Income Taxes

On December 22, 2017, the United States enacted the Tax Act, which made broad changes to the tax code including a reduction of the United States federal corporate income tax rate from 35% to 21% effective January 1, 2018 as well as a transition to a Territorial Tax regime.

The key provisions of the Tax Act and their related impacts, which totaled a $77.2 tax benefit, are as follows:

•

The deferred tax liability previously recorded for non-United States earnings that are not permanently invested was reduced with a corresponding benefit to tax expense of $275.8. This is comprised of the deferred tax liability recorded as of December 22, 2017, offset by $5.5 of tax expense related to non-United States withholding tax. The reporting for these amounts is provisional as we continue to evaluate various aspects of the Tax Act and gather additional information on our non-United States earnings.

•

As part of the transition to a Territorial Tax regime, a tax was imposed on our unremitted post-1986 non-United States earnings. We have currently estimated and recorded this transition tax expense at $170.2, which is a provisional estimate of the amount due and may change as additional guidance becomes available. The tax is payable in installments over eight years beginning April 2018 with 8 percent of the liability due in each of the first five years, 15 percent due in year six, 20 percent due in year seven and the remaining 25 percent due in year eight. In addition to the transition tax, certain foreign tax credit benefits were disallowed resulting in tax expense of $3.8.


•	The impact of the Tax Act on our deferred tax assets and liabilities balance, excluding the provision for unremitted earnings, was a tax expense of $1.2. The reporting for this amount is provisional as we continue to evaluate the state-level impacts of the Tax Act and other matters.


•	The Tax Act negatively impacted our prior year unrecognized tax benefits resulting in tax expense of $23.4. The reporting for this amount is complete.

•

The Tax Act creates a new Global Intangible Low-Taxed Income (“GILTI”) tax regime. Under GILTI, income earned after December 31, 2017 by certain non-United States subsidiaries must be included currently in the gross income of the United States parent company. Because of the complexity of the new GILTI tax rules and lack of guidance as to how to calculate the tax, we are continuing to evaluate this provision of the Tax Act and its impact on us. In accordance with accounting guidance on income taxes, we are allowed to make an accounting policy choice of either (1) treating taxes due on future inclusions in taxable income related to GILTI as a current-period expense (the “period cost method”) or (2) considering such amounts into a company’s measurement of its deferred taxes (the “deferred method”). When additional guidance is available, we will make a policy decision regarding whether to record deferred taxes on GILTI.

French tax reform was also enacted at the end of December 2017, which will gradually reduce the French corporate income tax rate from the current 33.3%, without surtax, to 25% in 2022. We have reduced the value of our French deferred tax assets to recognize the lower realization of future tax deductions. The tax expense related to this revaluation was $3.5 for 2017.

The provision for income taxes was as follows:



Year Ended December 31	2017			2016		2015
Current
United States
Federal		$211.7			$35.6		($8.4	)
State	8.4			4.0		—
Non-United States	168.6			144.0		158.7
Total current	388.7			183.6		150.3
Deferred
United States
Federal	(178.2		)	69.7		92.9
State	(0.8		)	0.5		1.8
Non-United States	(17.8		)	3.8		(3.5		)
Total deferred	(196.8		)	74.0		91.2
Total provision		$191.9			$257.6		$241.5

Increase in the current United States federal tax expense is due to the transition tax expense resulting from the Tax Act. The change in the deferred United States federal tax benefit is due to the reversal of our deferred tax liability related to non-United States earnings that were deemed to be not permanently invested as a result of the Tax Act.

A reconciliation between taxes computed at the United States federal statutory rate of 35% and the consolidated effective tax rate is as follows:



Year Ended December 31	2017			2016			2015
Income tax based on statutory rate		$258.1			$245.5			$231.2
Increase (decrease) resulting from:
Non-United States tax rate difference:
French business tax⁽¹⁾	46.9			41.0			40.0
French CICE⁽²⁾	(77.1		)	—			—
Other⁽²⁾	(28.6		)	(23.5		)	(19.6		)
Repatriation of non-United States earnings⁽²⁾⁽³⁾	69.7			(10.5		)	(16.9		)
State income taxes, net of federal benefit	1.1			2.2			2.7
Change in valuation allowance	(6.9		)	(6.0		)	3.3
United States Tax Act and French tax reform⁽³⁾	(73.7		)	—			—
Other, net	2.4			8.9			0.8
Tax provision		$191.9			$257.6			$241.5

(1) The French business tax is allowed as a deduction for French income tax purposes. The gross amount of the French business tax was $72.1, $63.1 and $61.5 for 2017, 2016 and 2015, respectively. The amounts in the table above of $46.9, $41.0 and $40.0, respectively, represent the French business tax expense net of the French tax benefit.

(2) The French CICE is a payroll tax credit that is tax-free for French tax purposes and increases French earnings. The French tax benefits related to the CICE were $58.9 and $56.2 for 2016 and 2015, respectively. Prior to the Tax Act, this increase in French earnings resulted in a United States tax expense as these French earnings were deemed to be not permanently invested, which is included in Repatriations of non-United States earnings. Included in Other Non-United States tax rate differences are benefits of $2.4, $1.8 and $1.5 for 2017, 2016 and 2015, respectively, that relate to French earnings that are deemed to be permanently invested.

