Note 6 — Income Taxes

Income before income taxes comprises the following:



	2016		2015		2014
Domestic	$	518.9	$	552.3	$	699.2
Foreign	191.1		39.5		68.6
Total income before income taxes	$	710.0	$	591.8	$	767.8

The provisions for income taxes consist of the following:



	2016			2015			2014
Current expense (benefit):
Federal	$	44.2		$	97.1		$	102.4
State	20.9			32.2			30.7
Foreign	78.7			36.0			37.0
Investment tax credit	—			(1.2		)	(1.6		)
Total current expense	143.8			164.1			168.5
Deferred expense (benefit):
Federal	81.2			28.1			61.9
State	1.3			2.9			7.8
Foreign	(4.8		)	(17.0		)	(2.7		)
Investment tax credit amortization	(0.3		)	(0.3		)	(0.3		)
Total deferred expense	77.4			13.7			66.7
Total income tax expense	$	221.2		$	177.8		$	235.2

Federal income taxes for Fiscal 2016, Fiscal 2015 and Fiscal 2014 are net of foreign tax credits of $25.6, $63.0 and $12.1, respectively.

A reconciliation from the U.S. federal statutory tax rate to our effective tax rate is as follows:



	2016		2015		2014
U.S. federal statutory tax rate	35.0	%	35.0	%	35.0	%
Difference in tax rate due to:
Noncontrolling interests not subject to tax	(6.2	)	(7.9	)	(9.0	)
State income taxes, net of federal benefit	3.0		3.3		3.4
Valuation allowance adjustments	(0.9	)	0.8		—
Effects of foreign operations	0.6		0.2		1.0
Other, net	(0.3	)	(1.4	)	0.2
Effective tax rate	31.2	%	30.0	%	30.6	%

In December 2013, the French Parliament approved the Finance Bill for 2014 and amended the Finance Bill for 2013 (collectively, the “Finance Bills”). Among other things, the Finance Bills limit UGI France’s ability to deduct certain interest expense for income tax purposes and temporarily increase the corporate surtax rate for a period of two years. Based upon our review of the Finance Bills and interpretive guidance, provisions of the Finance Bills associated with the deductibility of certain interest expense at UGI France apply retroactively to such interest expense incurred during Fiscal 2013. In December 2013, the Company recorded additional income taxes of $5.7 to reflect the effects of the retroactive provisions of the Finance Bills, which are included in effects of foreign operations in the effective tax rate table above.

Earnings of the Company’s foreign subsidiaries are generally subject to U.S. taxation upon repatriation to the U.S. and the Company’s tax provisions reflect the related incremental U.S. tax except for certain foreign subsidiaries whose unremitted earnings are considered to be indefinitely reinvested. At September 30, 2016, unremitted earnings of foreign subsidiaries of approximately $81.7 were deemed to be indefinitely reinvested. No deferred tax liability has been recognized with regard to the remittance of such earnings. Because of the availability of U.S. foreign tax credits, it is likely no U.S. tax would be due if such earnings were repatriated.

Pennsylvania utility ratemaking practice permits the flow through to ratepayers of state tax benefits resulting from accelerated tax depreciation. For Fiscal 2016, Fiscal 2015 and Fiscal 2014, the beneficial effects of state tax flow through of accelerated depreciation reduced income tax expense by $1.3, $1.5 and $2.0, respectively.

Deferred tax liabilities (assets) comprise the following at September 30:



	2016			2015
Excess book basis over tax basis of property, plant and equipment	$	873.9		$	798.4
Investment in AmeriGas Partners	323.2			321.4
Intangible assets and goodwill	87.1			87.1
Utility regulatory assets	148.3			117.4
Other	11.9			8.9
Gross deferred tax liabilities	1,444.4			1,333.2

Pension plan liabilities	(79.7		)	(59.1		)
Employee-related benefits	(63.1		)	(57.6		)
Operating loss carryforwards	(31.5		)	(32.5		)
Foreign tax credit carryforwards	(105.1		)	(113.8		)
Utility regulatory liabilities	(13.9		)	(24.0		)
Derivative instruments	(14.7		)	(11.4		)
Utility environmental liabilities	(22.8		)	(6.0		)
Other	(28.3		)	(17.4		)
Gross deferred tax assets	(359.1		)	(321.8		)
Deferred tax assets valuation allowance	114.3			131.3
Net deferred tax liabilities	$	1,199.6		$	1,142.7

