10. INCOME TAXES

On December 22, 2017, the Tax Cuts and Jobs Act (the 2017 Act) was enacted in the United States. The following is a summary of the key provisions of the 2017 Act:

•Reduces the U.S. federal statutory income tax rate for corporations from 35% to 21%


•	Requires companies to pay a one-time transition tax (Transition Tax) on certain foreign earnings for which U.S. income tax was previously deferred


•	Generally eliminates U.S. federal income taxes on dividends from foreign subsidiaries


•	Requires a current inclusion in U.S. federal taxable income of certain earnings of controlled foreign corporations


•	Eliminates the corporate alternative minimum tax (AMT) and changes how existing AMT credits can be realized


•	Creates a new limitation on deductible net interest expense incurred by U.S. corporations


•	Allows for immediate expensing of certain capital investments in the U.S. for the period September 27, 2017 through December 31, 2022


•	Creates a new base erosion anti-abuse minimum tax (BEAT)

Following the enactment of the 2017 Act, the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) 118 to provide guidance on the accounting and reporting impacts of the 2017 Act. SAB 118 states that companies should account for changes related to the 2017 Act in the period of enactment if all information is available and the accounting can be completed. In situations where companies do not have enough information to complete the accounting in the period of enactment, a company must either 1) record an estimated provisional amount if the impact of the change can be reasonably estimated; or 2) continue to apply the accounting guidance that was in effect immediately prior to the 2017 Act if the impact of the change cannot be reasonably estimated. If estimated provisional amounts are recorded, SAB 118 provides a measurement period of no longer than one year during which companies should adjust those amounts as additional information becomes available.

In connection with our preliminary analysis of the impacts of the 2017 Act, we have recorded a discrete net tax benefit of approximately $20 million for the year ended December 31, 2017. This net benefit primarily consists of a benefit of approximately $110 million for the remeasurement of our net deferred tax liabilities as a result of the change in tax rate and a benefit of $18 million related to the reduction of a previously recorded deferred tax liability on certain foreign earnings, partially offset by expense of approximately $108 million related to the Transition Tax.

These adjustments were estimates based on information currently available and, in accordance with the guidance in SAB 118, these amounts are provisional and subject to adjustment as we obtain additional information and complete our analysis. The additional information required is as follows:

Reduction of U.S. federal corporate tax rate: While we were able to make a reasonable estimate of the impact of the reduction in the corporate tax rate, the final impact may be affected by other elements related to the 2017 Act including, but not limited to, our calculation of deemed repatriation of deferred foreign income and the state tax effect of adjustments made to federal temporary differences.

Transition Tax: In order to finalize the impact of the Transition Tax, we must determine, in addition to other factors, the amount of earnings of certain foreign subsidiaries, as well as the amount of non-U.S. income taxes paid on these earnings. In the fourth quarter of 2017, we were able to make a reasonable estimate, however, we are continuing to gather information to more precisely calculate the Transition Tax.

For the remaining provisions of the 2017 Act, as listed above, we either did not have sufficient information to estimate the impact of the provision for 2017, or the item became effective on or after January 1, 2018 and did not require accounting treatment in 2017. We are currently analyzing the impact of these provisions.

Income before income taxes for U.S. and non-U.S. operations was as follows:



	2017			2016		2015
	(in millions)
U.S. income (loss)	$	(37.1	)	$	90.0	$	88.3
Non - U.S. income	377.1			209.0		184.4
Total income before income taxes	$	340.0		$	299.0	$	272.7

The following is a summary of the components of our provisions for income taxes:



	2017			2016			2015
	(in millions)
Current
Federal	$	87.1		$	0.4		$	0.5
Other state and local	(0.7		)	—			0.2
Foreign	62.4			27.5			10.8
Total current	$	148.8		$	27.9		$	11.5

Deferred
Federal	$	(122.3	)	$	31.2		$	26.4
Other state and local	(17.0		)	—			—
Foreign	(7.0		)	(0.8		)	(0.8		)
Total deferred	(146.3		)	30.4			25.6
Total income tax expense	$	2.5		$	58.3		$	37.1

The following is a reconciliation of our provision for income taxes to the expected amounts using statutory rates:



	2017		2016		2015
Federal statutory	35.0	%	35.0	%	35.0	%
Foreign income taxes	(28.3	)	(20.5	)	(17.6	)
Change in enacted tax rate	(31.6	)	(0.2	)	—
Transition tax	31.9		—		—
State and local	(1.9	)	—		0.1
Tax credits	(2.6	)	(1.1	)	(1.3	)
Valuation allowance	(1.8	)	0.4		2.6
U.S. tax on unremitted foreign earnings	(5.5	)	0.2		0.2
Uncertain tax positions	4.0		0.5		(5.7	)
Other	1.5		5.2		0.3
Effective income tax rate	0.7	%	19.5	%	13.6	%

In 2017, 2016 and 2015, our income tax expense and effective income tax rate, as compared to the U.S. federal statutory rate of 35%, reflect the impact of favorable foreign tax rates, partially offset by our inability to realize a tax benefit for current foreign losses.

