Income Taxes

For the three years ended December 31, 2017 we recorded net tax provisions of $330.5 million, $95.6 million and $132.6 million, respectively.

On December 22, 2017, U.S. federal legislation, commonly referred to as the Tax Cuts and Jobs Act (the "TCJA"), was signed into law, significantly reforming tax law by changing how the U.S. imposes income tax on multinational corporations. The TCJA, among other things, reduces the U.S. corporate income tax rate from 35% to 21%, creates a territorial tax system with a one-time mandatory tax on previously deferred foreign earnings of U.S. subsidiaries, and creates new taxes on certain foreign earnings. On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) allowing for a 12 month window to finalize the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the TCJA. We have not completed our determination of the accounting implications of the 2017 TCJA on our tax accruals. However, as a result of the reduction in the U.S. corporate income tax rate from 35% to 21% under the TCJA, and consideration of executive compensation items, the Company revalued its ending net deferred tax assets at December 31, 2017 and recognized a provisional $41.1 million tax expense in the Company’s consolidated statement of income for the year ended December 31, 2017. The one-time mandatory tax is based on our total post-1986 earnings and profits (E&P) deferred from U.S. income taxes, cash and cash equivalents and foreign tax pools. In addition, the sale of Diversey on September 6, 2017, created significant adjustments in tax attributes mentioned above in measuring the transition tax. We are in the process of quantifying these attributes and therefore are not able to make a provisional estimate at this time.

The ultimate impact of the TCJA may differ from the provisional amount due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made, additional regulatory guidance that may be issued, and actions the Company may take as a result of the TCJA. The accounting is expected to be complete when the 2017 U.S. corporate income tax return is filed in 2018.

The components of earnings before income tax provision were as follows:



	Year Ended December 31,
(In millions)	2017		2016		2015
Domestic	$	192.1	$	175.9	$	115.8
Foreign	201.2		212.0		175.6
Total	$	393.3	$	387.9	$	291.4

The components of our income tax provision (benefit) were as follows:



	Year Ended December 31,
(In millions)	2017			2016			2015
Current tax expense:
Federal	$	79.6		$	57.6		$	44.7
State and local	14.3			1.2			8.4
Foreign	106.0			67.3			49.0
Total current expense	$	199.9		$	126.1		$	102.1
Deferred tax expense (benefit):
Federal	$	130.1		$	(15.8	)	$	10.7
State and local	5.3			3.6			10.9
Foreign	(4.8		)	(18.3		)	8.9
Total deferred tax expense (benefit)	130.6			(30.5		)	30.5
Total income tax provision	$	330.5		$	95.6		$	132.6

Deferred tax assets (liabilities) consist of the following:



	December 31,
(In millions)	2017			2016
Restructuring reserves	$	2.7		$	6.6
Accruals not yet deductible for tax purposes	10.7			8.4
Net operating loss carryforwards	199.4			188.4
Foreign, federal and state credits	69.2			51.5
Employee benefit items	69.6			132.1
Capitalized expenses	10.8			45.7
Derivatives and other	23.7			—
Sub-total deferred tax assets	386.1			432.7
Valuation allowance	(189.2		)	(167.7		)
Total deferred tax assets	$	196.9		$	265.0

Depreciation and amortization	$	(13.9	)	$	(24.7	)
Unremitted foreign earnings	(9.0		)	(22.2		)
Intangibles	(26.3		)	(23.6		)
Other	—			(2.2		)
Total deferred tax liabilities	(49.2		)	(72.7		)
Net deferred tax assets	$	147.7		$	192.3

The decrease in net deferred tax assets is primarily attributable to the revaluation associated with U.S. Tax Reform and the deduction of research and development expenses formerly capitalized, offset by a decrease in the liability for unremitted earnings based on a change in our repatriation strategy.

In assessing the need for a valuation allowance, we estimate future reversals of existing temporary differences, future taxable earnings, taxable income in carryback periods and tax planning strategies to determine which deferred tax assets are more likely than not to be realized in the future. Changes to tax laws, statutory tax rates and future taxable earnings can have an impact on valuation allowances related to deferred tax assets.

A valuation allowance has been provided based on the uncertainty of utilizing the tax benefits primarily related to the following deferred tax assets:


•	$151.2 million of foreign items, primarily net operating losses;


•	$21.9 million of state net operating loss carryforwards; and


•	$12.1 million of state tax credits.

For the year ended December 31, 2017, the valuation allowance increased by $21.5 million. This is primarily driven by currency translation adjustments.

As of December 31, 2017, we have foreign net operating loss carryforwards of $650.3 million expiring in years beginning in 2018 with the majority of losses having an unlimited carryover. The state net operating loss carryforwards totaling $738.6 million expire in various amounts over one to 20 years.

As of December 31, 2017, we have foreign and federal foreign tax credit carryforwards totaling $98.8 million that expire in calendar year 2018 through 2025 including $2.6 million of foreign tax credits that will expire in 2018 if not utilized. We have $15.4 million of state credit carryovers expiring in 2018 – 2029. We have provided a full valuation allowance on the state credits.

The Company has not recorded a deferred tax liability related to the federal and state income taxes and foreign withholding taxes on approximately $3.5 billion of undistributed earnings of certain foreign subsidiaries indefinitely reinvested. Upon repatriation of those earnings the Company could be subject to both U.S. income taxes and withholding taxes payable to the various foreign countries. Determination of the amount of unrecognized deferred U.S. income tax liability is not practicable due to the complexities associated with its hypothetical calculation; however, unrecognized foreign tax credits would be available to reduce a portion of the U.S. tax liability.

