Income Taxes

The sources of income (loss) before income taxes and equity in net earnings of affiliates were as follows for the years ended December 31, 2016, 2015 and 2014 (in millions):



	2016			2015			2014
United States	$	(150.0	)	$	(49.1	)	$	63.5
Foreign	354.9			328.5			475.5
Income before income taxes and equity in net earnings of affiliates	$	204.9		$	279.4		$	539.0

The provision (benefit) for income taxes by location of the taxing jurisdiction for the years ended December 31, 2016, 2015 and 2014 consisted of the following (in millions):



	2016			2015			2014
Current:
United States:
Federal	$	(24.3	)	$	(1.3	)	$	12.6
State	0.2			2.8			2.8
Foreign	114.2			97.8			168.7
	90.1			99.3			184.1
Deferred:
United States:
Federal	21.9			(19.0		)	(0.4		)
State	—			—			—
Foreign	(19.8		)	(7.8		)	4.0
	2.1			(26.8		)	3.6
	$	92.2		$	72.5		$	187.7

At December 31, 2016, the Company’s foreign subsidiaries had approximately $2.5 billion of undistributed earnings. These earnings are considered to be indefinitely invested, and, accordingly, no income taxes have been provided on these earnings. Determination of the amount of unrecognized deferred taxes on these earnings is not practicable; however, unrecognized foreign tax credits would be available to reduce a portion of the tax liability.

A reconciliation of income taxes computed at the United States federal statutory income tax rate (35%) to the provision for income taxes reflected in the Company’s Consolidated Statements of Operations for the years ended December 31, 2016, 2015 and 2014 is as follows (in millions):



	2016			2015			2014
Provision for income taxes at United States federal statutory rate of 35%	$	71.7		$	97.8		$	188.7
State and local income taxes, net of federal income tax effects	(6.0		)	(2.0		)	2.6
Taxes on foreign income which differ from the United States statutory rate	(44.5		)	(34.9		)	(33.4		)
Tax effect of permanent differences	14.4			7.1			(10.3		)
Change in valuation allowance	37.9			(4.5		)	22.8
Change in tax contingency reserves	23.4			15.4			25.2
Research and development tax credits	(3.8		)	(4.9		)	(7.1		)
Other	(0.9		)	(1.5		)	(0.8		)
	$	92.2		$	72.5		$	187.7

The significant components of the deferred tax assets and liabilities at December 31, 2016 and 2015 were as follows (in millions):



	2016			2015
Deferred Tax Assets:
Net operating loss carryforwards	$	85.5		$	74.0
Sales incentive discounts	73.7			86.6
Inventory valuation reserves	39.9			40.3
Pensions and postretirement health care benefits	70.4			63.4
Warranty and other reserves	118.1			91.8
Research and development tax credits	11.2			9.3
Foreign tax credits	24.0			2.2
Other	24.6			22.4
Total gross deferred tax assets	447.4			390.0
Valuation allowance	(116.0		)	(75.8		)
Total net deferred tax assets	331.4			314.2
Deferred Tax Liabilities:
Tax over book depreciation and amortization	284.9			275.1
Investment in affiliates	45.6			10.4
Other	13.6			14.4
Total deferred tax liabilities	344.1			299.9
Net deferred tax (liabilities) assets	$	(12.7	)	$	14.3
Amounts recognized in Consolidated Balance Sheets:
Deferred tax assets - noncurrent	$	99.7		$	100.7
Deferred tax liabilities - noncurrent	(112.4		)	(86.4		)
	$	(12.7	)	$	14.3

The Company recorded a net deferred tax liability of $12.7 million as of December 31, 2016 and a net deferred tax asset of $14.3 million as of December 31, 2015. As reflected in the preceding table, the Company had a valuation allowance of $116.0 million and $75.8 million as of December 31, 2016 and 2015, respectively.

During the second quarter of 2016, the Company established a valuation allowance to fully reserve its net deferred tax assets in the United States. A valuation allowance is established when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company assessed the likelihood that its deferred tax assets would be recovered from estimated future taxable income and available tax planning strategies and determined that the adjustment to the valuation allowance was appropriate. In making this assessment, all available evidence was considered including the current economic climate, as well as reasonable tax planning strategies. The Company believes it is more likely than not that the Company will realize its remaining net deferred tax assets, net of the valuation allowance, in future years.

The Company had net operating loss carryforwards of $286.4 million as of December 31, 2016, with expiration dates as follows: 2017 - $27.3 million; 2018 - $38.0 million; 2019 - $41.8 million and thereafter or unlimited - $179.3 million. The net operating loss carryforwards of $286.4 million were entirely in tax jurisdictions outside of the United States.

The Company paid income taxes of $106.2 million, $97.6 million and $223.6 million for the years ended December 31, 2016, 2015 and 2014, respectively.

At December 31, 2016 and 2015, the Company had $139.9 million and $133.0 million, respectively, of unrecognized income tax benefits, all of which would affect the Company’s effective tax rate if recognized. At December 31, 2016 and 2015, the Company had approximately $47.0 million and $61.2 million, respectively, of accrued or deferred taxes related to uncertain income tax positions connected with ongoing income tax audits in various jurisdictions that it expects to settle or pay in the next 12 months. The Company accrued approximately $3.4 million and $5.1 million of interest and penalties related to unrecognized tax benefits in its provision for income taxes during 2016 and 2015, respectively. At December 31, 2016 and 2015, the Company had accrued interest and penalties related to unrecognized tax benefits of $16.4 million and $18.3 million, respectively.

A reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits as of and during the years ended December 31, 2016 and 2015 is as follows (in millions):



	2016			2015
Gross unrecognized income tax benefits	$	133.0		$	130.6
Additions for tax positions of the current year	14.4			14.4
Additions for tax positions of prior years	15.2			7.1
Reductions for tax positions of prior years for:
Changes in judgments	(1.2		)	(0.3		)
Settlements during the year	(13.8		)	—
Lapses of applicable statute of limitations	(5.0		)	(5.8		)
Foreign currency translation	(2.7		)	(13.0		)
Gross unrecognized income tax benefits	$	139.9		$	133.0

The Company and its subsidiaries file income tax returns in the United States and in various state, local and foreign jurisdictions. The Company and its subsidiaries are routinely examined by tax authorities in these jurisdictions. As of December 31, 2016, a number of income tax examinations in foreign jurisdictions were ongoing. It is possible that certain of these ongoing examinations may be resolved within 12 months. Due to the potential for resolution of federal, state and foreign examinations, and the expiration of various statutes of limitation, it is reasonably possible that the Company’s gross unrecognized income tax benefits balance may materially change within the next 12 months. Due to the number of jurisdictions and issues involved and the uncertainty regarding the timing of any settlements, the Company is unable at this time to provide a reasonable estimate of such change that may occur within the next 12 months. Although there are ongoing examinations in various federal and state jurisdictions, the 2013 through 2016 tax years generally remain subject to examination in the United States by applicable authorities. In the Company’s significant foreign jurisdictions, primarily the United Kingdom, France, Germany, Switzerland, Finland and Brazil, the 2011 through 2016 tax years generally remain subject to examination by their respective tax authorities. In Brazil, the Company is contesting disallowed deductions related to the amortization of certain goodwill amounts (Note 12).