Nexeo Solutions, Inc.

Income Taxes

The Company provides for income taxes and the related accounts under the asset and liability method. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates expected to be in effect during the year in which the basis differences reverse. The Company has not recognized deferred taxes for temporary outside basis differences of $85.2 million as of September 30, 2017, related to investments in foreign subsidiaries that management considers to be permanent in duration. It is not practicable to estimate the amount of the unrecognized deferred income tax liabilities at this time due to the complexities associated with its hypothetical calculation.

The Company and its two active U.S. corporate subsidiaries, Blocker and Sub Holding, were both incorporated in the U.S. and as such are subject to U.S. income taxes. The Company and Blocker will file a consolidated U.S. Federal income tax return and both will file various state returns. Sub Holding will file a separate U.S. Federal income tax return and various state tax returns. The Company’s controlled foreign corporations are subject to taxation at the entity level in each of their respective jurisdictions.

Holdings is organized as a limited liability company and is taxed as a partnership for U.S. income tax purposes. With the exception of a limited number of state and local jurisdictions, Holdings is not subject to U.S. income taxes. Accordingly, Blocker and the Selling Equityholders (other than the holders of equity interests in Blocker) will report their share of Holdings’ taxable income earned prior to the Closing Date on their respective U.S. federal tax returns. Holdings and its subsidiaries made no tax distributions to, or on behalf of, the Selling Equityholders during the fiscal year ended September 30, 2016.

For all periods, the Company computed the provision for income taxes based on the actual year-to-date effective tax rate by applying the discrete method. Use of the annual effective tax rate, which relies on accurate projections by legal entity of income earned and taxed in foreign jurisdictions, as well as accurate projections by legal entity of permanent and temporary differences, was not considered a reliable estimate for purposes of calculating year-to-date income tax expense.

For financial reporting purposes, income (loss) before income taxes includes the following components:



	Successor					Predecessor
	Fiscal Year Ended September 30, 2017		Fiscal Year Ended September 30, 2016*			October 1, 2015 Through June 8, 2016			Fiscal Year Ended September 30, 2015
U.S.	$	7.9	$	(9.1	)	$	(19.6	)	$	22.0
Foreign	17.0		1.9			9.9			3.1
Income (loss) before income taxes	$	24.9	$	(7.2	)	$	(9.7	)	$	25.1

A summary of income tax expense (benefit) is as follows:



	Successor						Predecessor
	Fiscal Year Ended September 30, 2017			Fiscal Year Ended September 30, 2016*			October 1, 2015 Through June 8, 2016			Fiscal Year Ended September 30, 2015
Current tax expense (benefit):
U.S. - Federal	$	1.3		$	0.5		$	—		$	(1.8	)
U.S. - State	0.5			(0.2		)	(0.1		)	0.1
Foreign	6.5			2.0			3.2			2.8
Total current tax expense	8.3			2.3			3.1			1.1
Deferred tax expense (benefit):
U.S. - Federal	4.6			(0.8		)	0.4			2.2
U.S. - State	0.2			0.4			0.1			—
Foreign	(2.6		)	(0.7		)	0.6			0.6
Total deferred tax expense (benefit)	2.2			(1.1		)	1.1			2.8
Total income tax expense	$	10.5		$	1.2		$	4.2		$	3.9

^{*The fiscal year ended September 30, 2016 includes}¹¹⁴^{days of the acquired business’ operating activities as a result of the consummation of the Business Combination on June 9, 2016.}

The reconciliation of the U.S. statutory tax rate to the Company's effective tax rate is as follows:



	Successor						Predecessor
	Fiscal Year Ended September 30, 2017			Fiscal Year Ended September 30, 2016*			October 1, 2015 Through June 8, 2016			Fiscal Year Ended September 30, 2015
U.S. statutory rate	34.0		%	34.0		%	0.0		%	0.0		%
Pretax income (loss) at statutory rate	$	8.5		$	(2.5	)	$	—		$	—
State income taxes	0.9			0.2			—			(0.1		)
Statutory rate differential	(1.4		)	(0.2		)	2.5			4.5
FIN 48 expense (benefit)	(0.5		)	—			0.1			(0.7		)
Withholding and other taxes	0.5			—			0.3			0.3
Stock basis adjustment	—			—			—			(2.7		)
Transaction costs	—			5.0			—			—
Contingent liability	2.4			(1.6		)	—			—
Permanent differences and other items	(0.6		)	0.3			0.6			(0.7		)
Statutory tax rate changes and differences	—			(0.2		)	(0.1		)	(0.1		)
True-up to prior year taxes	0.6			—			0.2			2.1
Other	—			—			—			0.3
Valuation allowance	0.1			0.2			0.6			1.0
Income tax expense	$	10.5		$	1.2		$	4.2		$	3.9
Effective tax rate	42.2		%	(16.7		)%	(43.3		)%	15.5		%

^{*The fiscal year ended September 30, 2016 includes}¹¹⁴^{days of the acquired business’ operating activities as a result of the consummation of the Business Combination on June 9, 2016.}

