Income Taxes

For the three and six months ended June 30, 2016 and 2015, the effective tax rates, including discrete items, were as follows:



	Three Months Ended June 30,				Six Months Ended June 30,
	2016		2015		2016		2015
Effective tax rate	32.8	%	37.8	%	38.8	%	35.9	%

We determine our interim tax provision using an Estimated Annual Effective Tax Rate methodology (“EAETR”) in accordance with GAAP. The EAETR is applied to the year-to-date ordinary income, exclusive of discrete items. The tax effects of discrete items are then included to arrive at the total reported interim tax provision.

The determination of the EAETR is based upon a number of estimates, including the estimated annual pretax ordinary income in each tax jurisdiction in which we operate. As our projections of ordinary income change throughout the year, the EAETR will change period-to-period. The tax effects of discrete items are recognized in the tax provision in the period they occur in accordance with GAAP. Depending on various factors, such as the item’s significance in relation to total income and the rate of tax applicable in the jurisdiction to which it relates, discrete items in any quarter can materially impact the reported effective tax rate. As a global enterprise, our tax expense can be impacted by changes in tax rates or laws, the finalization of tax audits and reviews, as well as other factors. As such, there can be significant volatility in interim tax provisions.

The below chart provides a reconciliation between our reported effective tax rates and the EAETR.



	Three Months Ended June 30,
	2016								2015
in millions, except percentages	Before Tax			Tax			Effective Tax Rate % Impact		Before Tax			Tax			Effective Tax Rate % Impact
Combined operations	$	38.4		$	12.6		32.8	%	$	43.6		$	16.5		37.8	%

Discrete items:
Separation costs ⁽¹⁾	4.7			1.3					4.8			1.1
Restructuring & other (income) charges	1.0			0.2					(0.4		)	(0.2		)
Results of legal entities with full valuation allowances ⁽²⁾	(0.9		)	—					2.5			—
Other tax only discrete items	—			(0.1		)			—			—
Total discrete items	4.8			1.4					6.9			0.9

Combined operations, before discrete items	$	43.2		$	14.0				$	50.5		$	17.4
Quarterly effect of changes in the EAETR							32.4	%							34.5	%

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(1)	Separation costs are primarily taxed at domestic tax rates resulting in a material tax benefit, see Note 13 for more information on the costs incurred.


(2)	In accordance with GAAP, legal entities within the combined results of Ingevity with full valuation allowances are treated discretely for income tax purposes.



	Six Months Ended June 30,
	2016							2015
in millions, except percentages	Before Tax		Tax			Effective Tax Rate % Impact		Before Tax			Tax			Effective Tax Rate % Impact
Combined operations	$	58.2	$	22.6		38.8	%	$	80.0		$	28.7		35.9	%

Discrete items:
Separation costs ⁽¹⁾	11.1		2.3					6.3			1.4
Restructuring & other (income) charges	5.6		1.1					(0.7		)	(0.3		)
Results of legal entities with full valuation allowances ⁽²⁾	2.8		—					4.2			—
Other tax only discrete items	—		(0.2		)			—			0.3
Total discrete items	19.5		3.2					9.8			1.4

Combined operations, before discrete items	$	77.7	$	25.8				$	89.8		$	30.1
EAETR ⁽³⁾						33.2	%							33.5	%

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(1)	Separation costs are primarily taxed at domestic tax rates resulting in a material tax benefit, see Note 13 for more information on the costs incurred.


(2)	In accordance with GAAP, legal entities within the combined results of Ingevity with full valuation allowances are treated discretely for income tax purposes.


(3)	The decrease in the EAETR for the six months ended June 30, 2016 as compared to June 30, 2015 is primarily due to income mix between domestic and foreign subsidiaries.