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Income Taxes | 12 Months Ended
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Dec. 31, 2018
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) | 2018 |  | 2017 |  | 2016
Earnings before income taxes: |  |  |  |  |
U.S. | $ | 220.0 |  |  | $ | 203.0 |  |  | $ | 27.5 |
Non-U.S. | 975.9 |  |  | 860.6 |  |  | 915.2 |
Total | $ | 1,195.9 |  |  | $ | 1,063.6 |  |  | $ | 942.7 |
Provision for income taxes: |  |  |  |  |  |  |  |
Current: |  |  |  |  |  |  |  |
Federal | $ | 17.1 |  |  | $ | 36.4 |  |  | $ | 37.4 |
State | 5.4 |  |  | 4.6 |  |  | 6.1 |
Foreign | 258.8 |  |  | 247.4 |  |  | 251.7 |
Total current | 281.3 |  |  | 288.4 |  |  | 295.2 |
Deferred: |  |  |  |  |
Federal | (39.6 | ) |  | 323.7 |  |  | 23.5 |
State | (8.5 | ) |  | 2.1 |  |  | (0.8 | )
Foreign | (21.9 | ) |  | (33.9 | ) |  | (11.9 | )
Total deferred | (70.0 | ) |  | 291.9 |  |  | 10.8 |
Total provision for income taxes | $ | 211.3 |  |  | $ | 580.3 |  |  | $ | 306.0 |
The provision for income taxes resulted in an effective tax rate of 17.7%, 54.6% and 32.5% for the years ended December 31, 2018, 2017 and 2016, respectively. An analysis of the differences between the effective tax rate and the U.S. statutory rate for the years ended December 31, 2018, 2017 and 2016 is presented below. On December 22, 2017, the Tax Act was enacted into law, which significantly changed existing U.S. tax law and included many provisions applicable to the Company, such as reducing the U.S. federal statutory tax rate, imposing a one-time transition tax on deemed repatriation of deferred foreign income, and adopting a territorial tax system. The Tax Act reduced the U.S. federal statutory tax rate from 35% to 21% effective January 1, 2018. The Tax Act also includes a provision to tax Global Intangible Low-Taxed Income (“GILTI”) of foreign subsidiaries, a special tax deduction for Foreign-Derived Intangible Income (“FDII”), and a Base Erosion Anti-Abuse (“BEAT”) tax measure that may tax certain payments between a U.S. corporation and its subsidiaries. These additional provisions of the Tax Act were effective beginning January 1, 2018. In accordance with guidance provided by Staff Accounting Bulletin No 118 (SAB 118), as of December 31, 2017, we had not completed our accounting for the tax effects of the Tax Act and had recorded provisional estimates for significant items including the following: (i) the effects on our existing deferred balances, including executive compensation, (ii) the one-time transition tax, and (iii) our indefinite reinvestment assertion. The measurement period begins in the reporting period that includes the Tax Act’s enactment date and ends when the additional information is obtained, prepared, or analyzed to complete the accounting requirements under ASC Topic 740. The measurement period should not extend beyond one year from the enactment date. In light of the treatment of foreign earnings under the Tax Act, we reconsidered our indefinite reinvestment position and concluded we would no longer assert indefinite reinvestment with respect to our foreign unremitted earnings as of December 31, 2017. We recognized income tax expense of $273.5 million for the year ended December 31, 2017 for the significant items we could reasonably estimate associated with the Tax Act. This amount was comprised of (i) a revaluation of our U.S. deferred tax assets and liabilities at December 31, 2017, resulting in a tax charge of $74.7 million, including $11.0 million for executive compensation (ii) a one-time transition tax resulting in a tax charge of $104.7 million and (iii) a tax charge of $94.1 million for additional provisional deferred tax liabilities with respect to the expected future remittance of foreign earnings. For the year ended December 31, 2018, the Company completed its accounting for the tax effects of the Tax Act. The final SAB 118 adjustments resulted in: (i) an increase in the Company's existing deferred tax asset balances of $12.9 million, including $8.7 million for executive compensation (ii) a tax charge of $7.6 million for the one-time transition tax, and (iii) a decrease in the deferred tax liability associated with our indefinite reinvestment assertion of $7.3 million. The total impact to tax expense from these adjustments was a net tax benefit of $12.6 million. Compared to the year ended December 31, 2017, this additional tax benefit from the final adjustments was a result of further analysis performed by the Company and the issuance of additional regulatory guidance. We have made an accounting policy election to treat the future tax impacts of the GILTI provisions of the Tax Act as a period cost to the extent applicable. In January 2019, the U.S. Department of the Treasury and the Internal Revenue Service issued final Section 965 regulations subsequent to the reporting period which provide additional guidance related to the calculation of the one-time transition tax. The tax effect of this subsequent event will be recorded in 2019 is not material. As discussed above, in light of the treatment of foreign earnings under the Tax Act, we reconsidered our indefinite reinvestment position with respect to our foreign unremitted earnings in 2017 and we are no longer asserting indefinite reinvestment with respect to our foreign unremitted earnings. The Company has recorded a deferred tax liability of $57.4 million with respect to our foreign unremitted earnings at December 31, 2018. With respect to certain book versus tax basis differences not represented by undistributed earnings of approximately $300 million as of December 31, 2018, the Company continues to assert indefinite reinvestment of these basis differences. These basis differences would become taxable upon the sale or liquidation of the foreign subsidiaries. The Company's best estimate of the unrecognized deferred tax liability on these basis differences is approximately $30 million as of December 31, 2018. The following table provides a reconciliation of tax expense based on the U.S. statutory tax rate to final tax expense.
