Income Taxes

The sources of income before income taxes and equity in net earnings of affiliates were as follows for the years ended December 31, 2017, 2016 and 2015 (in millions):



	2017			2016			2015
United States	$	(141.6	)	$	(150.0	)	$	(49.1	)
Foreign	425.4			354.9			328.5
Income before income taxes and equity in net earnings of affiliates	$	283.8		$	204.9		$	279.4

The provision (benefit) for income taxes by location of the taxing jurisdiction for the years ended December 31, 2017, 2016 and 2015 consisted of the following (in millions):



	2017			2016			2015
Current:
United States:
Federal	$	20.3		$	(24.3	)	$	(1.3	)
State	0.6			0.2			2.8
Foreign	126.8			114.2			97.8
	147.7			90.1			99.3
Deferred:
United States:
Federal	0.9			21.9			(19.0		)
State	—			—			—
Foreign	(15.0		)	(19.8		)	(7.8		)
	(14.1		)	2.1			(26.8		)
	$	133.6		$	92.2		$	72.5

On December 22, 2017, the Tax Cuts and Jobs Act (“the 2017 Tax Act”) was enacted in the United States. The 2017 Tax Act includes a number of changes to existing U.S. tax laws that impact the Company, including a reduction of the U.S. corporate income tax rate from 35 percent to 21 percent for tax years beginning after December 31, 2017. The 2017 Tax Act also provides for a one-time transition tax on certain foreign earnings and the acceleration of depreciation for certain assets placed into service after September 27, 2017, as well as prospective changes beginning in 2018, including the repeal of the domestic manufacturing deduction, capitalization of research and development expenditures, additional limitations on executive compensation and limitations on the deductibility of interest.

During the three months ended December 31, 2017, the Company recorded a provision of approximately $42.0 million in accordance with Staff Accounting Bulletin No. 118, which provides SEC Staff guidance for the application of ASC 740, “Income Taxes,” in the reporting period in which the 2017 Tax Act was enacted. The Company’s Consolidated Financial Statements reflect both the income tax effects of the 2017 Tax Act for which the accounting under ASC 740 is complete as well as provisional amounts for those specific income tax effects of the 2017 Tax Act for which the accounting under ASC 740 is incomplete but a reasonable estimate could be determined. The Company did not identify any items for which the income tax effects of the 2017 Tax Act have not been completed and a reasonable estimate could not be determined as of December 31, 2017.

The $42.0 million provision included a provisional income tax charge of approximately $14.3 million related to the one-time transition tax associated with the mandatory deemed repatriation of approximately $3.4 billion of unremitted foreign earnings. The $42.0 million provision included in the Company’s rate reconciliation below as “Impacts related to the 2017 Tax Act” is net of (a) a $49.6 million benefit associated with 2017 U.S. pre-tax losses that were netted against the determination of the U.S. transition tax and (b) a $37.0 million benefit from the use of certain tax credits. The offsets of these benefits are reflected within “Tax effect of permanent differences” and “Change in valuation allowance”, respectively. The Company’s provision also included a provisional income tax charge of approximately $10.4 million for the income tax consequences associated with the expected future repatriation of certain underlying foreign earnings as, historically, the Company had considered them to be indefinitely reinvested. The remaining balance of the Company’s provision primarily related to the remeasurement of certain net deferred tax assets using the lower enacted U.S. Corporate tax rate, as well as other miscellaneous related impacts. The final impact of the tax reform legislation may differ materially due to factors such as further refinement of the Company’s calculations, changes in interpretations and assumptions that the Company and its advisors have made, additional guidance that may be issued in the future by the U.S. government, and actions that the Company may take as a result of the tax reform legislation. Additional information and analysis are needed for factors such as whether non-U.S. entities are subject to withholding taxes, have reserve requirements, or have projected working capital and other capital needs in the country where the earnings were generated that would result in a decision to indefinitely reinvest a portion or all of their earnings. When more guidance and interpretations are released, specifically with respect to the transition tax and future repatriation of foreign earnings to the U.S., the Company will complete its accounting and revise any provisional estimates, if required.

