INCOME TAXES

12 Months Ended

Dec. 28, 2019

Significant components of the Company’s deferred tax assets and liabilities at the end of each fiscal year were as follows:



(Millions of Dollars)	2019			2018
Deferred tax liabilities:
Depreciation	$	144.9		$	128.5
Amortization of intangibles	731.8			672.8
Liability on undistributed foreign earnings	159.3			202.5
Lease right-of-use asset	129.7			—
Other	89.5			73.9
Total deferred tax liabilities	$	1,255.2		$	1,077.7
Deferred tax assets:
Employee benefit plans	$	235.4		$	222.1
Basis differences in liabilities	82.0			93.3
Operating loss, capital loss and tax credit carryforwards	1,100.3			710.6
Lease liability	129.6			—
Other	149.2			147.3
Total deferred tax assets	$	1,696.5		$	1,173.3
Net Deferred Tax Asset before Valuation Allowance	$	441.3		$	95.6
Valuation Allowance	$	(1,065.0	)	$	(626.7	)
Net Deferred Tax Liability after Valuation Allowance	$	(623.7	)	$	(531.1	)

A valuation allowance is recorded on certain deferred tax assets if it has been determined it is more likely than not that all or a portion of these assets will not be realized. The Company recorded a valuation allowance of $1,065.0 million and $626.7 million on deferred tax assets existing as of December 28, 2019 and December 29, 2018, respectively. The valuation allowance in 2019 and 2018 was primarily attributable to foreign and state net operating loss carryforwards and foreign capital loss carryforwards.

As of December 28, 2019, the Company has approximately $5.2 billion of unremitted foreign earnings and profits. Of the total amount, the Company has provided for deferred taxes of $159.3 million on approximately $2.5 billion, which is not indefinitely reinvested primarily due to the changes brought about by the Act. The Company otherwise continues to consider the remaining undistributed earnings of its foreign subsidiaries to be permanently reinvested based on its current plans for use outside of the U.S. and accordingly no taxes have been provided on such earnings. The cash that the Company’s non-U.S. subsidiaries hold for indefinite reinvestment is generally used to finance foreign operations and investments, including acquisitions. The income taxes applicable to such earnings are not readily determinable or practicable to calculate.

Net operating loss carryforwards of $4.3 billion as of December 28, 2019 are available to reduce future tax obligations of certain U.S. and foreign companies. The net operating loss carryforwards have various expiration dates beginning in 2020 with certain jurisdictions having indefinite carryforward periods. The foreign capital loss carryforwards of $32.9 million as of December 28, 2019 have indefinite carryforward periods.

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



(Millions of Dollars)	2019		2018		2017
United States	$	214.5	$	444.1	$	715.2
Foreign	915.5		578.0		812.6
Earnings before income taxes and equity interest	$	1,130.0	$	1,022.1	$	1,527.8

Income tax expense (benefit) consisted of the following:



(Millions of Dollars)	2019			2018		2017
Current:
Federal	$	(23.7	)	$	25.4	$	590.6
Foreign	195.9			175.0		224.6
State	6.5			24.8		25.4
Total current	$	178.7		$	225.2	$	840.6
Deferred:
Federal	$	5.7		$	29.7	$	(513.0	)
Foreign	(32.9		)	132.7		(33.0		)
State	9.3			28.7		6.3
Total deferred	(17.9		)	191.1		(539.7		)
Income taxes	$	160.8		$	416.3	$	300.9

Net income taxes paid during 2019, 2018 and 2017 were $250.1 million, $339.4 million and $273.6 million, respectively. The 2019, 2018 and 2017 amounts include refunds of $72.5 million, $43.7 million and $28.5 million, respectively, primarily related to prior year overpayments and settlement of tax audits.

The reconciliation of the U.S. federal statutory income tax provision to Income taxes in the Consolidated Statements of Operations is as follows:



(Millions of Dollars)	2019			2018			2017
Tax at statutory rate	$	237.3		$	214.6		$	534.1
State income taxes, net of federal benefits	22.1			24.7			13.3
Foreign tax rate differential	(53.3		)	(33.2		)	(149.0		)
Uncertain tax benefits	(53.1		)	4.5			64.4
Change in valuation allowance	10.5			5.1			(5.4		)
Change in deferred tax liabilities on undistributed foreign earnings	—			—			(94.1		)
Basis difference for businesses Held for Sale	—			—			27.9
Stock-based compensation	(24.1		)	(4.1		)	(23.2		)
Sale of businesses	6.7			—			(47.3		)
U.S. Federal tax reform	—			199.6			23.6
Other	14.7			5.1			(43.4		)
Income taxes	$	160.8		$	416.3		$	300.9

The Company conducts business globally and, as a result, files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course, the Company is subject to examinations by taxing authorities throughout the world. The Internal Revenue Service is currently examining the Company's consolidated U.S. income tax returns for the 2015 and 2016 tax years. With few exceptions, as of December 28, 2019, the Company is no longer subject to U.S. federal, state, local, or foreign examinations by tax authorities for years before 2012.

