Income taxes

Following is the total income (loss) before income taxes and the provision for income taxes for the three years ended December 31, 2017.



Year ended December 31,	2017			2016			2015
Income (loss) before income taxes
United States	$	(152.7	)	$	(88.3	)	$	(130.6	)
Foreign	80.6			108.8			71.8
Total income (loss) before income taxes	$	(72.1	)	$	20.5		$	(58.8	)
Provision for income taxes
Current
United States	$	(42.8	)	$	6.7		$	1.0
Foreign	33.9			47.7			42.2
State and local	—			—			0.3
Total	(8.9		)	54.4			43.5
Deferred
Foreign	3.4			2.8			0.9
Total (benefit) provision for income taxes	$	(5.5	)	$	57.2		$	44.4

Following is a reconciliation of the (benefit) provision for income taxes at the United States statutory tax rate to the provision for income taxes as reported:



Year ended December 31,	2017			2016			2015
United States statutory income tax provision (benefit)	$	(25.2	)	$	7.2		$	(20.6	)
Income and losses for which no provision or benefit has been recognized	70.3			65.5			69.1
Foreign rate differential and other foreign tax expense	(11.3		)	(21.1		)	(15.9		)
Income tax withholdings	16.8			22.8			12.5
Permanent items	(3.0		)	(4.7		)	(1.9		)
Enacted rate changes	(0.4		)	3.5			9.1
Change in uncertain tax positions	2.3			0.4			1.5
Change in valuation allowances due to changes in judgment	(4.6		)	(16.4		)	(5.4		)
Income tax credits, U.S.	(50.4		)	—			(4.0		)
(Benefit) provision for income taxes	$	(5.5	)	$	57.2		$	44.4

The TCJA was enacted by the U.S. on December 22, 2017. The TCJA eliminates the corporate Alternative Minimum Tax (“AMT”) beginning in 2018, and also provides for refunds of all remaining AMT credits. Consequently, the company recorded a benefit of $50.4 million in 2017. Of this total, $9.1 million was received in 2017, and approximately $7.2 million will be received in 2018 under Internal Revenue Code section 168(k)(4) of the prior tax law. The remainder, $34.1 million, will be refundable under the TCJA between 2019 and 2022.

The 2016 and 2015 provision for income taxes included $3.5 million and $9.1 million due to a reduction in the UK income tax rate. The rate reductions were enacted in the third quarter of 2016 and the fourth quarter of 2015 and reduced the rate from 18% to 17% and from 20% to 18% effective April 1, 2020 and 2017, respectively.

The tax effects of temporary differences and carryforwards that give rise to significant portions of deferred tax assets and liabilities at December 31, 2017 and 2016 were as follows:



As of December 31,	2017			2016
Deferred tax assets
Tax loss carryforwards	$	837.6		$	889.6
Postretirement benefits	437.7			728.9
Foreign tax credit carryforwards	127.0			317.6
Other tax credit carryforwards	29.1			91.4
Deferred revenue	40.9			81.0
Employee benefits and compensation	35.2			49.1
Purchased capitalized software	22.2			32.6
Depreciation	24.5			28.3
Warranty, bad debts and other reserves	5.3			16.1
Capitalized costs	3.1			10.9
Other	39.3			27.7
	1,601.9			2,273.2
Valuation allowance	(1,441.1		)	(2,084.6		)
Total deferred tax assets	$	160.8		$	188.6
Deferred tax liabilities
Capitalized research and development	$	24.3		$	20.3
Other	25.8			28.4
Total deferred tax liabilities	$	50.1		$	48.7
Net deferred tax assets	$	110.7		$	139.9

The TCJA reduced the U.S. federal tax rate from 35% to 21% effective in 2018. This rate decrease resulted in a remeasurement of U.S. deferred tax balances in 2017, with no net financial statement impact due to the valuation allowance recorded against all U.S. deferred tax assets.

At December 31, 2017, the company has tax effected U.S. Federal ($319.5 million), state and local ($250.7 million), and foreign ($267.4 million) tax loss carryforwards, the total of which is $837.6 million. These carryforwards will expire as follows: 2018, $5.3; 2019, $7.3; 2020, $28.5; 2021, $14.5; 2022, $114.0; and $668.0 thereafter. The company also has available tax credit carryforwards of $127.0 million, which will expire as follows: 2018, $10.1; 2019, $10.2; 2020, $20.9; 2021, $8.7; 2022, $7.7; and $69.4 thereafter.

Failure to achieve forecasted taxable income might affect the ultimate realization of the company’s net deferred tax assets. Factors that may affect the company’s ability to achieve sufficient forecasted taxable income include, but are not limited to, the following: increased competition, a decline in sales or margins, loss of market share, the impact of the economic environment, delays in product availability and technological obsolescence.

