Income Taxes

A summary of consolidated income before provision for income taxes and equity in net income of affiliates and the components of provision for income taxes is shown below (in millions):



For the year ended December 31,	2017			2016		2015
Consolidated income before provision for income taxes and equity in net income of affiliates:
Domestic	$	449.5		$	457.3	$	344.7
Foreign	1,077.2			881.0		686.8
	$	1,526.7		$	1,338.3	$	1,031.5
Domestic (benefit) provision for income taxes:
Current provision	$	25.8		$	46.6	$	45.4
Deferred (benefit) provision	(46.1		)	99.2		55.0
Total domestic (benefit) provision	(20.3		)	145.8		100.4
Foreign provision for income taxes:
Current provision	253.0			220.0		191.5
Deferred (benefit) provision	(35.2		)	4.4		(6.4		)
Total foreign provision	217.8			224.4		185.1
Provision for income taxes	$	197.5		$	370.2	$	285.5

The domestic (benefit) provision includes withholding taxes related to dividends and royalties paid by the Company’s foreign subsidiaries, as well as state and local taxes. In 2017, 2016 and 2015, the foreign deferred (benefit) provision includes the benefit of prior unrecognized net operating loss carryforwards of $11.5 million, $5.4 million and $1.7 million, respectively.

A summary of the differences between the provision for income taxes calculated at the United States federal statutory income tax rate of 35% and the consolidated provision for income taxes is shown below (in millions):



For the year ended December 31,	2017			2016			2015
Consolidated income before provision for income taxes and equity in net income of affiliates multiplied by the United States federal statutory income tax rate	$	534.4		$	468.4		$	361.0
Differences in income taxes on foreign earnings, losses and remittances	(128.9		)	(43.9		)	(79.2		)
Valuation allowance adjustments	(56.8		)	(44.2		)	24.6
Tax credits	(26.8		)	(2.7		)	(5.7		)
Repatriation of certain foreign earnings	(289.7		)	—			—
Transition tax on accumulated foreign earnings	131.0			—			—
U.S. tax rate change and other tax reform items	42.5			—			—
Tax audits and assessments	(1.4		)	(1.8		)	0.7
Other	(6.8		)	(5.6		)	(15.9		)
Provision for income taxes	$	197.5		$	370.2		$	285.5

For the years ended December 31, 2017, 2016 and 2015, income in foreign jurisdictions with tax holidays was $124.1 million, $89.7 million and $72.2 million, respectively. Such tax holidays generally expire from 2018 through 2027.

Deferred income taxes represent temporary differences in the recognition of certain items for financial reporting and income tax purposes. A summary of the components of the net deferred income tax asset is shown below (in millions):



December 31,	2017			2016
Deferred income tax assets:
Tax loss carryforwards	$	452.9		$	485.1
Tax credit carryforwards	341.0			187.9
Retirement benefit plans	58.2			89.4
Accrued liabilities	144.1			158.2
Self-insurance reserves	5.9			8.4
Current asset basis differences	37.4			44.6
Long-term asset basis differences	(88.1		)	(77.3		)
Deferred compensation	41.4			57.3
Recoverable customer engineering, development and tooling	3.6			(6.9		)
Undistributed earnings of foreign subsidiaries	(41.7		)	(62.4		)
Derivative instruments and hedging activities	3.3			20.1
Other	(0.4		)	0.6
	957.6			905.0
Valuation allowance	(402.2		)	(445.6		)
Net deferred income tax asset	$	555.4		$	459.4

As of December 31, 2017 and 2016, the valuation allowance with respect to the Company’s deferred tax assets was $402.2 million and $445.6 million, respectively, a net decrease of $43.4 million.

Concluding that a valuation allowance is not required is difficult when there is significant negative evidence, such as cumulative losses in recent years, which is objective and verifiable. When measuring cumulative losses in recent years, the Company uses a rolling three-year period of pretax book income, adjusted for permanent differences between book and taxable income and certain other items. As of December 31, 2017, the Company continues to maintain a valuation allowance of $20.9 million with respect to certain U.S. deferred tax assets that, due to their nature, are not likely to be realized. In addition, the Company continues to maintain a valuation allowance of $381.3 million with respect to its deferred tax assets in several international jurisdictions.

