the Company believes it is reasonably possible that the amount of unrecognized tax positions could decrease by approximately $3.9 million during the next 12 months. The potential decrease would be primarily driven by settlements with tax authorities and the expiration of various applicable statutes of limitation. As of December 31, 2017, the Company had accrued $3.0 million of interest and penalties related to uncertain tax positions. The Company records interest and penalties related to uncertain tax positions as a component of income tax expense.
As of December 31, 2016, the Company had $39.2 million of total gross unrecognized tax benefits. Included in this amount was $35.9 million of unrecognized tax benefits that would impact favorably the Company’s effective income tax rate in any future period if such benefits were recognized. As of December 31, 2016, the Company had accrued $8.5 million of interest and penalties related to uncertain tax positions.
As of December 31, 2015, the Company had $50.4 million of total gross unrecognized tax benefits. Included in this amount was $38.0 million of unrecognized tax benefits that would favorably impact the Company’s effective income tax rate in any future period if such benefits were recognized. As of December 31, 2015, the Company had accrued $12.2 million of interest and penalties related to uncertain tax positions.
The following table reconciles the Company’s total gross unrecognized tax benefits for the years ended December 31, 2017, 2016 and 2015:
|
| | | | | | | | | |
| 2017 | 2016 | 2015 |
Beginning balance, January 1 | $ | 39.2 |
| $ | 50.4 |
| $ | 57.5 |
|
Tax positions related to the current year: | | | |
Additions | 2.7 |
| — |
| 6.5 |
|
Tax positions related to prior years: | | | |
Additions | 6.9 |
| 5.7 |
| 5.0 |
|
Reductions | (5.2 | ) | (7.8 | ) | (4.0 | ) |
Settlements with tax authorities | — |
| (9.1 | ) | (14.6 | ) |
Lapses in statutes of limitation | (29.6 | ) | — |
| — |
|
Ending balance, December 31 | $ | 14.0 |
| $ | 39.2 |
| $ | 50.4 |
|
During 2017, gross unrecognized tax benefits decreased primarily due to expiration of applicable statutes of limitations in multiple jurisdictions. These decreases were partially offset by accruals related to both current and prior year tax matters, including certain U.S. federal taxes, U.S. state and local taxes and taxes related to the Company’s international operations.
During 2016, gross unrecognized tax benefits decreased primarily due to settlements with tax authorities related to various prior year tax matters, including certain U.S. federal taxes, U.S. state and local taxes and taxes related to the Company’s international operations. The decrease also was related to reductions in unrecognized tax benefits for changes in judgment regarding prior year tax matters in multiple jurisdictions. These decreases were partially offset by accruals related to prior year tax matters, including certain U.S. federal taxes, U.S. state and local taxes and taxes related to the Company’s international operations.
During 2015, gross unrecognized tax benefits decreased primarily due to settlements with tax authorities related to various prior year tax matters, including certain U.S. federal taxes, U.S. state and local taxes and taxes related to the Company’s international operations. These decreases were partially offset by accruals related to both current and prior year tax matters, including certain U.S. federal taxes, U.S. state and local taxes and taxes related to the Company’s international operations.
As of December 31, 2017, the Company is subject to examination by the Internal Revenue Service ("IRS") for tax years 2014 to the present. The Company also was subject to tax examination in various U.S. state and local tax jurisdictions for tax years 2007 to the present, as well as various foreign tax jurisdictions, including Mexico, China, Poland and India for tax years as early as 2002 to the present. The Company’s unrecognized tax benefits were presented on the Consolidated Balance Sheets as a component of other non-current liabilities.