Income Taxes

Selected income tax data (in millions):



	2018		2017		2016
Components of income before income taxes:
United States	$	721.6	$	547.2	$	512.1
Non-United States	609.2		490.2		431.0
Total	$	1,330.8	$	1,037.4	$	943.1



Components of the income tax provision:
Current:
United States	$	475.3	$	67.3		$	175.9
Non-United States	131.4		109.9			91.7
State and local	18.1		0.7			16.3
Total current	624.8		177.9			283.9
Deferred:
United States	118.6		44.6			(53.7		)
Non-United States	48.0		(14.1		)	(8.8		)
State and local	3.9		3.3			(8.0		)
Total deferred	170.5		33.8			(70.5		)
Income tax provision	$	795.3	$	211.7		$	213.4

Total income taxes paid	$	222.9	$	211.9		$	299.8

Provisional Amounts

On December 22, 2017, the Tax Act was enacted. The Tax Act significantly changes U.S. tax law by, among other things, lowering the statutory corporate income tax rate, implementing a modified territorial tax system, and imposing a one-time transition tax on accumulated earnings of foreign subsidiaries that were previously deferred from U.S. tax ("transition tax"). As a fiscal year taxpayer, certain provisions of the Tax Act impact us in fiscal year 2018, including the change in the federal statutory rate and the one-time transition tax, while other provisions will be effective in fiscal year 2019, including the tax on global intangible low-tax income ("GILTI") of foreign subsidiaries, the deduction for foreign derived intangible income ("FDII"), and the elimination of the domestic manufacturing deduction.

Our base rate reflects a change in the U.S. federal statutory rate from 35 percent to 21 percent resulting from the enactment of the Tax Act. The rate change was effective for us at the beginning of our fiscal year, using a blended rate for the annual period. As a result, the blended statutory rate for our fiscal year 2018 is 24.53 percent.

In December 2017, the SEC issued Staff Accounting Bulletin No. 118 ("SAB 118"), which provides guidance on how a company may recognize provisional estimates related to the effects of the Tax Act. The final impact of the Tax Act may differ from provisional estimates as a result of additional analysis of provisions of the Tax Act, and interpretation of any additional guidance issued by standard-setting and regulatory bodies such as the U.S. Treasury Department and FASB. The Company will complete its accounting related to the Tax Act within the one-year measurement period allowed under SAB 118.

As a result of the Tax Act, we revalued our U.S. deferred tax assets and liabilities based on the rate at which they are expected to reverse in the future, which is either 24.53 percent for reversals in 2018 or 21 percent for reversals in 2019 and subsequent years. We have recorded a provisional amount of $104.4 million in the year ended September 30, 2018.

The Tax Act requires the transition tax to be computed based on our total post-1986 earnings and profits (“E&P”) at December 31, 2017, that were previously deferred from U.S. income tax. As a result, we are required to make reasonable estimates given our September 30 fiscal year. We have recorded a provisional expense of $395.8 million for the transition tax liability for all of our foreign subsidiaries in 2018. The transition tax is applied to the balance of post-1986 E&P at rates of 15.5 percent of cash assets (as defined in the Tax Act) and 8 percent for non-cash assets measured at the higher of the balance at September 30, 2018, or the average of the ending balances at September 30, 2016 and September 30, 2017. Our estimates will change as a result of adjustments impacting E&P, and distributions and other transactions impacting cash. Under the Tax Act, the Company will elect to pay the transition tax interest-free over eight years, with 8% due in each of the first five years, 15% in year six, 20% in year seven, and 25% in year eight. We have recorded income taxes payable of $389.4 million in the Consolidated Balance Sheet, of which $31.1 million is recorded within other current liabilities and $358.3 million is recorded within other liabilities because that portion is payable greater than twelve months after September 30, 2018.

The Tax Act includes a provision to tax GILTI of foreign subsidiaries. The FASB allows companies to adopt an accounting policy to either recognize deferred taxes for GILTI or treat it as a tax cost in the year incurred. Due to the complexity of the new GILTI tax rules, the Company is continuing to evaluate this provision of the Tax Act and the application of U.S. GAAP. The GILTI provisions will be effective for us beginning October 1, 2018.

The Company has historically accounted for the earnings of its foreign subsidiaries as being indefinitely reinvested under ASC 740-30. As a result of the broad changes to the U.S. international tax system under the Tax Act, the Company will begin to account for substantially all of its non-U.S. subsidiaries as being immediately subject to tax, while still concluding that earnings are indefinitely reinvested for a limited number of subsidiaries. For non-U.S. subsidiaries that are accounted for as being immediately subject to tax, we have recorded deferred tax liabilities of $34.8 million related to foreign withholding taxes on future distributions of historic earnings and deferred tax assets of $9.9 million related to U.S. foreign tax credits attributable to the foreign withholding taxes. The company continues to treat as permanently invested the earnings of a limited number of its subsidiaries due mainly to local country repatriation restrictions. We have not provided for deferred taxes on the undistributed earnings of these subsidiaries as they are not material.

