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Income Taxes | 12 Months Ended
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Dec. 31, 2016
Income Tax Disclosure [Abstract] |
Income taxes | INCOME TAXES Earnings before income taxes and the provision for income taxes are presented in the following table.
| Year Ended December 31,
(millions of dollars) | 2016 |  | 2015 |  | 2014
Earnings before income taxes: |  |  |  |  |
U.S. | $ | (724.7 | ) |  | $ | 125.6 |  |  | $ | 218.8 |
Non-U.S. | 915.2 |  |  | 801.2 |  |  | 761.3 |
Total | $ | 190.5 |  |  | $ | 926.8 |  |  | $ | 980.1 |
Provision for income taxes: |  |  |  |  |  |  |  |
Current: |  |  |  |  |  |  |  |
Federal | $ | 37.4 |  |  | $ | 32.5 |  |  | $ | 25.7 |
State | 6.1 |  |  | (4.3 | ) |  | 3.9 |
Foreign | 251.7 |  |  | 228.3 |  |  | 220.8 |
Total current | 295.2 |  |  | 256.5 |  |  | 250.4 |
Deferred: |  |  |  |  |
Federal | (239.8 | ) |  | 31.8 |  |  | 66.2 |
State | (13.2 | ) |  | 2.6 |  |  | (1.2 | )
Foreign | (11.9 | ) |  | (10.5 | ) |  | (22.8 | )
Total deferred | (264.9 | ) |  | 23.9 |  |  | 42.2 |
Total provision for income taxes | $ | 30.3 |  |  | $ | 280.4 |  |  | $ | 292.6 |
The provision for income taxes resulted in an effective tax rate of 15.9%, 30.3% and 29.9% for the years ended December 31, 2016, 2015 and 2014, respectively. An analysis of the differences between the effective tax rate and the U.S. statutory rate for the years ended December 31, 2016, 2015 and 2014 is presented below.
| Year Ended December 31,
(millions of dollars) | 2016 |  | 2015 |  | 2014
Income taxes at U.S. statutory rate of 35% | $ | 66.7 |  |  | $ | 324.4 |  |  | $ | 343.0 |
Increases (decreases) resulting from: |  |  |  |  |  |  |  |
State taxes, net of federal benefit | (10.6 | ) |  | 8.2 |  |  | 2.6 |
U.S. tax on non-U.S. earnings | 40.7 |  |  | 31.5 |  |  | 18.8 |
Affiliates' earnings | (15.0 | ) |  | (14.0 | ) |  | (16.2 | )
Foreign rate differentials | (93.3 | ) |  | (92.6 | ) |  | (84.1 | )
Tax holidays | (25.5 | ) |  | (21.2 | ) |  | (23.6 | )
Withholding taxes | 13.3 |  |  | 7.8 |  |  | 10.6 |
Tax credits | (3.2 | ) |  | (3.2 | ) |  | (3.9 | )
Reserve adjustments, settlements and claims | 11.6 |  |  | 19.4 |  |  | 41.0 |
Valuation allowance adjustments | (2.7 | ) |  | 8.3 |  |  | 5.5 |
Non-deductible transaction costs | 8.3 |  |  | 8.1 |  |  | 5.4 |
Provision to return and other one-time tax adjustments | 0.3 |  |  | (5.1 | ) |  | (8.8 | )
Impact of transactions | 16.3 |  |  | 11.6 |  |  | — |
Currency | 10.0 |  |  | 0.1 |  |  | (0.2 | )
Other foreign taxes | 12.9 |  |  | 9.0 |  |  | 7.4 |
Partnership income | 3.4 |  |  | 3.1 |  |  | (0.3 | )
Other | (2.9 | ) |  | (15.0 | ) |  | (4.6 | )
Provision for income taxes, as reported | $ | 30.3 |  |  | $ | 280.4 |  |  | $ | 292.6 |
The Company's provision for income taxes for the year ended December 31, 2016, includes tax benefits of $263.0 million, $22.7 million, $8.6 million, $6.0 million and $4.4 million associated with an asbestos-related charge, loss on divestiture, other one-time adjustments, restructuring expense and intangible asset impairment loss, respectively, discussed in the Other Expense, Net footnote. Additionally, this rate includes a tax expense of $2.2 million related to a gain associated with the release of certain Remy light vehicle aftermarket liabilities due to the expiration of a customer contract. The Company's provision for income taxes for the year ended December 31, 2015, includes tax benefits of $9.0 million, $3.8 million and $3.7 million related to the pension settlement loss, merger and acquisition expense and restructuring expense, respectively, discussed in the Other Expense, Net footnote. Additionally, this rate includes a tax benefit of $9.9 million primarily related to foreign tax incentives and tax settlements. The Company's provision for income taxes for the year ended