| Year Ended December 31,
(millions of dollars) | 2018 |  | 2017 |  | 2016
Income taxes at U.S. statutory rate of 21% (35% for 2016 and 2017) | $ | 251.2 |  |  | $ | 372.3 |  |  | $ | 330.0 |
Increases (decreases) resulting from: |  |  |  |  |  |  |  |
State taxes, net of federal benefit | 5.6 |  |  | 2.3 |  |  | 1.8 |
U.S. tax on non-U.S. earnings | 36.5 |  |  | 170.6 |  |  | 32.2 |
Affiliates' earnings | (10.3 | ) |  | (17.9 | ) |  | (15.0 | )
Foreign rate differentials | 27.5 |  |  | (100.2 | ) |  | (93.3 | )
Tax holidays | (28.0 | ) |  | (31.0 | ) |  | (25.5 | )
Net tax on remittance of foreign earnings | (21.5 | ) |  | 80.3 |  |  | 21.8 |
Tax credits | (26.0 | ) |  | (24.2 | ) |  | (3.2 | )
Reserve adjustments, settlements and claims | 32.5 |  |  | 8.0 |  |  | 11.6 |
Valuation allowance adjustments | (10.6 | ) |  | 12.2 |  |  | (2.7 | )
Non-deductible transaction costs | 2.6 |  |  | 10.9 |  |  | 8.3 |
Changes in accounting methods and filing positions | (29.8 | ) |  | (1.9 | ) |  | 0.3 |
Impact of transactions | (0.1 | ) |  | 4.0 |  |  | 16.3 |
Other foreign taxes | 8.4 |  |  | 8.1 |  |  | 12.9 |
Revaluation of U.S. deferred taxes | (4.2 | ) |  | 63.7 |  |  | — |
Impact of FDII | (15.3 | ) |  | — |  |  | — |
Other | (7.2 | ) |  | 23.1 |  |  | 10.5 |
Provision for income taxes, as reported | $ | 211.3 |  |  | $ | 580.3 |  |  | $ | 306.0 |
The change in the effective tax rate for 2018, as compared to 2017, was primarily due to items related to the Tax Act. The Tax Act includes a reduction in the US income tax rate from 35% to 21%, as of January 1, 2018. Tax expense includes a provision for GILTI of $28.9 million, net of foreign tax credits and a tax benefit for FDII of $15.3 million that was not applicable in 2017. The one-time transition tax that resulted in a tax charge of $104.7 million in 2017 was not applicable in 2018. There was also a tax charge of $74.7 million related to a revaluation of U.S. deferred tax assets and liabilities, including $11.0 million for executive compensation in 2017 and the initial tax charge of $94.1 million related to the Company’s change in indefinite reinvestment assertion with respect to the expected future remittance of undistributed foreign earnings in 2017. The Company's provision for income taxes for the year ended December 31, 2018, includes reductions of income tax expense of $15.0 million related to restructuring expense, $0.3 million related to merger, acquisition and divestiture expense, $5.5 million related to the asbestos-related adjustments, and $7.7 million related to asset impairment expense, offset by increases to tax expense of $0.9 million and $5.8 million related to a gain on commercial settlement and a gain on the sale of a building, respectively, discussed in Note 4, "Other Expense, Net," to the Consolidated Financial Statements. The provision for income taxes also includes reductions of income tax expense of $12.6 million related to final adjustments made to measurement period provisional estimates associated with the Tax Act, $22.0 million related to a decrease in our deferred tax liability due to a tax benefit for certain foreign tax credits now available due to actions the Company took during the year, $9.1 million related to valuation allowance releases, $2.8 million related to tax reserve adjustments, and $29.8 million related to changes in accounting methods and tax filing positions for prior years primarily related to the Tax Act. The Company's provision for income taxes for the year ended December 31, 2017, includes reductions of income tax expense of $10.1 million, $1.0 million, $18.2 million and $3.8 million related to the restructuring expense, merger and acquisition expense, asset impairment expense and other one-time adjustments, respectively, discussed in Note 4, "Other Expense, Net," to the Consolidated Financial Statements. The Company's provision for income taxes for the year ended December 31, 2016, includes reductions of income tax expense of $22.7 million, $8.6 million, $6.0 million and $4.4 million associated with a loss on divestiture, other one-time adjustments, restructuring expense and intangible asset impairment loss, respectively, discussed in Note 4, "Other Expense," to the Consolidated Financial Statements. The provision also includes additional tax expenses of $17.5 million associated with asbestos-related adjustments and $2.2 million associated with a gain on the release of certain Remy light vehicle aftermarket liabilities due to the expiration of a customer contract. A roll forward of the Company's total gross unrecognized tax benefits for the years ended December 31, 2018 and 2017, respectively, is presented below.
