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, 2018, 2017 and 2016 (in millions):



	2018			2017			2016
United States	$	(126.0	)	$	(141.6	)	$	(150.0	)
Foreign	486.3			425.4			354.9
Income before income taxes and equity in net earnings of affiliates	$	360.3		$	283.8		$	204.9

The provision (benefit) for income taxes by location of the taxing jurisdiction for the years ended December 31, 2018, 2017 and 2016 consisted of the following (in millions):



	2018			2017			2016
Current:
United States:
Federal	$	(9.1	)	$	20.3		$	(24.3	)
State	1.2			0.6			0.2
Foreign	133.5			126.8			114.2
	125.6			147.7			90.1
Deferred:
United States:
Federal	—			0.9			21.9
State	—			—			—
Foreign	(14.7		)	(15.0		)	(19.8		)
	(14.7		)	(14.1		)	2.1
	$	110.9		$	133.6		$	92.2

On December 22, 2017, The Tax Cuts and Jobs Act (“the 2017 Tax Act”) was enacted in the United States. During the three months ended December 31, 2017, the Company recorded a tax provision of approximately $42.0 million in accordance with Staff Accounting Bulletin No. 118, which provided SEC Staff guidance for the application of ASC 740 “Income Taxes,” in the reporting period in which the 2017 Tax Act was enacted. The $42.0 million tax provision recorded included a provisional income tax charge related to a one-time transition tax associated with the mandatory deemed repatriation of unremitted foreign earnings. The tax provision also included a provisional income tax charge associated with the income tax consequences related to the expected future repatriation of certain underlying foreign earnings, as historically, the Company had considered them to be permanently reinvested. The remaining balance of the tax 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. During the three months ended December 31, 2018, the Company finalized its calculations related to the 2017 Tax Act and recorded an income tax benefit of approximately $8.5 million.

A reconciliation of income taxes computed at the United States federal statutory income tax rate (21% for 2018 (from 35 percent to 21 percent), and 35% for 2017 and 2016) to the provision for income taxes reflected in the Company’s Consolidated Statements of Operations for the years ended December 31, 2018, 2017 and 2016 is as follows (in millions):



	2018			2017			2016
Provision for income taxes at United States federal statutory rate	$	75.7		$	99.3		$	71.7
State and local income taxes, net of federal income tax effects	(6.0		)	(5.7		)	(6.0		)
Taxes on foreign income which differ from the United States statutory rate	(0.3		)	(57.7		)	(44.5		)
Tax effect of permanent differences	26.7			60.6			14.4
Change in valuation allowance	24.6			(1.4		)	37.9
Change in tax contingency reserves	8.5			3.8			23.4
Research and development tax credits	(8.5		)	(5.0		)	(3.8		)
Impacts related to the 2017 Tax Act	(8.4		)	42.0			—
Other	(1.4		)	(2.3		)	(0.9		)
	$	110.9		$	133.6		$	92.2

The significant components of the deferred tax assets and liabilities at December 31, 2018 and 2017 were as follows (in millions):



	2018			2017
Deferred Tax Assets:
Net operating loss carryforwards	$	74.5		$	83.4
Sales incentive discounts	58.8			60.2
Inventory valuation reserves	36.3			34.4
Pensions and postretirement health care benefits	47.6			52.2
Warranty and other reserves	98.6			92.2
Research and development tax credits	3.1			2.9
Foreign tax credits	9.7			10.4
Other	21.6			19.2
Total gross deferred tax assets	350.2			354.9
Valuation allowance	(83.9		)	(81.9		)
Total net deferred tax assets	266.3			273.0
Deferred Tax Liabilities:
Tax over book depreciation and amortization	214.3			229.1
Investment in affiliates	42.8			53.9
Other	20.6			8.3
Total deferred tax liabilities	277.7			291.3
Net deferred tax liabilities	$	(11.4	)	$	(18.3	)
Amounts recognized in Consolidated Balance Sheets:
Deferred tax assets - noncurrent	$	104.9		$	112.2
Deferred tax liabilities - noncurrent	(116.3		)	(130.5		)
	$	(11.4	)	$	(18.3	)

The Company recorded a net deferred tax liability of $11.4 million and $18.3 million as of December 31, 2018 and December 31, 2017, respectively. As reflected in the preceding table, the Company had a valuation allowance against its gross deferred tax assets of approximately $83.9 million and $81.9 million as of December 31, 2018 and 2017, respectively.

The Company maintains a valuation allowance to fully reserve its net deferred tax assets in the United States and certain foreign jurisdictions. 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 $249.6 million as of December 31, 2018, with expiration dates as follows: 2019 - $19.5 million; 2020 - $18.8 million; 2021 - $22.9 million and thereafter or unlimited - $188.4 million. The net operating loss carryforwards of $249.6 million were entirely in tax jurisdictions outside of the United States.

The Company paid income taxes of $101.6 million, $111.2 million and $106.2 million for the years ended December 31, 2018, 2017 and 2016, respectively.

At December 31, 2018 and 2017, the Company had $166.1 million and $163.4 million, respectively, of unrecognized income tax benefits, all of which would affect the Company’s effective tax rate if recognized. At December 31, 2018 and 2017, the Company had approximately $58.5 million and $61.8 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 $5.6 million and $4.6 million of interest and penalties related to unrecognized tax benefits in its provision for income taxes during 2018 and 2017, respectively. At December 31, 2018 and 2017, the Company had accrued interest and penalties related to unrecognized tax benefits of $27.2 million and $23.0 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, 2018 and 2017 is as follows (in millions):



	2018			2017
Gross unrecognized income tax benefits	$	163.4		$	139.9
Additions for tax positions of the current year	3.8			16.4
Additions for tax positions of prior years	13.1			4.8
Reductions for tax positions of prior years for:
Changes in judgments	(1.6		)	1.4
Settlements during the year	(0.7		)	(0.4		)
Lapses of applicable statute of limitations	(4.4		)	(14.4		)
Foreign currency translation	(7.5		)	15.7
Gross unrecognized income tax benefits	$	166.1		$	163.4

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, 2018, 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 2015 through 2018 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 2013 through 2018 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).