Under U.S. tax law effective through December 31, 2017, undistributed earnings of foreign subsidiaries were generally taxable upon repatriation to the U.S. shareholder. Under the TCJA, effective January 1, 2018, distributions from foreign subsidiaries to U.S. shareholders are generally exempt from taxation. As a part of the transition to this new participation exemption system of taxation, the TCJA requires a transition tax to be paid on the net accumulated post-1986 undistributed earnings of foreign subsidiaries. The company has determined that, due to accumulated deficits of foreign subsidiaries offsetting the accumulated earnings of foreign subsidiaries, the company will not incur a transition tax.

With this change in U.S. taxation of earnings of foreign subsidiaries under the TCJA, future distributions of earnings from foreign subsidiaries will generally be exempt from U.S. taxation. Consequently, the deferred income tax liability on undistributed earnings is generally limited to any foreign withholding or other foreign taxes that will be imposed on such distributions. As the company currently intends to indefinitely reinvest the earnings of certain foreign subsidiaries, no provision has been made for income taxes that may become payable upon distribution of the earnings of such subsidiaries. The unrecognized deferred income tax liability at December 31, 2017 approximated $21.5 million.

While subsequent to 2017, the U.S. will not generally tax distributions from foreign subsidiaries, the TCJA introduced a tax on GILTI. Beginning in 2018, U.S. taxable income will include GILTI, which essentially includes net foreign subsidiaries’ earnings above a routine 10% return on their aggregate specified tangible assets. The company has made an accounting policy election to treat the GILTI as a period cost when included in U.S. taxable income, and consequently GILTI has no impact on the 2017 financial statements.

Cash paid for income taxes, net of refunds, during 2017, 2016 and 2015 was $34.3 million, $46.4 million and $59.7 million, respectively.

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



Year ended December 31,	2017			2016			2015
Balance at January 1	$	35.8		$	27.7		$	35.0
Additions based on tax positions related to the current year	4.2			2.7			3.4
Changes for tax positions of prior years	(11.2		)	12.0			(4.0		)
Reductions as a result of a lapse of applicable statute of limitations	(2.7		)	(2.8		)	(3.4		)
Settlements	(0.2		)	(0.1		)	(0.9		)
Changes due to foreign currency	2.0			(3.7		)	(2.4		)
Balance at December 31	$	27.9		$	35.8		$	27.7

The company recognizes penalties and interest accrued related to income tax liabilities in the provision for income taxes in its consolidated statements of income. At December 31, 2017 and 2016, the company had an accrual of $2.3 million and $1.2 million, respectively, for the payment of penalties and interest.

At December 31, 2017, all of the company’s liability for unrecognized tax benefits, if recognized, would affect the company’s effective tax rate. Within the next 12 months, the company believes that it is reasonably possible that the amount of unrecognized tax benefits may significantly change; however, various events could cause this belief to change in the future.

The company and its subsidiaries file income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. Several U.S. state and foreign income tax audits are in process. The company is under an audit in India, for which years prior to 2006 are closed. For the most significant jurisdictions outside the U.S., the audit periods through 2012 are closed for Brazil, and the audit periods through 2013 are closed for the United Kingdom. All of the various ongoing income tax audits throughout the world are not expected to have a material impact on the company’s financial position.

Internal Revenue Code Sections 382 and 383 provide annual limitations with respect to the ability of a corporation to utilize its net operating loss (as well as certain built-in losses) and tax credit carryforwards, respectively (“Tax Attributes”), against future U.S. taxable income, if the corporation experiences an “ownership change.” In general terms, an ownership change may result from transactions increasing the ownership of certain stockholders in the stock of a corporation by more than 50 percentage points over a three-year period. The company regularly monitors ownership changes (as calculated for purposes of Section 382). The company has determined that, for purposes of the rules of Section 382 described above, an ownership change occurred in February 2011. Any future transaction or transactions and the timing of such transaction or transactions could trigger additional ownership changes under Section 382.

As a result of the February 2011 ownership change, utilization for certain of the company’s Tax Attributes, U.S. net operating losses and tax credits, is subject to an overall annual limitation of $70.6 million. The cumulative limitation as of December 31, 2017 is approximately $416.0 million. This limitation will be applied first to any recognized built in losses, then to any net operating losses, and then to any other Tax Attributes. Any unused limitation may be carried over to later years. Based on presently available information and the existence of tax planning strategies, the company does not expect to incur a U.S. cash tax liability in the near term. The company maintains a full valuation allowance against the realization of all U.S. deferred tax assets as well as certain foreign deferred tax assets in excess of deferred tax liabilities.