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Income Taxes | 12 Months Ended
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Dec. 31, 2019
Income Tax Disclosure [Abstract] |
Income Taxes | INCOME TAXES For each of the years ended December 31, 2019, 2018, and 2017 the tax data related to continuing operations is as follows:
| 2019 |  |  | 2018 |  |  | 2017 |
Income components: |  |  |  |  |
United States | $ | 143.9 |  |  | $ | 114.4 |  |  | $ | 89.2 |
International | 270.5 |  |  | 276.6 |  |  | 220.2 |
Income from continuing operations before income tax | 414.4 |  |  | 391.0 |  |  | 309.4 |
Income tax expense components: |  |  |  |  |
Current income tax expense: |  |  |  |  |
United States – federal | 9.4 |  |  | 6.3 |  |  | 7.7 |
United States – state and local | 0.5 |  |  | 7.9 |  |  | 1.3 |
International | 49.1 |  |  | 58.2 |  |  | 38.6 |
Total current income tax expense | 59.0 |  |  | 72.4 |  |  | 47.6 |
Deferred income tax expense (benefit) components: |  |  |  |  |
United States – federal | 10.1 |  |  | 7.4 |  |  | 105.9 |
United States – state and local | 1.5 |  |  | (0.2 | ) |  | 4.4 |
International | 19.3 |  |  | (21.9 | ) |  | 36.7 |
Total deferred income tax expense (benefit) | 30.9 |  |  | (14.7 | ) |  | 147.0 |
Income tax expense | $ | 89.9 |  |  | $ | 57.7 |  |  | $ | 194.6 |
Effective income tax rate | 21.7 | % |  | 14.8 | % |  | 62.9 | %
A reconciliation of the income tax expense for continuing operations from the U.S. statutory income tax rate to the effective income tax rate is as follows for each of the years ended December 31, 2019, 2018, and 2017:
| 2019 |  |  | 2018 |  |  | 2017 |
Tax provision at U.S. statutory rate | 21.0 | % |  | 21.0 | % |  | 35.0 | %
Foreign tax rate differential | 2.8 | % |  | 3.7 | % |  | (7.8 | )%
U.S. permanent items | (2.1 | )% |  | (0.2 | )% |  | (2.2 | )%
Tax on undistributed foreign earnings | 1.8 | % |  | (1.2 | )% |  | (4.8 | )%
Italy patent box | (1.2 | )% |  | (1.0 | )% |  | (0.8 | )%
Italy patent box discrete benefit relating to prior years | — | % |  | — | % |  | (1.1 | )%
State and local income tax | 0.7 | % |  | 1.5 | % |  | 0.3 | %
Valuation allowance on deferred tax assets | (0.5 | )% |  | (2.4 | )% |  | 7.2 | %
Audit settlements and unrecognized tax benefits | 0.1 | % |  | (0.3 | )% |  | (0.8 | )%
Tax exempt interest | — | % |  | (5.8 | )% |  | (7.8 | )%
One-time tax on foreign earnings - Tax Act | — | % |  | (1.0 | )% |  | 18.8 | %
Federal deferred taxes remeasurement - Tax Act | — | % |  | 0.4 | % |  | 27.8 | %
U.S. tax on foreign earnings | — | % |  | 0.5 | % |  | 0.3 | %
Other adjustments | (0.9 | )% |  | (0.4 | )% |  | (1.2 | )%
Effective income tax rate | 21.7 | % |  | 14.8 | % |  | 62.9 | %
The increase in the effective tax rate in 2019 compared to 2018 was primarily due to tax benefits of $22.9 in 2018 from German valuation allowance reversals on deferred tax assets. The effective tax rate in 2017 was driven by the Tax Cuts and Jobs Act of 2017 (the "Tax Act"). At the end of 2018, ITT capitalized its investment in a foreign subsidiary, which eliminated its tax exempt interest. On December 22, 2017, the Tax Act was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, the transition of U.S. international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017. In accordance with the Tax Act, the Company recorded $129.2 as additional income tax expense in 2017, the period in which the legislation was enacted. The total expense included $57.9 related to the transition tax and $86.0 related to the remeasurement of certain deferred tax assets and liabilities. The Company also recorded a tax benefit of $14.7 reversing a previously recorded tax liability related to undistributed foreign earnings. The Company continues to provide tax for foreign withholding taxes, foreign and U.S. state income taxes on future distributions of its foreign earnings. The Company provides for deferred taxes on the undistributed earnings and profits of all foreign subsidiaries, determined under U.S. tax law. At year-end 2019, the amount of undistributed earnings and profits of all foreign subsidiaries was $1,415.0. The Company anticipates that these foreign earnings and future earnings of its foreign subsidiaries that are not indefinitely reinvested will be sufficient to meet its U.S. cash needs. The Company is indefinitely reinvested in any excess of financial reporting over tax basis in its foreign subsidiaries that exceeds undistributed earnings and profits. At year-end 2019, the indefinitely reinvested excess of financial reporting over tax basis was $107.5. Deferred tax assets and liabilities include the following:
| 2019 |  |  | 2018 |
Deferred Tax Assets: |  |  |
Loss carryforwards | $ | 139.8 |  |  | $ | 157.0 |
Asbestos | 101.5 |  |  | 108.7 |
Employee benefits | 59.4 |  |  | 64.9 |
Accruals | 46.0 |  |  | 47.7 |
Other | 23.0 |  |  | 24.7 |
Gross deferred tax assets | 369.7 |  |  | 403.0 |
Less: Valuation allowance | 129.8 |  |  | 141.0 |
Net deferred tax assets | $ | 239.9 |  |  | $ | 262.0 |
Deferred Tax Liabilities: |  |  |
Intangibles | $ | (43.0 | ) |  | $ | (43.5 | )
Undistributed earnings | (33.8 | ) |  | (28.2 | )
Accelerated depreciation | (26.9 | ) |  | (27.2 | )
Investment | (0.2 | ) |  | (0.2 | )
Total deferred tax liabilities | $ | (103.9 | ) |  | $ | (99.1 | )
Net deferred tax assets | $ | 136.0 |  |  | $ | 162.9 |
Deferred taxes are presented in the Consolidated Balance Sheets as follows:
| 2019 |  |  | 2018 |
Non-current assets | $ | 138.1 |  |  | $ | 164.5 |
Other non-current liabilities | (2.1 | ) |  | (1.6 | )
Net deferred tax assets | $ | 136.0 |  |  | $ | 162.9 |
The table included below provides a rollforward of our valuation allowance on net deferred income tax assets from December 31, 2016 to December 31, 2019.
| State |  |  | Foreign |  |  | Total |
DTA valuation allowance - December 31, 2016 | $ | 45.9 |  |  | $ | 67.4 |  |  | $ | 113.3 |
Change in assessment | — |  |  | — |  |  | — |
Current year operations | 26.5 |  |  | 30.2 |  |  | 56.7 |
DTA valuation allowance - December 31, 2017 | $ | 72.4 |  |  | $ | 97.6 |  |  | $ | 170.0 |
Change in assessment | — |  |  | (22.9 | ) |  | (22.9 | )
Current year operations | (15.1 | ) |  | 9.0 |  |  | (6.1 | )
DTA valuation allowance - December 31, 2018 | $ | 57.3 |  |  | $ | 83.7 |  |  | $ | 141.0 |
Change in assessment | — |  |  | 5.6 |  |  | 5.6 |
Current year operations | (8.8 | ) |  | (8.0 | ) |  | (16.8 | )
DTA valuation allowance - December 31, 2019 | $ | 48.5 |  |  | $ | 81.3 |  |  | $ | 129.8 |
The Company continues to maintain a valuation allowance against certain deferred tax assets attributable to state net operating losses and tax credits, and certain foreign net deferred tax assets primarily in Luxembourg, China, Germany and India which are not expected to be realized. Management assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit the use of deferred tax assets. The cumulative loss incurred over the three-year period ending December 31, 2019 constitutes significant objective negative evidence, resulting in the recognition of a valuation allowance against the net deferred tax assets for these jurisdictions. Such objective negative evidence limits our ability to consider subjective positive evidence, such as our projections of future taxable income. The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income change or if objective negative evidence in the form of cumulative losses is no longer present and additional weight can be given to subjective evidence. We have the following tax attributes available for utilization at December 31, 2019:
Attribute | Amount |  |  | First Year of Expiration
U.S. federal net operating losses | $ | 5.6 |  |  | 12/31/2027
U.S. state net operating losses | 1,061.9 |  |  | 12/31/2021
U.S. federal tax credits | 1.3 |  |  | 12/31/2021
U.S. state tax credits | 1.1 |  |  | 12/31/2027
Foreign net operating losses(a) | 338.7 |  |  | 12/31/2021
(a) Includes approximately $230.3 of net operating loss carryforwards in Luxembourg as of December 31, 2019. Excess tax benefits related to stock-based compensation of $4.6, $2.2 and $2.7 for 2019, 2018 and 2017, respectively, were recorded as an income tax benefit in the statement of operations and have been reflected in the caption “U.S. permanent items” within the effective tax rate reconciliation table. Uncertain Tax Positions We recognize income tax benefits from uncertain tax positions only if, based on the technical merits of the position, it is more likely than not that the tax position will be sustained on examination by the taxing authorities. The tax benefits recognized in the Consolidated Financial Statements from such positions are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. A reconciliation of the beginning and ending amount of unrecognized tax benefits for each of the years ended December 31, 2019, 2018, and 2017 is as follows:
| 2019 |  |  | 2018 |  |  | 2017 |
Unrecognized tax benefits – January 1 | $ | 45.8 |  |  | $ | 51.9 |  |  | $ | 69.5 |
Additions for: |  |  |  |  |
Current year tax positions | 1.5 |  |  | 1.5 |  |  | 1.1 |
Prior year tax positions | 0.3 |  |  | — |  |  | — |
Reductions for: |  |  |  |  |
Prior year tax positions | (0.1 | ) |  | (0.2 | ) |  | (12.7 | )
Expiration of statute of limitations | (1.2 | ) |  | (1.9 | ) |  | (5.8 | )
Settlements | (0.1 | ) |  | (5.5 | ) |  | (0.2 | )
Unrecognized tax benefits – December 31 | $ | 46.2 |  |  | $ | 45.8 |  |  | $ | 51.9 |
As of December 31, 2019, $20.9 and $1.2 of the unrecognized tax benefits would affect the effective tax rate for continuing operations and discontinued operations respectively, if realized. The Company operates in various tax jurisdictions and is subject to examination by tax authorities in these jurisdictions. The Company is currently under examination in several jurisdictions including the Czech Republic, Germany, Hong Kong, India, Italy, Japan, the U.S. and Venezuela. The calculation of our tax liability for unrecognized tax benefits includes dealing with uncertainties in the application of complex tax laws and regulations in various tax jurisdictions. Due to the complexity of some uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the unrecognized tax benefit. Over the next 12 months, the net amount of the tax liability for unrecognized tax benefits in foreign and domestic jurisdictions could change by approximately $14 due to changes in audit status, expiration of statutes of limitations and other events. The settlement of any future examinations could result in changes in the amounts attributable to the Company under its existing Tax Matters Agreement with Exelis and Xylem. The following table summarizes the earliest open tax years by major jurisdiction as of December 31, 2019:
Jurisdiction | Earliest Open Year
China | 2014
Czech Republic | 2015
Germany | 2010
Hong Kong | 2007
India | 2008
Italy | 2009
Korea | 2014
Luxembourg | 2015
Mexico | 2014
United States | 2016
We classify interest relating to tax matters as a component of interest expense and tax penalties as a component of income tax expense in our Consolidated Statements of Operations. During 2019, 2018, and 2017 we recognized a net interest benefit of $0.3, $0.9, and $2.4, respectively, related to tax matters. We had $2.9, $3.2, and $4.1 of interest expense accrued from continuing and discontinued operations related to tax matters as of December 31, 2019, 2018, and 2017, respectively. Tax Matters Agreement In relation to ITT's 2011 spin-off of its Defense and Information Solutions business, Exelis Inc. (Exelis), and its water-related business, Xylem Inc. (Xylem), ITT entered into a Tax Matters Agreement with Exelis and Xylem that governs the respective rights, responsibilities and obligations of the companies after the 2011 spin-off with respect to tax liabilities and benefits, tax attributes, tax contests and other tax sharing regarding U.S. Federal, state, local and foreign income taxes, other tax matters and related tax returns. On May 29, 2015, Harris Corporation acquired Exelis and on June 29, 2019, Harris Corporation and L3 Technologies completed a merger. As of December 31, 2019, examinations remained open for income taxes from certain state and foreign jurisdictions. The settlement of future examinations and additional audit service fees may result in changes in amounts attributable to us through the Tax Matters Agreement entered into with Exelis and Xylem. Currently we cannot reasonably estimate the amount of such changes.

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- Definition The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -URI http://asc.fasb.org/topic&trid=2144680 + Details
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