(millions of dollars) | 2018 |  | 2017 |  | 2016
Balance, January 1 | $ | 92.0 |  |  | $ | 91.1 |  |  | $ | 127.3 |
Additions based on tax positions related to current year | 24.1 |  |  | 16.8 |  |  | 16.1 |
Additions/(reductions) for tax positions of prior years | 17.7 |  |  | (2.4 | ) |  | 1.6 |
Reductions for closure of tax audits and settlements | (7.7 | ) |  | (19.9 | ) |  | (45.7 | )
Reductions for lapse in statute of limitations | — |  |  | (0.8 | ) |  | (5.0 | )
Translation adjustment | (5.7 | ) |  | 7.2 |  |  | (3.2 | )
Balance, December 31 | $ | 120.4 |  |  | $ | 92.0 |  |  | $ | 91.1 |
The Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense. The amount recognized in income tax expense for 2018 and 2017 is $10.4 million and $6.4 million, respectively. The Company has an accrual of approximately $31.5 million and $22.6 million for the payment of interest and penalties at December 31, 2018 and 2017, respectively. As of December 31, 2018, approximately $111.6 million represents the amount that, if recognized, would affect the Company's effective income tax rate in future periods. This amount includes a decrease in U.S. federal income taxes which would occur upon recognition of the state tax benefits and U.S. foreign tax credits included therein. The Company estimates that payments of approximately $9.7 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 Note 6, "Balance Sheet Information," to the Consolidated Financial Statements. 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 |  | 2014 and prior |  | Japan |  | 2015 and prior
China |  | 2012 and prior |  | Mexico |  | 2012 and prior
France |  | 2015 and prior |  | Poland |  | 2013 and prior
Germany |  | 2011 and prior |  | South Korea |  | 2012 and prior
Hungary |  | 2013 and prior |  |  |  |
In the U.S., certain tax attributes created in years prior to 2015 were subsequently utilized. Even though the U.S. federal statute of limitations has expired for years prior to 2015, 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 components of deferred tax assets and liabilities as of December 31, 2018 and 2017 consist of the following:
| December 31,
(millions of dollars) | 2018 |  | 2017
Deferred tax assets: |  |  |  |  |
Employee compensation | 23.9 |  |  | 26.4 |
Other comprehensive loss | 63.9 |  |  | 54.5 |
Research and development capitalization | 91.8 |  |  | 76.4 |
Net operating loss and capital loss carryforwards | 83.8 |  |  | 74.6 |
Pension and other postretirement benefits | 18.8 |  |  | 19.1 |
Asbestos-related | 172.7 |  |  | 167.1 |
Other | 155.2 |  |  | 146.6 |
Total deferred tax assets | $ | 610.1 |  |  | $ | 564.7 |
Valuation allowance | (86.3 | ) |  | (95.9 | )
Net deferred tax asset | $ | 523.8 |  |  | $ | 468.8 |
Deferred tax liabilities: |  |  |  |  |
Goodwill and intangible assets | (183.3 | ) |  | (193.9 | )
Fixed assets | (117.5 | ) |  | (104.6 | )
Unremitted foreign earnings | (57.4 | ) |  | (98.5 | )
Other | (19.2 | ) |  | (12.0 | )
Total deferred tax liabilities | $ | (377.4 | ) |  | $ | (409.0 | )
Net deferred taxes | $ | 146.4 |  |  | $ | 59.8 |
At December 31, 2018, certain non-U.S. subsidiaries have net operating loss carryforwards totaling $222.7 million available to offset future taxable income. Of the total $222.7 million, $155.1 million expire at various dates from 2019 through 2038 and the remaining $67.6 million have no expiration date. The Company has a valuation allowance recorded against $143.3 million of the $222.7 million of non-U.S. net operating loss carryforwards. Certain U.S. subsidiaries have state net operating loss carryforwards totaling $824.9 million which are partially offset by a valuation allowance of $756.8 million. The state net operating loss carryforwards expire at various dates from 2019 to 2038. Certain U.S. subsidiaries also have state tax credit carryforwards of $19.8 million which are partially offset by a valuation allowance of $17.9 million. Certain non-U.S. subsidiaries located in China had tax exemptions or tax holidays, which reduced local tax expense approximately $28.0 million and $31.0 million in 2018 and 2017, respectively. The tax holidays for these subsidiaries are issued in three year terms with expirations for certain subsidiaries ranging from 2018 to 2020. The Company is in the process of renewing the tax holidays for certain subsidiaries that expired as of December 31, 2018.

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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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