Income Taxes

For the three and six months ended June 30, 2017 and 2016, the effective tax rates, including discrete items, were as follows:



	Three Months Ended June 30,				Six Months Ended June 30,
	2017		2016		2017		2016
Effective tax rate	32.5	%	32.7	%	32.4	%	38.8	%

We determine our interim tax provision using an Estimated Annual Effective Tax Rate methodology (“EAETR”). 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 pre-tax 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. 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 may materially impact the reported effective tax rate. As a global enterprise, our tax expense may be impacted by changes in tax rates or laws, the finalization of tax audits and reviews, as well as other factors. As such, there may be significant volatility in interim tax provisions.

As a result of a lapse in statute of limitations, management anticipates a decrease in the accrual for unrecognized tax benefit of $0.4 million in the next twelve months.

The below tables provide a reconciliation between our reported effective tax rates and the EAETR.



	Three Months Ended June 30,
	2017								2016
In millions, except percentages	Before tax			Tax			Effective tax rate % impact		Before tax			Tax			Effective tax rate % impact
Consolidated operations	$	53.0		$	17.2		32.5	%	$	38.5		$	12.6		32.7	%

Discrete items:
Separation costs ⁽¹⁾	0.2			0.1					4.7			1.3
Restructuring & other (income) charges	1.1			—					1.0			0.2
Results of legal entities with full valuation allowances⁽²⁾	(0.3		)	—					(0.9		)	—
Other tax only discrete items	—			(0.6		)			—			(0.1		)
Total discrete items	1.0			(0.5		)			4.8			1.4

Consolidated operations, before discrete items	$	54.0		$	16.7				$	43.3		$	14.0
Quarterly effect of changes in the EAETR							30.9	%							32.3	%

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(1)	Separation costs are classified as deductible or non-deductible for income tax purposes and are primarily taxed at domestic tax rates, see Note 13 for more information on the costs incurred.


(2)	Legal entities within the consolidated results of Ingevity with full valuation allowances are treated discretely for income tax purposes.



	Six Months Ended June 30,
	2017							2016
In millions, except percentages	Before tax		Tax			Effective tax rate % impact		Before tax		Tax			Effective tax rate % impact
Consolidated operations	$	87.0	$	28.2		32.4	%	$	61.4	$	23.8		38.8	%

Discrete items:
Separation costs ⁽¹⁾	0.5		0.2					11.1		2.3
Restructuring & other (income) charges	3.4		0.6					5.6		1.1
Results of legal entities with full valuation allowances ⁽²⁾	1.5		—					2.8		—
Other tax only discrete items	—		(0.4		)			—		(0.2		)
Total discrete items	5.4		0.4					19.5		3.2

Consolidated operations, before discrete items	$	92.4	$	28.6				$	80.9	$	27.0
EAETR ⁽³⁾						31.0	%						33.4	%

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(1)	Separation costs are classified as deductible or non-deductible for income tax purposes and are primarily taxed at domestic tax rates, see Note 13 for more information on the costs incurred.


(2)	Legal entities within the consolidated 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, 2017, as compared to June 30, 2016 is primarily due to an increase in forecasted profits from our 70 percent owned joint venture and income mix between domestic and foreign subsidiaries. Our 70 percent owned joint venture is a limited liability company which is treated as a "pass through" entity for tax purposes. Although we consolidate 100 percent of the joint venture, only 70 percent of the earnings are included in the calculation of Ingevity's provision for income taxes.