A reconciliation of the provision for income taxes, with the amount computed by applying the statutory federal income tax rate (35%) to income before provision for income taxes, is as follows (dollars in millions):



	Year Ended December 31,
	2017					2016					2015
Computed expected tax	$	137.7		35.0	%	$	135.9		35.0	%	$	102.0		35.0	%
State income taxes, net of federal tax benefit	7.6			1.9	%	4.8			1.2	%	12.5			4.3	%
Foreign earnings taxed at lower rates	(22.3		)	(5.7	)%	(22.4		)	(5.8	)%	(22.6		)	(7.8	)%
U.S. tax on foreign earnings	72.3			18.4	%	10.7			2.8	%	(0.5		)	(0.2	)%
Foreign tax credits	(12.1		)	(3.1	)%	(30.3		)	(7.8	)%	(5.3		)	(1.8	)%
Unremitted foreign earnings	—			—	%	(9.4		)	(2.4	)%	(86.0		)	(29.5	)%
Reorganization and divestitures	75.9			19.3	%	—			—	%	67.9			23.3	%
Net change in valuation allowance	(2.0		)	(0.5	)%	(47.8		)	(12.3	)%	47.8			16.4	%
Net change in unrecognized tax benefits	33.4			8.5	%	16.0			4.1	%	75.3			25.8	%
U.S. Tax Reform	41.1			10.4	%	—			—	%	—			—	%
Deferred tax adjustments	14.1			3.6	%	47.1			12.1	%	(75.6		)	(25.9	)%
Other	(15.2		)	(3.8	)%	(9.0		)	(2.3	)%	17.1			5.9	%
Income tax expense and rate	$	330.5		84.0	%	$	95.6		24.6	%	$	132.6		45.5	%

The primary adjustments to the statutory rate in 2017 were the following items:


•	increase in tax on items related to the sale of Diversey recognized in continuing operations;


•	increase related to U.S. tax on foreign income offset by benefit of foreign tax credits;


•	increase in tax expense due to the provisional impacts of the U.S. Tax Reform including revaluation of U.S. deferred tax assets; and


•	increase in tax expense for unrecognized tax benefits in foreign jurisdictions.

Unrecognized Tax Benefits

We are providing the following disclosures related to our unrecognized tax benefits and the effect on our effective income tax rate if recognized (in millions):



	Year Ended December 31,
	2017			2016			2015
Beginning balance of unrecognized tax benefits	$	162.6		$	131.3		$	18.9
Additions for tax positions of current year	7.3			11.1			1.2
Additions for tax positions of prior years	49.3			23.4			111.8
Reductions for tax positions of prior years	(4.3		)	(1.4		)	(0.6		)
Reductions for lapses of statutes of limitation and settlements	(0.6		)	(1.8		)	—
Ending balance of unrecognized tax benefits	$	214.3		$	162.6		$	131.3

In 2017, our unrecognized tax benefit increased by $51.7 million, related to an increase in unrecognized tax benefits in North America. In 2016, we increased our unrecognized tax benefit by $31.3 million primarily related to an increase for taxation of foreign income.

If the unrecognized tax benefits at December 31, 2017 were recognized, our income tax provision would decrease by $187.7 million, resulting in a substantially lower effective tax rate. Based on the potential outcome of the Company’s global tax examinations and the expiration of the statute of limitations for specific jurisdictions, it is reasonably possible that the unrecognized tax benefits will change within the next 12 months. The associated impact on the reserve balance is estimated to be a decrease in the range of $0 to $53.0 million.

We recognize interest and penalties related to unrecognized tax benefits in income tax provision in the Consolidated Statements of Operations. We had a liability of approximately of $14.8 million (of which $4.5 million represents penalties) at December 31, 2017 for the payment of interest and penalties (before any tax benefit), a liability of $12.0 million (of which $3.7 million represents penalties) at December 31, 2016 and a liability of approximately $4.0 million (of which $0.7 million represents penalties) at December 31, 2015. In 2017, there was a $4.0 million increase in interest and penalties in the tax accruals for uncertainties in prior years. In 2016, there was a $5.6 million increase in interest and penalties in the tax accruals for uncertainties in prior years. In 2015, there was a $0.6 million increase in interest and penalties in the tax accruals for uncertainties in prior years.

Income Tax Returns

The Internal Revenue Service (the “Service”) has concluded its examination of the legacy Sealed Air U.S. federal income tax returns for all years through 2008, except 2007 which remains open to the extent of a capital loss carryback. The Service is currently auditing 2011 U.S. federal income tax returns of legacy Sealed Air. We are also under examination by the IRS for the years 2012-2014. The outcome of the negotiations for this exam period may affect the utilization of certain tax attributes and require us to make a significant payment.

State income tax returns are generally subject to examination for a period of 3 to 5 years after their filing date. We have various state income tax returns in the process of examination, and are open to examination for periods after 2002.

Our foreign income tax returns are under examination in various jurisdictions in which we conduct business. Income tax returns in foreign jurisdictions have statutes of limitations generally ranging from 3 to 5 years after their filing date and except where still under examination. Of the unrecognized tax benefit amount of $214.3 million, $204.7 million relates to North America, most of which is either being disputed or litigated. We have largely concluded all other income tax matters for years prior to 2008.

Management believes that an adequate provision has been made for any adjustments that may result from tax examinations. However, the outcome of tax audits cannot be predicted with certainty. If any issues addressed in the Company’s tax audits are resolved in a manner not consistent with management’s expectations, the Company could be required to adjust its provision for income taxes in the period such resolution occurs.