Note 8: Income Taxes

The source of earnings before income taxes and equity earnings consisted of the following:


(Amounts in millions)	2015		2014		2013
United States	$	578.4	$	481.1	$	406.7
Foreign		132.1		149.8		119.5

Total	$	710.5	$	630.9	$	526.2

The provision (benefit) for income taxes consisted of the following:


(Amounts in millions)	2015		2014		2013
Current:
Federal	$	165.8	$	137.6	$	115.5
Foreign		40.8		41.2		27.6
State		19.7		17.5		14.1

Total current		226.3		196.3		157.2


Deferred:
Federal		(8.7)		10.0		6.9
Foreign		3.9		(8.2)		2.0
State		(0.3)		1.4		0.6

Total deferred		(5.1)		3.2		9.5

Total income tax provision	$	221.2	$	199.5	$	166.7

The following is a reconciliation of the statutory federal income tax rate to Snap-on’s effective tax rate:


	2015		2014		2013
Statutory federal income tax rate		35.0%		35.0%		35.0%
Increase (decrease) in tax rate resulting from:
State income taxes, net of federal benefit		2.3		2.2		2.1
Noncontrolling interests		(0.6)		(0.5)		(0.6)
Repatriation of foreign earnings		(3.0)		(0.4)		–
Change in valuation allowance for deferred tax assets		0.1		(0.9)		0.7
Adjustments to tax accruals and reserves		0.8		0.5		(1.3)
Foreign rate differences		(1.9)		(2.2)		(1.7)
Domestic production activities deduction		(1.9)		(2.0)		(2.7)
Other		0.3		(0.1)		0.2

Effective tax rate		31.1%		31.6%		31.7%

Snap-on’s effective income tax rate on earnings attributable to Snap-on Incorporated was 31.7% in 2015, 32.1% in 2014, and 32.3% in 2013. The 2015 effective income tax rate includes tax benefits associated with distributions from certain non-U.S. subsidiaries, partially offset by a tax assessment in a foreign jurisdiction.

Temporary differences that give rise to the net deferred income tax asset (liability) as of 2015, 2014 and 2013 year end are as follows:


(Amounts in millions)	2015		2014		2013
Current deferred income tax assets (liabilities):
Inventories	$	29.4	$	29.2	$	24.4
Accruals not currently deductible		71.1		72.7		63.2
Tax credit carryforward		10.2		–		–
Valuation allowance		(1.1)		(1.1)		(2.4)

Total current (included in deferred income tax assets and other accrued liabilities)		109.6		100.8		85.2

Long-term deferred income tax assets (liabilities):
Employee benefits		101.2		91.5		62.5
Net operating losses		44.4		53.5		59.9
Depreciation and amortization		(199.3)		(191.2)		(180.8)
Valuation allowance		(30.9)		(33.7)		(43.0)
Equity-based compensation		22.7		19.6		17.6
Other		(1.6)		(5.7)		(2.9)

Total long term		(63.5)		(66.0)		(86.7)

Net deferred income tax asset (liability)	$	46.1	$	34.8	$	(1.5)

As of 2015 year end, Snap-on had tax net operating loss carryforwards totaling $266.4 million as follows:


(Amounts in millions)	State		United States		Foreign		Total
Year of expiration:
2016 – 2020	$	–	$	–	$	32.9	$	32.9
2021 – 2025		0.3		–		20.5		20.8
2026 – 2030		–		–		20.3		20.3
2031 – 2035		136.5		–		10.2		146.7
Indefinite		–		–		45.7		45.7

Total net operating loss carryforwards	$	136.8	$	–	$	129.6	$	266.4

A valuation allowance totaling $32.0 million, $34.8 million and $45.4 million as of 2015, 2014 and 2013 year end, respectively, has been established for deferred income tax assets primarily related to certain subsidiary loss carryforwards that may not be realized. Realization of the net deferred income tax assets is dependent on generating sufficient taxable income prior to their expiration. Although realization is not assured, management believes it is more-likely-than-not that the net deferred income tax assets will be realized. The amount of the net deferred income tax assets considered realizable, however, could change in the near term if estimates of future taxable income during the carryforward period fluctuate.

The following is a reconciliation of the beginning and ending amounts of unrecognized tax benefits for 2015, 2014 and 2013:


(Amounts in millions)	2015		2014		2013
Unrecognized tax benefits at beginning of year	$	6.4	$	4.6	$	6.8
Gross increases – tax positions in prior periods		1.7		2.1		1.5
Gross decreases – tax positions in prior periods		(0.5)		–		(1.6)
Gross increases – tax positions in the current period		0.5		1.8		0.5
Settlements with taxing authorities		–		(1.6)		(2.1)
Lapsing of statutes of limitations		(0.9)		(0.5)		(0.5)

Unrecognized tax benefits at end of year	$	7.2	$	6.4	$	4.6

The unrecognized tax benefits of $7.2 million, $6.4 million and $4.6 million as of 2015, 2014 and 2013 year end, respectively, would impact the effective income tax rate if recognized.

Interest and penalties related to unrecognized tax benefits are recorded in income tax expense. During 2015 and 2014, the company reversed a net $0.1 million and $0.4 million, respectively, of interest and penalties to income associated with unrecognized tax benefits. As of 2015, 2014 and 2013 year end, the company has provided for $0.5 million, $0.5 million and $0.9 million, respectively, of accrued interest and penalties related to unrecognized tax benefits. The unrecognized tax benefits and related accrued interest and penalties are included in “Other long-term liabilities” on the accompanying Consolidated Balance Sheets.

Snap-on and its subsidiaries file income tax returns in the United States and in various state, local and foreign jurisdictions. It is reasonably possible that certain unrecognized tax benefits may either be settled with taxing authorities or the statutes of limitations for such items may lapse within the next 12 months, causing Snap-on’s gross unrecognized tax benefits to decrease by a range of zero to $1.6 million. Over the next 12 months, Snap-on anticipates taking certain tax positions on various tax returns for which the related tax benefit does not meet the recognition threshold. Accordingly, Snap-on’s gross unrecognized tax benefits may increase by a range of zero to $1.0 million over the next 12 months for uncertain tax positions expected to be taken in future tax filings.

With few exceptions, Snap-on is no longer subject to U.S. federal and state/local income tax examinations by tax authorities for years prior to 2010, and Snap-on is no longer subject to non-U.S. income tax examinations by tax authorities for years prior to 2007.

The undistributed earnings of all non-U.S. subsidiaries totaled $624.1 million, $619.1 million and $556.0 million as of 2015, 2014 and 2013 year end, respectively. Snap-on has not provided any deferred taxes on these undistributed earnings as it considers the undistributed earnings to be permanently invested. Determination of the amount of unrecognized deferred income tax liability related to these earnings is not practicable.