Effective Tax Rate Reconciliation

The reconciliation between the U.S. federal statutory rate and our effective tax rate was:



	2018		2017		2016
Statutory tax rate	24.5	%	35.0	%	35.0	%
State and local income taxes	1.0		0.7		0.6
Non-United States taxes	(4.4	)	(9.3	)	(8.6	)
Tax effect of foreign dividends	4.2		0.5		0.1
Impact of the Tax Act	36.6		—		—
Foreign currency transaction loss	—		(1.9	)	(0.8	)
Share-based compensation	(1.3	)	(2.8	)	—
Research and development tax credit	(1.3	)	(0.6	)	(2.0	)
Other	0.5		(1.2	)	(1.7	)
Effective income tax rate	59.8	%	20.4	%	22.6	%

We operate in certain non-U.S. tax jurisdictions under government-sponsored tax incentive programs, which may be extended if certain additional requirements are met. The program which generates the primary benefit will expire in 2022. The tax benefit attributable to these programs was $52.3 million ($0.41 per diluted share) in 2018, $43.4 million ($0.33 per diluted share) in 2017 and $33.9 million ($0.26 per diluted share) in 2016.

Deferred Taxes

The tax effects of temporary differences that give rise to our net deferred income tax assets (liabilities) were (in millions):



	2018			2017
Deferred income tax assets:
Compensation and benefits	$	6.5		$	18.8
Inventory	11.5			20.2
Returns, rebates and incentives	34.0			45.9
Retirement benefits	141.5			305.5
Environmental remediation and other site-related costs	20.7			33.4
Share-based compensation	19.6			32.4
Other accruals and reserves	49.7			71.3
Net operating loss carryforwards	19.6			20.4
Tax credit carryforwards	17.9			15.3
Capital loss carryforwards	10.0			10.3
Other	4.6			11.1
Subtotal	335.6			584.6
Valuation allowance	(27.0		)	(18.6		)
Net deferred income tax assets	308.6			566.0
Deferred income tax liabilities:
Property	(54.7		)	(74.0		)
Intangible assets	(25.3		)	(45.9		)
Investments	(21.7		)	—
Unremitted earnings of foreign subsidiaries	(22.7		)	—
Other	(4.6		)	(2.5		)
Deferred income tax liabilities	(129.0		)	(122.4		)
Total net deferred income tax assets	$	179.6		$	443.6

We believe it is more likely than not that we will realize our deferred tax assets through the reduction of future taxable income, other than for the deferred tax assets reflected below.

Tax attributes and related valuation allowances at September 30, 2018 were (in millions):



Tax attributes and related valuation allowances	Tax Benefit Amount		Valuation Allowance		Carryforward Period Ends
Non-United States net operating loss carryforward	$	7.0	$	7.0	2019	-	2024
Non-United States net operating loss carryforward	3.3		3.3		Indefinite
Non-United States capital loss carryforward	10.0		10.0		Indefinite
United States net operating loss carryforward	0.6		—		2019	-	2033
United States tax credit carryforward	0.8		—		2019	-	2037
State and local net operating loss carryforward	8.7		1.4		2019	-	2037
State tax credit carryforward	17.1		0.7		2019	-	2033
Subtotal	47.5		22.4
Other deferred tax assets	4.6		4.6		Indefinite
Total	$	52.1	$	27.0

Unrecognized Tax Benefits

A reconciliation of our gross unrecognized tax benefits, excluding interest and penalties, is as follows (in millions):



	2018			2017			2016
Gross unrecognized tax benefits balance at beginning of year	$	31.1		$	32.4		$	43.9
Additions based on tax positions related to the current year	—			1.9			2.3
Additions based on tax positions related to prior years	3.0			10.8			14.9
Reductions based on tax positions related to prior years	(1.1		)	(0.1		)	—
Reductions related to settlements with taxing authorities	(11.3		)	(7.7		)	(27.1		)
Reductions related to lapses of statute of limitations	(1.6		)	(6.3		)	(1.6		)
Effect of foreign currency translation	—			0.1			—
Gross unrecognized tax benefits balance at end of year	$	20.1		$	31.1		$	32.4

The amount of gross unrecognized tax benefits that would reduce our effective tax rate if recognized was $20.1 million, $31.1 million and $32.4 million at September 30, 2018, 2017 and 2016, respectively.

Accrued interest and penalties related to unrecognized tax benefits were $2.5 million and $4.0 million at September 30, 2018 and 2017, respectively. We recognize interest and penalties related to unrecognized tax benefits in the income tax provision. Benefits (expense) recognized were $1.5 million, $1.2 million and $(0.1) million in 2018, 2017 and 2016, respectively.

We believe it is reasonably possible that the amount of gross unrecognized tax benefits could be reduced by up to $6.0 million in the next 12 months as a result of the resolution of tax matters in various global jurisdictions and the lapses of statutes of limitations. If all of the unrecognized tax benefits were recognized, the net reduction to our income tax provision, including the recognition of interest and penalties and offsetting tax assets, could be up to $5.5 million.

We conduct business globally and are routinely audited by the various tax jurisdictions in which we operate. We are no longer subject to U.S. federal income tax examinations for years before 2016 and are no longer subject to state, local and non-U.S. income tax examinations for years before 2009.