The classification of the net deferred income tax asset is shown below (in millions):



December 31,	2017			2016
Long-term deferred income tax assets	$	646.8		$	504.4
Long-term deferred income tax liabilities	(91.4		)	(45.0		)
Net deferred income tax asset	$	555.4		$	459.4

As of December 31, 2017, deferred income taxes have not been provided on the undistributed earnings of the Company’s foreign subsidiaries since all of these earnings are subject to the one-time transition tax and are not taxable upon repatriation to the United States. However, the Company continues to provide a deferred tax liability for foreign withholding tax that will be incurred with respect to the undistributed foreign earnings that are not permanently reinvested.

As of December 31, 2017, the Company had tax loss carryforwards of $1.9 billion. Of the total tax loss carryforwards, $1.5 billion have no expiration date, and $342.0 million expire between 2018 and 2037. In addition, the Company had tax credit carryforwards of $341.0 million, comprised principally of U.S. foreign tax credits, research and development credits and investment tax credits that generally expire between 2018 and 2037.

On January 1, 2017, the Company adopted Accounting Standards Update ("ASU") 2016-09, "Improvements to Employee Share-Based Payment Accounting." The new standard requires that the tax impact related to the difference between share-based compensation for book and tax purposes be recognized as income tax benefit or expense in the Company’s consolidated statement of comprehensive income in the reporting period in which such awards vest. The standard also required a modified retrospective adoption for previously unrecognized excess tax benefits. Accordingly, the Company recognized a deferred tax asset of $52.9 million and a corresponding credit to retained earnings in conjunction with the adoption. The effects of adopting the other provisions of ASU 2016-09 were not significant.

As of December 31, 2017 and 2016, the Company’s gross unrecognized tax benefits were $33.2 million and $29.5 million (excluding interest and penalties), respectively, all of which, if recognized, would affect the Company’s effective tax rate. The gross unrecognized tax benefits are recorded in other long-term liabilities.

A summary of the changes in gross unrecognized tax benefits is shown below (in millions):



For the year ended December 31,	2017			2016			2015
Balance at beginning of period	$	29.5		$	30.4		$	39.7
Additions based on tax positions related to current year	5.4			4.0			5.0
Reductions based on tax positions related to prior years	(0.3		)	(0.9		)	(0.2		)
Settlements	(0.8		)	—			(12.3		)
Statute expirations	(2.2		)	(2.9		)	(0.6		)
Foreign currency translation	1.6			(1.1		)	(1.2		)
Balance at end of period	$	33.2		$	29.5		$	30.4

The Company recognizes interest and penalties with respect to unrecognized tax benefits as income tax expense. As of December 31, 2017 and 2016, the Company had recorded gross reserves of $9.9 million and $7.8 million, respectively, related to interest and penalties, all of which, if recognized, would affect the Company’s effective tax rate.

The Company operates in multiple jurisdictions throughout the world, and its tax returns are periodically audited or subject to review by both domestic and foreign tax authorities. During the next twelve months, it is reasonably possible that, as a result of audit settlements, the conclusion of current examinations and the expiration of the statute of limitations in multiple jurisdictions, the Company may decrease the amount of its gross unrecognized tax benefits by $2.2 million, all of which, if recognized, would affect the Company’s effective tax rate. The gross unrecognized tax benefits subject to potential decrease involve issues related to transfer pricing and various other tax items in multiple jurisdictions. However, as a result of ongoing examinations, tax proceedings in certain countries, additions to the gross unrecognized tax benefits for positions taken and interest and penalties, if any, arising in 2018, it is not possible to estimate the potential net increase or decrease to the Company’s gross unrecognized tax benefits during the next twelve months.

The Company considers its significant tax jurisdictions to include China, Germany, Hungary, Italy, Mexico, Poland, Spain, the United Kingdom and the United States. The Company or its subsidiaries generally remain subject to income tax examination in certain U.S. state and local jurisdictions for years after 2012. Further, the Company or its subsidiaries remain subject to income tax examination in Spain for years after 2005, in Mexico for years after 2006, in Hungary and Poland for years after 2011, in Italy generally for years after 2012, in China and the United Kingdom for years after 2013 and in the United States generally for years after 2016.