Temporary differences that result in significant deferred tax assets and liabilities are as follows:



	September 30, 2017			September 30, 2016
Deferred Tax Assets
Foreign operating losses	$	6.3		$	5.8
Federal and state operating losses	27.6			14.1
163J interest	—			6.7
Unrealized gains/losses	0.2			—
Fixed assets and intangibles	0.9			0.6
Compensation and other accruals	2.4			1.0
Other items	0.9			0.4
Valuation allowance	(3.1		)	(2.8		)
Total deferred tax assets	$	35.2		$	25.8
Deferred Tax Liabilities
Fixed assets and intangibles	$	23.8		$	16.1
Compensation and other accruals	0.2			2.7
Investment in partnerships	43.2			28.9
Other items	0.6			0.1
Total deferred tax liabilities	$	67.8		$	47.8

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

At September 30, 2017, the Company had foreign loss carryforwards of $6.3 million and U.S. loss carryforwards of $27.4 million. In those countries in which net operating losses are subject to an expiration period, the Company's loss carryforwards, if not utilized, will expire at various dates from 2018 through 2038. Based on historical performance, the Company believes that it is more likely than not that taxable income in future years will allow the Company to utilize the carryforwards that have not had a valuation allowance placed against them.

At September 30, 2017 and September 30, 2016, the valuation allowance was $3.1 million, $2.8 million, respectively and for the Predecessor as of September 30, 2015 the valuation allowance was $3.6 million, primarily relating to operations in Asia. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Based upon management’s expectations at September 30, 2017, management believes it is more likely than not that it will realize the majority of its deferred tax assets.

Uncertain Tax Positions

U.S. GAAP prescribes a recognition threshold and measurement attribute for the accounting and financial statement disclosure of tax positions taken or expected to be taken in a tax return. The evaluation of a tax position is a two-step process. The first step requires the Company to determine whether it is more likely than not that a tax position will be sustained upon examination based on the technical merits of the position. The second step requires the Company to recognize in the financial statements each tax position that meets the more likely than not criteria, measured as the amount of benefit that has a greater than 50% likelihood of being realized. Differences between the amount of tax benefits taken or expected to be taken in the income tax returns and the amount of tax benefits recognized in the financial statements represent the Company’s unrecognized income tax benefits, which are recorded as a liability, with the long-term portion included in Other non-current liabilities and the current portion included in Accrued expenses and other liabilities on the Company’s consolidated balance sheets.

During the fiscal year ended September 30, 2017, the Company added income tax-related uncertainties associated with the purchase of Ultra Chem. The initial reserve of $1.3 million, inclusive of interest and penalties, was added in connection with these uncertainties. Accordingly, the Company also recognized indemnification assets related to certain of these income tax-related uncertainties. The indemnification assets were initially included in Other current assets and other non-current assets in the consolidated balance sheets, representing the reimbursement the Company reasonably expected to receive from funds held in escrow pursuant to the purchase agreement. During the fiscal year ended September 30, 2015, the Predecessor completed its evaluation of income tax-related uncertainties associated with the Archway Acquisition, determined that the recognition threshold was met and recorded an initial reserve of $1.4 million associated with these uncertainties.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is shown below:



	Successor					Predecessor
	Fiscal Year Ended September 30, 2017			Fiscal Year Ended September 30, 2016*		October 1, 2015 Through June 8, 2016			Fiscal Year Ended September 30, 2015
Balance at beginning of period	$	0.9		$	—	$	0.9		$	0.4
Increases related to positions taken on items from prior years	0.1			—		0.2			1.2
Unrecognized tax benefits assumed related to acquisitions	0.8			0.9		—			—
Lapse of statute of limitations	(0.6		)	—		(0.2		)	(0.7		)
Balance at end of period	$	1.2		$	0.9	$	0.9		$	0.9

^{*The fiscal year ended September 30, 2016 includes}¹¹⁴^{days of the acquired business’ operating activities as a result of the consummation of the Business Combination on June 9, 2016.}

The Company recognizes interest and penalties related to uncertain tax positions, if any, as a component of income tax expense in the consolidated statements of operations. There was an insignificant amount of interest and penalties recognized during all periods. At September 30, 2017 and September 30, 2016, there was $1.8 million and $1.2 million, respectively, related to uncertain tax positions and at September 30, 2015, there was $1.1 million related to uncertain tax positions, including related accrued interest and penalties for the Predecessor.

The Company believes it is reasonably possible that within the next 12 months unrecognized tax benefits may decrease by up to $0.3 million as a result of the expiration of certain statute of limitations periods and anticipated settlements.

The Company or one of its subsidiaries files income tax returns in various state and foreign jurisdictions. Within the U.S., the Company is subject to federal and state income tax examination by tax authorities for periods after December 2014. With respect to countries outside of the U.S., with certain exceptions, the Company’s foreign subsidiaries are subject to income tax audits for years after 2013.