At September 30, 2016, foreign net operating loss carryforwards principally relating to Flaga, UGI International Holdings BV and certain operations of UGI France totaled $52.4, $2.5 and $21.4, respectively, with no expiration dates. We have state net operating loss carryforwards primarily relating to certain subsidiaries which approximate $179.4 and expire through 2036. We also have operating loss carryforwards of $22.4 for certain operations of AmeriGas Propane that expire through 2036. At September 30, 2016, deferred tax assets relating to operating loss carryforwards include $9.7 for Flaga, $7.6 for UGI France, $0.6 for UGI International Holdings BV, $8.6 for AmeriGas Propane and $5.0 for certain other subsidiaries.

In 2016, the Company reversed valuation allowances associated with certain state tax net operating loss carryforwards of approximately $5.5 as a result of certain tax planning strategies that were related to legal entity classification. A valuation allowance of $0.2 remains for deferred tax assets related to other state net operating loss carryforwards and other state deferred tax assets of certain subsidiaries because, on a state reportable basis, it is more likely than not that these assets will expire unused. A valuation allowance of $9.0 also exists for deferred tax assets related to certain operations of UGI France, Flaga and UGI International Holdings BV. Operating activities and tax deductions related to the exercise of non-qualified stock options contributed to the state net operating losses disclosed above. We first recognize the utilization of state net operating losses from operations (which exclude the impact of tax deductions for exercises of non-qualified stock options) to reduce income tax expense. Then, to the extent state net operating loss carryforwards, if realized, relate to non-qualified stock option deductions, the resulting benefits are credited to UGI Corporation stockholders’ equity. The table of deferred tax assets and liabilities do not include $7.7 for Fiscal 2016 and $6.5 for Fiscal 2015 of deferred tax assets and associated valuation allowance for unrealized state tax benefits for equity compensation deductions.

We have foreign tax credit carryforwards of approximately $105.1 expiring through 2026 resulting from the actual and planned repatriation of UGI France’s accumulated earnings since acquisition which are includable in U.S. taxable income. Because we expect that these credits will expire unused, a valuation allowance has been provided for the entire foreign tax credit carryforward amount. The valuation allowance for all deferred tax assets decreased by $17.0 in Fiscal 2016 due to decreases in unusable foreign tax credits of $8.8, foreign operating loss carryforwards of $2.0 and unusable state operating loss tax benefits of $6.2.

We conduct business and file tax returns in the U.S., numerous states, local jurisdictions and in France and certain other European countries. Our U.S. federal income tax returns are settled through the 2012 tax year, our French tax returns are settled through the 2012 tax year, our Austrian tax returns are settled through 2013 and our other European tax returns are effectively settled for various years from 2007 to 2014. State and other income tax returns in the U.S. are generally subject to examination for a period of three to five years after the filing of the respective returns.

As of September 30, 2016, we have unrecognized income tax benefits totaling $7.2 including related accrued interest of $0.3. If these unrecognized tax benefits were subsequently recognized, $5.8 would be recorded as a benefit to income taxes on the Consolidated Statement of Income and, therefore, would impact the reported effective tax rate. Generally, a net reduction in unrecognized tax benefits could occur because of the expiration of the statute of limitations in certain jurisdictions or as a result of settlements with tax authorities. There is no material change expected in unrecognized tax benefits and related interest in the next twelve months.

A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows:



	2016			2015			2014
Unrecognized tax benefits - beginning of year	$	3.2		$	2.4		$	3.4
Additions for tax positions of the current year	2.2			0.9			0.7
Additions for tax positions taken in prior years	2.3			0.5			—
Settlements with tax authorities/statute lapses	(0.5		)	(0.6		)	(1.7		)
Unrecognized tax benefits - end of year	$	7.2		$	3.2		$	2.4