(3) Prior to the enactment of the Tax Act on December 22, 2017, we recorded $83.3 of tax expense in 2017 related to non-United States earnings that were deemed to be not permanently invested. This amount is included in the Repatriation of non-United States earnings consistent with prior years. As a result of the Tax Act, this $83.3 was reversed as we are no longer recording United States federal income tax expense on these earnings, and this tax benefit is included in the United States Tax Act and French tax reform benefit of $73.7.

Deferred income taxes are recorded based on temporary differences at the tax rate expected to be in effect when the temporary differences reverse. The Tax Act significantly impacted our deferred income taxes. Temporary differences, which give rise to the deferred taxes, are as follows:



December 31	2017			2016
Future Income Tax Benefits (Expense)
Accrued payroll taxes and insurance		$17.3			$30.6
Employee compensation payable	20.2			26.6
Pension and postretirement benefits	49.0			60.7
Intangible assets	(103.0		)	(146.8		)
Repatriation of non-United States earnings	(5.5		)	(164.8		)
Intercompany loans denominated in foreign currencies	(13.5		)	(74.2		)
Net operating losses	104.1			92.7
Other	77.6			120.7
Valuation allowance	(77.5		)	(86.3		)
Total future tax benefits (expense)		$68.7			($140.8	)
Deferred tax asset		$101.0			$81.4
Deferred tax liability	(32.3		)	(222.2		)
Total future tax benefits (expense)		$68.7			($140.8	)

Pre-tax earnings of non-United States operations were $514.9, $482.2 and $511.2 in 2017, 2016 and 2015, respectively. As of December 31, 2017, provisional deferred taxes related to non-United States withholding taxes were provided on $1,746.3 of unremitted earnings of non-United States subsidiaries that may be remitted to the United States. We have an additional $264.3 of unremitted earnings of non-United States subsidiaries for which we have not currently provided deferred taxes. As of December 31, 2017 and 2016, we have recorded a deferred tax liability of $5.5 and $164.8, respectively, related to these non-United States earnings that may be remitted. The deferred tax liability decreased as we have no longer provided United States federal income taxes on unremitted earnings of non-United States subsidiaries that are not considered permanently invested.

We had United States federal and non-United States net operating loss carryforwards and United States state net operating loss carryforwards totaling $401.2 and $198.7, respectively, as of December 31, 2017. The net operating loss carryforwards expire as follows:



	United States Federal and Non-United States		United States State
2018		$1.5		$3.0
2019	6.5		4.0
2020	3.3		0.2
2021	5.3		3.8
2022	3.4		—
Thereafter	25.0		187.7
No expirations	356.2		—
Total net operating loss carryforwards		$401.2		$198.7

We have recorded a deferred tax asset of $104.1 as of December 31, 2017, for the benefit of these net operating losses. Realization of this asset is dependent on generating sufficient taxable income prior to the expiration of the loss carryforwards. A related valuation allowance of $68.4 has been recorded as of December 31, 2017, as management believes that realization of certain net operating loss carryforwards is unlikely.

As of December 31, 2017, we had gross unrecognized tax benefits related to various tax jurisdictions, including interest and penalties, of $66.5 that would favorably affect the effective tax rate if recognized. Our prior year unrecognized tax benefits were negatively impacted by the Tax Act during 2017. We do not expect our unrecognized tax benefits to change significantly over the next year.

As of December 31, 2016, we had gross unrecognized tax benefits related to various tax jurisdictions, including interest and penalties, of $44.0.

We recognize accrued interest and penalties related to unrecognized tax benefits in income tax expense. We accrued net interest and penalties of $0.2, $0.3 and $12.1 in 2017, 2016 and in 2015, respectively.

The following table summarizes the activity related to our unrecognized tax benefits during 2017, 2016 and 2015:



	2017			2016			2015
Gross unrecognized tax benefits, beginning of year		$23.8			$19.0			$23.0
Increases in prior year tax positions	27.1			4.1			2.3
Decreases in prior year tax positions	(1.2		)	(1.7		)	(0.5		)
Increases for current year tax positions	6.6			4.1			3.1
Expiration of statute of limitations and audit settlements	(10.2		)	(1.7		)	(8.9		)
Gross unrecognized tax benefits, end of year		$46.1			$23.8			$19.0
Potential interest and penalties	20.4			20.2			19.9
Balance, end of year		$66.5			$44.0			$38.9

We conduct business globally in various countries and territories. We are routinely audited by the tax authorities of the various tax jurisdictions in which we operate. Generally, the tax years that could be subject to examination are 2010 through 2017 for our major operations in France, Germany, Japan, the United Kingdom and the United States. As of December 31, 2017, we were subject to tax audits in Austria, Canada, Denmark, France, Germany, Italy and the United States. We believe that the resolution of these audits will not have a material impact on earnings.