December 31, 2014, includes tax benefits of $15.3 million, $0.4 million and $1.1 million related to restructuring expense, intangible asset impairment losses and the pension settlement loss, respectively, discussed in the Other Expense, Net footnote. A roll forward of the Company's total gross unrecognized tax benefits for the years ended December 31, 2016 and 2015, respectively, is presented below. Of the total $88.6 million of unrecognized tax benefits as of December 31, 2016, approximately $69.9 million of the total represents the amount that, if recognized, would affect the Company's effective income tax rate in future periods. This amount differs from the gross unrecognized tax benefits presented in the table due to the decrease in the U.S. federal income taxes which would occur upon recognition of the state tax benefits and U.S. foreign tax credits included therein.
(millions of dollars) | 2016 |  | 2015
Balance, January 1 | $ | 127.3 |  |  | $ | 60.4 |
Additions based on tax positions related to current year | 16.1 |  |  | 20.7 |
Additions for tax positions of prior years | 1.6 |  |  | 6.7 |
Additions from acquisitions | — |  |  | 53.4 |
Reductions for closure of tax audits and settlements | (45.7 | ) |  | (10.4 | )
Reductions for lapse in statute of limitations | (5.0 | ) |  | (0.3 | )
Translation adjustment | (3.2 | ) |  | (3.2 | )
Balance, December 31 | $ | 91.1 |  |  | $ | 127.3 |
Remy applied for a bilateral Advance Pricing Agreement ("APA") between the U.S. Internal Revenue Service and South Korea National Tax Service covering the tax years 2007 through 2014. At December 31, 2015, the Company recorded an uncertain tax benefit and related U.S. foreign tax credits of approximately $44.0 million. In the second quarter of 2016, the Company received the signed APA from the tax authorities and reclassified the related uncertain tax benefit to a current tax payable, which the Company paid in the third quarter of 2016. The Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense. The amount recognized in income tax expense for 2016 and 2015 is $3.2 million and $2.3 million, respectively. The Company has an accrual of approximately $16.0 million and $12.8 million for the payment of interest and penalties at December 31, 2016 and 2015, respectively. The Company estimates that payments of approximately $15.5 million will be made in the next 12 months for assessed tax liabilities from certain taxing jurisdictions and has reclassified this amount to current in the balance sheet as shown in the Balance Sheet Information footnote. Other possible changes within the next 12 months cannot be reasonably estimated at this time. The Company and/or one of its subsidiaries files income tax returns in the U.S. federal, various state jurisdictions and various foreign jurisdictions. In certain tax jurisdictions, the Company may have more than one taxpayer. The Company is no longer subject to income tax examinations by tax authorities in its major tax jurisdictions as follows:
Tax jurisdiction |  | Years no longer subject to audit |  | Tax jurisdiction |  | Years no longer subject to audit
U.S. Federal |  | 2012 and prior |  | Japan |  | 2015 and prior
China |  | 2010 and prior |  | Mexico |  | 2010 and prior
France |  | 2013 and prior |  | Poland |  | 2011 and prior
Germany |  | 2007 and prior |  | South Korea |  | 2010 and prior
Hungary |  | 2008 and prior |  |  |  |
In the U.S., certain tax attributes created in years prior to 2012 were subsequently utilized. Even though the U.S. federal statute of limitations has expired for years prior to 2012, the years in which these tax attributes were created could still be subject to examination, limited to only the examination of the creation of the tax attribute. The gross components of deferred tax assets and liabilities as of December 31, 2016 and 2015 consist of the following:
| December 31,
(millions of dollars) | 2016 |  | 2015
Deferred tax assets: |  |  |  |  |
Foreign tax credits | $ | 139.5 |  |  | $ | 142.6 |
Employee compensation | 41.3 |  |  | 34.6 |
Other comprehensive loss | 66.3 |  |  | 79.7 |
Research and development capitalization | 145.1 |  |  | 100.4 |
Net operating loss and capital loss carryforwards | 71.5 |  |  | 81.8 |
Pension and other postretirement benefits | 38.8 |  |  | 41.1 |
Asbestos-related | 263.0 |  |  | — |
Other | 128.9 |  |  | 125.3 |
Total deferred tax assets | $ | 894.4 |  |  | $ | 605.5 |
Valuation allowance | (71.2 | ) |  | (71.0 | )
Net deferred tax asset | $ | 823.2 |  |  | $ | 534.5 |
Deferred tax liabilities: |  |  |  |  |
Goodwill and intangible assets | (251.3 | ) |  | (259.2 | )
Fixed assets | (147.1 | ) |  | (115.5 | )
Other | (55.0 | ) |  | (66.4 | )
Total deferred tax liabilities | $ | (453.4 | ) |  | $ | (441.1 | )
Net deferred taxes | $ | 369.8 |  |  | $ | 93.4 |
At December 31, 2016, certain non-U.S. subsidiaries have net operating loss carryforwards totaling $134.7 million available to offset future taxable income. Of the total $134.7 million, $96.6 million expire at various dates from 2017 through 2036 and the remaining $38.1 million have no expiration date. The Company has a valuation allowance recorded against $72.9 million of the $134.7 million of non-U.S. net operating loss carryforwards. Certain U.S. subsidiaries have state net operating loss carryforwards totaling $817.8 million which are partially offset by a valuation allowance of $632.3 million. The state net operating loss carryforwards expire at various dates from 2017 to 2037. Certain U.S. subsidiaries also have state tax credit carryforwards of $14.8 million which are fully offset by a valuation allowance of $14.8 million. Certain non-U.S. subsidiaries located in China, Korea and Poland had tax exemptions or tax holidays, which reduced tax expense approximately $25.5 million and $21.2 million in 2016 and 2015, respectively. The U.S. has foreign tax credit carryforwards of $139.5 million, which expire at various dates from 2018 through 2025. The Company is not required to provide U.S. federal or state income taxes on cumulative undistributed earnings of foreign subsidiaries when such earnings are considered permanently reinvested. The Company's policy is to evaluate this assertion on a quarterly basis. At December 31, 2016, the Company's deferred tax liability associated with unremitted foreign earnings was $38.5 million. In connection with the acquisition of Remy in 2015, management executed a legal restructuring plan to align the Remy and BorgWarner non-US businesses. This transaction resulted in a taxable gain in the U.S., which was partially offset by Remy tax attributes including a net operating loss carryforward of $68.4 million, foreign tax credits of $93.6 million, and research and development credits of $6.9 million. The net impact of this transaction with the filing of Remy’s final 2015 U.S. consolidated federal tax return resulted in a foreign tax credit carryforward of $47.0 million. The net U.S. cash tax liability resulting from the transaction was $8.4 million. The Company has not recorded deferred income taxes on the difference between the book and tax basis of investments in foreign subsidiaries or foreign equity affiliates totaling approximately $3.9 billion in 2016, as these amounts are essentially permanent in nature. The difference will become taxable upon repatriation of assets, sale or liquidation of the investment. Due to fluctuation in tax laws around the world and fluctuations in foreign exchange rates, it is not practicable to determine the unrecognized deferred tax liability on this difference because the actual tax liability, if any, is dependent on circumstances existing when the repatriation occurs.

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