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, 2017, 2016 and 2015 is as follows (in millions):



	2017			2016			2015
Provision for income taxes at United States federal statutory rate of 35%	$	99.3		$	71.7		$	97.8
State and local income taxes, net of federal income tax effects	(5.7		)	(6.0		)	(2.0		)
Taxes on foreign income which differ from the United States statutory rate	(57.7		)	(44.5		)	(34.9		)
Tax effect of permanent differences	60.6			14.4			7.1
Change in valuation allowance	(1.4		)	37.9			(4.5		)
Change in tax contingency reserves	3.8			23.4			15.4
Research and development tax credits	(5.0		)	(3.8		)	(4.9		)
Impacts related to the 2017 Tax Act	42.0			—			—
Other	(2.3		)	(0.9		)	(1.5		)
	$	133.6		$	92.2		$	72.5

The significant components of the deferred tax assets and liabilities at December 31, 2017 and 2016 were as follows (in millions):



	2017			2016
Deferred Tax Assets:
Net operating loss carryforwards	$	83.4		$	85.5
Sales incentive discounts	60.2			73.7
Inventory valuation reserves	34.4			39.9
Pensions and postretirement health care benefits	52.2			70.4
Warranty and other reserves	92.2			118.1
Research and development tax credits	2.9			11.2
Foreign tax credits	10.4			24.0
Other	19.2			24.6
Total gross deferred tax assets	354.9			447.4
Valuation allowance	(81.9		)	(116.0		)
Total net deferred tax assets	273.0			331.4
Deferred Tax Liabilities:
Tax over book depreciation and amortization	229.1			284.9
Investment in affiliates	53.9			45.6
Other	8.3			13.6
Total deferred tax liabilities	291.3			344.1
Net deferred tax (liabilities) assets	$	(18.3	)	$	(12.7	)
Amounts recognized in Consolidated Balance Sheets:
Deferred tax assets - noncurrent	$	112.2		$	99.7
Deferred tax liabilities - noncurrent	(130.5		)	(112.4		)
	$	(18.3	)	$	(12.7	)

The Company recorded a net deferred tax liability of $18.3 million and $12.7 million as of December 31, 2017 and December 31, 2016, respectively. As reflected in the preceding table, the Company had a valuation allowance of $81.9 million and $116.0 million as of December 31, 2017 and 2016, 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. The decrease in the Company’s valuation allowance during 2017 was primarily related to the release of a portion of the Company’s valuation allowance in China, which it had maintained against the deferred tax assets of one of its Chinese subsidiaries. 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 all adjustments to the valuation allowance were 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 $272.3 million as of December 31, 2017, with expiration dates as follows: 2018 - $26.5 million; 2019 - $41.1 million; 2020 - $48.2 million and thereafter or unlimited - $156.5 million. The net operating loss carryforwards of $272.3 million were entirely in tax jurisdictions outside of the United States.

The Company paid income taxes of $111.2 million, $106.2 million and $97.6 million for the years ended December 31, 2017, 2016 and 2015, respectively.

At December 31, 2017 and 2016, the Company had $163.4 million and $139.9 million, respectively, of unrecognized income tax benefits, all of which would affect the Company’s effective tax rate if recognized. At December 31, 2017 and 2016, the Company had approximately $61.8 million and $47.0 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 $4.6 million and $3.4 million of interest and penalties related to unrecognized tax benefits in its provision for income taxes during 2017 and 2016, respectively. At December 31, 2017 and 2016, the Company had accrued interest and penalties related to unrecognized tax benefits of $23.0 million and $16.4 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, 2017 and 2016 is as follows (in millions):



	2017			2016
Gross unrecognized income tax benefits	$	139.9		$	133.0
Additions for tax positions of the current year	16.4			14.4
Additions for tax positions of prior years	4.8			15.2
Reductions for tax positions of prior years for:
Changes in judgments	1.4			(1.2		)
Settlements during the year	(0.4		)	(13.8		)
Lapses of applicable statute of limitations	(14.4		)	(5.0		)
Foreign currency translation	15.7			(2.7		)
Gross unrecognized income tax benefits	$	163.4		$	139.9

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, 2017, 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 2014 through 2017 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 2012 through 2017 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).