Our income tax expense and effective income tax rate for 2017 were lower than our income tax expense and effective income tax rate for 2016 primarily as a result of an increase in the proportionate share of earnings attributable to lower tax rate jurisdictions. In addition, subsequent to the acquisition of MPG, we re-evaluated our valuation allowance position with regard to jurisdictions in which consolidated state tax returns are filed and recorded an income tax benefit for the year ended December 31, 2017. This was partially offset by a discrete tax adjustment related to certain non-deductible transaction and acquisition-related costs.

Further, we recognized a net benefit in 2017 related to accounting for the following provisions of the Tax Cuts and Jobs Act: 1) remeasurement of our net deferred tax liabilities in the U.S. from 35% to 21%; and 2) a one-time Transition Tax on certain foreign earnings for which U.S. tax was previously deferred, which also resulted in a benefit related to the reduction of a previously recorded deferred tax liability on these foreign earnings.

Our income tax expense and effective income tax rate for 2016 were higher than our income tax expense and effective income tax rate in 2015 primarily due to the impact of an $11.5 million reduction in tax expense related to uncertain tax positions attributable to transfer pricing in the fourth quarter of 2015.

As of December 31, 2017, we have refundable income taxes of $30.0 million, of which $9.6 million was classified as Prepaid expenses and other and $20.4 million was classified as Other assets and deferred charges on our Consolidated Balance Sheet. At December 31, 2016, we had refundable income taxes of $3.4 million classified as Prepaid expenses and other on our Consolidated Balance Sheet. We also have income taxes payable of $11.6 million and $0.9 million classified as Other accrued expenses on our Consolidated Balance Sheet as of December 31, 2017 and 2016, respectively.

The following is a summary of the significant components of our deferred tax assets and liabilities:



	December 31,
	2017			2016
	(in millions)
Deferred tax assets
Employee benefits	$	155.9		$	219.3
Inventory	20.8			20.3
Net operating loss (NOL) carryforwards	172.4			126.7
Tax credit carryforwards	96.4			35.1
Capital allowance carryforwards	11.2			11.6
Fixed assets	5.1			15.9
Deferred revenue	14.7			19.3
Capitalized expenditures	35.4			71.9
Other	26.9			20.5
Valuation allowances	(180.4		)	(164.8		)
Deferred tax assets	$	358.4		$	375.8

Deferred tax liabilities
U.S. tax on unremitted foreign earnings	(2.4		)	—
Other intangible assets	(281.6		)	—
Fixed assets	(120.3		)	(23.0		)
Other	(18.7		)	—
Deferred tax liabilities	$	(423.0	)	$	(23.0	)

Deferred tax asset (liability), net	$	(64.6	)	$	352.8

Deferred tax assets and liabilities recognized in our Consolidated Balance Sheets are as follows:



	December 31,
	2017			2016
	(in millions)
U.S. federal and state deferred tax asset (liability), net	$	(79.4	)	$	340.9
Other foreign deferred tax asset, net	14.8			11.9
Deferred tax asset (liability), net	$	(64.6	)	$	352.8

DEFERRED INCOME TAX ASSETS AND LIABILITIES AND VALUATION ALLOWANCES The deferred income tax assets and liabilities summarized above reflect the impact of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the basis of such assets and liabilities as measured by tax laws. ASC 740 - Income Taxes states that companies must measure deferred tax amounts at the rate at which they are expected to be realized. As a result of the enactment of the 2017 Act, we have remeasured our deferred tax assets and liabilities in the U.S. from the prior 35% rate to the new 21% rate at December 31, 2017.

As of December 31, 2017 and December 31, 2016, we had deferred tax assets from domestic and foreign NOL and tax credit carryforwards of $280.0 million and $173.4 million, respectively. Approximately $118.2 million of the deferred tax assets at December 31, 2017 relate to NOL and tax credits that can be carried forward indefinitely with the remainder having carryover periods of five to 20 years.

Accounting guidance for income taxes requires a deferred tax liability to be established for the U.S. tax impact of undistributed earnings of foreign subsidiaries unless it can be shown that these earnings will be permanently reinvested outside the U.S. As a result of the enactment of the 2017 Act in the fourth quarter of 2017, we recognized a one-time transition tax expense related to certain foreign earnings for which U.S. tax had been previously deferred, and remeasured our deferred tax liability related to future foreign earnings.

