Trinseo S.A.

NOTE 13—INCOME TAXES

Income before income taxes earned within and outside the United States is shown below:


	Year Ended
	December 31,
	2017		2016		2015
United States	$	138.0	$	137.2	$	105.2
Outside of the United States		273.1		268.1		98.6
Income before income taxes	$	411.1	$	405.3	$	203.8

The provision for income taxes is composed of:


	Year Ended						Year Ended						Year Ended
	December 31, 2017						December 31, 2016						December 31, 2015
	Current		Deferred		Total		Current		Deferred		Total		Current		Deferred		Total
U.S. federal	$	33.5	$	6.9	$	40.4	$	24.8	$	15.6	$	40.4	$	28.3	$	0.2	$	28.5
U.S. state and other		4.8		—		4.8		4.0		1.4		5.4		4.5		—		4.5
Non-U.S.		29.7		7.9		37.6		42.1		(0.9)		41.2		37.5		(0.3)		37.2
Total	$	68.0	$	14.8	$	82.8	$	70.9	$	16.1	$	87.0	$	70.3	$	(0.1)	$	70.2

The effective tax rate on pre-tax income differs from the U.S. statutory rate due to the following:


	Year Ended December 31,
	2017			2016			2015
Taxes at U.S. statutory rate(1)	$	143.9		$	141.9		$	71.4
State and local income taxes		3.4			3.9			3.0
Non U.S. statutory rates, including credits		(98.6)			(77.8)			(29.9)
U.S. tax effect of foreign earnings and dividends		(1.6)			(1.7)			(1.9)
Unremitted earnings		6.6			3.8			4.0
Change in valuation allowances		34.0			6.2			24.3
Uncertain tax positions		(10.7)			(1.8)			1.2
Withholding taxes on interest and royalties		2.9			2.4			2.6
U.S. manufacturing deduction		(3.6)			(2.9)			(3.0)
Stock-based compensation		(1.1)			2.1			1.2
Non-deductible interest		2.9			2.5			3.1
Non-deductible other expenses		1.2			6.0			0.9
Impact on foreign currency exchange		0.4			2.1			(3.5)
Other—net(2)		3.1			0.3			(3.2)
Total provision for income taxes	$	82.8		$	87.0		$	70.2
Effective tax rate		20	%		21	%		34	%

(1)

The U.S. statutory rate has been used as management believes it is more meaningful to the Company.

(2)

Included in “Other-net” is $3.1 million of one-time income tax expense related to the revaluation of our U.S. federal deferred tax assets and liabilities at the new U.S. federal corporate income tax rate of 21% in accordance with the enactment of the “Tax Cuts and Jobs Act” signed into law on December 22, 2017. There were no other applicable provisions of this newly enacted tax law that have a significant impact to the Company’s financial statements.

Deferred income taxes reflect temporary differences between the valuation of assets and liabilities for financial and tax reporting:


	December 31,
	2017				2016
	Deferred		Deferred		Deferred		Deferred
	Tax		Tax		Tax		Tax
	Assets		Liabilities		Assets		Liabilities
Tax loss and credit carry forwards	$	137.3	$	—	$	104.4	$	—
Unremitted earnings		—		17.2		—		10.6
Unconsolidated affiliates		—		0.1		4.4		—
Other accruals and reserves		2.2		—		5.2		—
Property, plant and equipment		—		34.4		—		44.3
Goodwill and other intangible assets		—		1.2		13.8		—
Deferred financing fees		12.9		—		13.2		—
Employee benefits		36.4		—		45.4		—
		188.8		52.9		186.4		54.9
Valuation allowance		(149.6)		—		(112.6)		—
Total	$	39.2	$	52.9	$	73.8	$	54.9

As of December 31, 2017 and 2016, all undistributed earnings of foreign subsidiaries and affiliates are expected to be repatriated.

Operating loss carryforwards amounted to $535.6 million in 2017 and $404.6 million in 2016. As of December 31, 2017, $42.1 million of the operating loss carryforwards were subject to expiration in 2018 through 2022, and $493.5 million of the operating loss carryforwards expire in years beyond 2022 or have an indefinite carryforward period. The Company had valuation allowances which were related to the realization of recorded tax benefits on tax loss carryforwards, as well as other net deferred tax assets, primarily from subsidiaries in Luxembourg and China, of $149.6 million as of December 31, 2017 and $112.6 million as of December 31, 2016.

For the years presented, a reconciliation of the beginning and ending amount of the unrecognized tax benefits is as follows:


Balance as of December 31, 2014	$	20.4
Increases related to current year tax positions		1.3
Decreases related to prior year tax positions		(1.6)
Balance as of December 31, 2015	$	20.1
Increases related to current year tax positions		0.1
Increases related to prior year tax positions		4.0
Decreases related to prior year tax positions		(6.0)
Settlement of uncertain tax positions		(1.1)
Decreases due to expiration of statues of limitations		(1.0)
Balance as of December 31, 2016	$	16.1
Increases related to current year tax positions		—
Increases related to prior year tax positions		0.9
Decreases related to prior year tax positions		(8.0)
Settlement of uncertain tax positions		(0.7)
Decrease due to expiration of statutes of limitations		(1.3)
Balance as of December 31, 2017	$	7.0

In regard to unrecognized tax benefits, the Company recognized a benefit related to interest and penalties of $2.4 million during the year ended December 31, 2017, whereas the Company recognized expense related to interest and penalties of $0.9 million and $0.7 million during the years ended December 31, 2016 and 2015, respectively. Interest and penalties related to unrecognized tax benefits was included as a component of income tax expense in the consolidated statements of operations. As of December 31, 2017 and 2016, the Company had $0.9 million and $3.1 million, respectively, accrued for interest and penalties. To the extent that the unrecognized tax benefits are recognized in the future, $3.3 million will impact the Company’s effective tax rate.

As of December 31, 2017, the Company anticipates that it is reasonably possible that approximately $1.0 million to $2.0 million of unrecognized tax benefits, including the impact relating to accrued interest and penalties, could be realized within the next twelve months due to the expiration of the statute of limitations in certain jurisdictions.

During the year ended December 31, 2017, the Company recorded a previously unrecognized tax benefit in the amount of $8.5 million, including interest and penalties, upon completion of the 2010 through 2013 audit with the German taxing authority.

Tax years that remain subject to examination for the Company’s major tax jurisdictions are shown below.


Major Tax Jurisdictions			Earliest Open Year
United States: Federal income tax			2012
Germany			2014
Switzerland			2014
Netherlands			2017
Luxembourg			2011
China			2007
Hong Kong			2006
Indonesia			2011
Italy			2010