The Company’s liabilities for unrecognized tax benefits relate to U.S. and various foreign jurisdictions. The following table summarizes the activity related to the unrecognized tax benefits:



(Millions of Dollars)	2019			2018			2017
Balance at beginning of year	$	406.3		$	387.8		$	309.8
Additions based on tax positions related to current year	48.6			28.3			34.6
Additions based on tax positions related to prior years	78.5			103.0			82.5
Reductions based on tax positions related to prior years	(91.1		)	(91.5		)	(4.2		)
Settlements	(0.3		)	(2.5		)	(0.3		)
Statute of limitations expirations	(35.7		)	(18.8		)	(34.6		)
Balance at end of year	$	406.3		$	406.3		$	387.8

The gross unrecognized tax benefits at December 28, 2019 and December 29, 2018 include $398.2 million and $397.0 million, respectively, of tax benefits that, if recognized, would impact the effective tax rate. The liability for potential penalties and interest related to unrecognized tax benefits decreased by $4.3 million in 2019 and $15.8 million in 2018, and increased by $3.8 million in 2017. The liability for potential penalties and interest totaled $47.8 million as of December 28, 2019, $52.1 million as of December 29, 2018, and $67.9 million as of December 30, 2017. The Company classifies all tax-related interest and penalties as income tax expense.

The Company considers many factors when evaluating and estimating its tax positions and the impact on income tax expense, which may require periodic adjustments, and which may not accurately anticipate actual outcomes. It is reasonably possible that the amount of the unrecognized benefit with respect to certain of the Company's unrecognized tax positions will significantly increase or decrease within the next twelve months. However, based on the uncertainties associated with finalizing audits with the relevant tax authorities including formal legal proceedings, it is not possible to reasonably estimate the impact of any such change.

Changes resulting from the Act included, but were not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, changes to U.S. international taxation, and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017. Pursuant to Staff Accounting Bulletin No. 118 (“SAB 118”) issued by the U.S. Securities and Exchange Commission ("SEC") in December 2017, issuers were permitted up to one year from the enactment of the Act to complete the accounting for the income tax effects of the Act (“the measurement period”). The Company completed its accounting for the tax effects of the Act within the measurement period and those effects are included as a component of Income taxes in the Consolidated Statements of Operations.

Deferred tax assets and liabilities: U.S. deferred tax assets and liabilities were remeasured as a result of the Act based on the rates at which they are expected to reverse in the future, resulting in an income tax benefit of approximately $230.6 million. The Company recorded an income tax provision of $21.9 million in 2018 as an adjustment to its provisional income tax benefit recorded in 2017 of $252.5 million.

Transition Tax: The one-time transition tax, which totals $447.2 million, is based on the Company’s post-1986 earnings and profits that were previously deferred from U.S. income taxes. As a result of legislative guidance issued in 2019, the Company recorded a $2.9 million adjustment to its income tax payable of approximately $450.1 million recorded as of December 29, 2018. The Company has elected to pay its transition tax over the eight-year period provided in the Act. As of December 28, 2019, the remaining balance of the transition tax obligation is $344.1 million, which will be paid over the next six years.

Indefinite reinvestment: Following enactment of the Act and the associated one-time transition tax, in general, repatriation of foreign earnings to the United States can be completed with no incremental U.S. tax. However, repatriation of foreign earnings could subject the Company to U.S. state and non-U.S. jurisdictional taxes (including withholding taxes) on distributions. While repatriation of some foreign earnings held outside the United States may be restricted by local laws, most of the Company’s foreign earnings as of December 2017 could be repatriated to the United States. As a result of the Act, the Company analyzed all unrepatriated foreign earnings as of December 2017 and concluded at that time that it no longer asserted indefinite reinvestment on approximately $4.8 billion. The deferred tax liability associated with these unrepatriated foreign earnings was approximately $217.7 million. The Company recorded a $188.3 million income tax provision in 2018, mainly comprised of U.S. state and non-U.S. jurisdictional withholding taxes. The Company otherwise continues to consider the remaining undistributed earnings of its foreign subsidiaries to be permanently reinvested based on its current plans for use outside of the U.S. and accordingly no taxes have been provided on such earnings.