In accordance with the accounting guidance for income taxes, we estimate whether recoverability of our deferred tax assets is “more likely than not,” based on forecasts of taxable income in the related tax jurisdictions. In this estimate, we use historical results, projected future operating results based upon approved business plans, eligible carry forward periods, tax planning opportunities and other relevant considerations. This includes the consideration of tax law changes, prior profitability performance and the uncertainty of future projected profitability.

Under applicable GAAP, a sustained period of profitability in our operations is required before we would change our judgment regarding the need for a valuation allowance against our net deferred tax assets. During 2016, our business in China turned to a position of cumulative profitability on a pre-tax basis, considering our operating results for the current year and the previous two years. We have concluded that this record of cumulative profitability in recent years, in addition to our long range forecast showing continued profitability, has provided positive evidence that it is more likely than not that our net deferred tax assets in China will be realized. Accordingly, in 2016 we released our valuation allowance in China resulting in a $5.4 million tax benefit in our 2016 provision for income taxes.

As of December 31, 2017 and December 31, 2016, we have a valuation allowance of $180.4 million and $164.8 million, respectively, related to net deferred tax assets in several foreign jurisdictions and U.S. state and local jurisdictions.

UNRECOGNIZED INCOME TAX BENEFITS To the extent our uncertain tax positions do not meet the “more likely than not” threshold, we have derecognized such positions. To the extent our uncertain tax positions meet the “more likely than not” threshold, we have measured and recorded the highest probable benefit, and have established appropriate reserves for benefits that exceed the amount likely to be sustained upon examination.

A reconciliation of the beginning and ending amounts of unrecognized income tax benefits is as follows:



	Unrecognized Income Tax			Interest and
	Benefits			Penalties
	(in millions)
Balance at January 1, 2015	$	47.3		$	12.2
Increase in prior year tax positions	—			1.4
Decrease in prior year tax positions	(9.4		)	(4.9		)
Increase in current year tax positions	8.8			—
Foreign currency remeasurement adjustment	(5.1		)	(1.8		)
Balance at December 31, 2015	$	41.6		$	6.9
Increase in prior year tax positions	0.4			2.0
Decrease in prior year tax positions	(2.5		)	(0.5		)
Increase in current year tax positions	9.3			—
Settlement	(17.3		)	(5.6		)
Foreign currency remeasurement adjustment	(3.3		)	(0.3		)
Balance at December 31, 2016	$	28.2		$	2.5
Increase in prior year tax positions	1.5			3.1
Decrease in prior year tax positions	(0.4		)	—
Increase in current year tax positions	10.5			—
Increase from acquisitions	8.3			1.9
Settlement	(1.2		)	(0.1		)
Foreign currency remeasurement adjustment	0.8			0.1
Balance at December 31, 2017	$	47.7		$	7.5

At December 31, 2017 and December 31, 2016, we had $47.7 million and $28.2 million of net unrecognized income tax benefits, respectively. The increase in net unrecognized income tax benefits at December 31, 2017, as compared to December 31, 2016, is primarily attributable to our acquisition of MPG and transfer pricing.

In January 2016, we completed negotiations with the Mexican tax authorities to settle 2007 through 2009 transfer pricing audits. We made a payment of $22.9 million in January 2016 that fully satisfied our obligations for transfer pricing issues for tax years 2007 through 2013. Including these settlements, we made payments of approximately $28 million in 2016 to the Mexican tax authorities related to transfer pricing matters.

In 2017, 2016, and 2015, we recognized expense of $3.1 million, expense of $1.5 million and a benefit of $3.5 million, respectively, related to interest and penalties in income tax expense on our Consolidated Statement of Income. We have a liability of $7.5 million and $2.5 million related to the estimated future payment of interest and penalties at December 31, 2017 and 2016, respectively. The amount of the uncertain tax position as of December 31, 2017 that, if recognized, would affect the effective tax rate is $55.2 million.

We file income tax returns in the U.S. federal jurisdiction, as well as various states and foreign jurisdictions. We are currently under a U.S. federal income tax examination for our legacy AAM business for the years 2014 and 2015, and are under a U.S. federal income tax examination for our legacy MPG business for 2015. We are also currently under examination by various state and local, as well as foreign tax authorities. U.S. federal income tax examinations for the years 2012 and 2013 were settled in January of 2017, resulting in no cash payment or reduction in our liability for unrecognized income tax benefits. We are no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2012.

Based on the status of the IRS audits and audits outside the U.S., and the protocol of finalizing audits by the relevant tax authorities, it is not possible to estimate the impact of changes, if any, to previously recorded uncertain tax positions. Although it is difficult to estimate with certainty the amount of an audit settlement, we do not expect the settlement will be materially different from what we have recorded. We will continue to monitor the progress and conclusions of all ongoing audits and will adjust our estimated liability as necessary.