4. Income Taxes

INCOME BEFORE INCOME TAXES	2017			2016		2015
U.S.	$	(104.5	)	$	132.4	$	143.8
Non-U.S.		611.0			671.4		531.9
Total	$	506.5		$	803.8	$	675.7

PROVISION FOR INCOME TAXES	2017			2016			2015
Current
U.S. federal	$	24.9		$	53.9		$	68.9
Non-U.S.		211.4			209.1			169.2
U.S. state and local		9.9			3.5			4.2

Deferred
U.S. federal		10.7			(8.3	)		(9.3	)
Non-U.S.		(53.7	)		(15.6	)		(13.7	)
U.S. state and local		0.3			(0.4	)		(1.1	)
Total income tax expense	$	203.5		$	242.2		$	218.2

EFFECTIVE INCOME TAX RATE	2017				2016				2015
U.S. federal income tax rate		35.0		%		35.0		%		35.0		%
Goodwill impairment		12.1				—				—
Foreign tax rate variances		(14.2	)			(7.7	)			(8.1	)
Tax credits		(7.0	)			(3.7	)			(4.3	)
Change in Valuation Allowances		(7.5	)			1.3				0.1
Current year losses with no benefit		4.3				2.1				4.1
Net operating loss carry-forwards		(0.2	)			(2.3	)			(0.5	)
Changes in tax reserves		1.3				0.5				1.4
U.S. Expense Allocation		3.2				2.0				2.7
Earnings of equity investments		(0.2	)			(0.1	)			(0.2	)
Withholding taxes		3.5				2.8				1.2
State taxes, net of federal benefit		0.4				0.2				0.3
Change in U.S. tax rate		4.8				—				—
Deemed mandatory repatriation		4.9				—				—
Other, net		(0.2	)			(0.0	)			0.6
Effective income tax rate		40.2		%		30.1		%		32.3		%

The Tax Cuts and Jobs Act (the “Tax Act”) was enacted on December 22, 2017. The Act makes broad and complex changes to the U.S. tax code, including reducing the U.S. federal corporate income tax rate from 35% to 21%, requiring companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously deferred and creates new taxes on certain foreign sourced earnings. The SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”) on December 22, 2017. SAB 118 allows for a measurement period in which companies can either use provisional estimates for changes resulting from the Tax Act or apply the tax laws that were in effect immediately prior to the Tax Act being enacted if estimates cannot be determined at the time of the preparation of the financial statements until the actual impacts can be determined. We have made a reasonable estimate of the effects on our existing deferred tax balances and the one-time transition tax and therefore have recorded provisional amounts. In other cases, we have not been able to make a reasonable estimate and continue to account for those items based on our existing accounting under ASC 740, Income Taxes, and the provisions of the tax laws that were in effect immediately prior to enactment. For the items for which we were able to determine a reasonable estimate, we recognized a provisional amount of $65 million, which is included as a component of income tax expense from continuing operations.

Provisional Amounts

Deferred tax assets and liabilities: We remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%. However, we are still analyzing certain aspects of the Tax Act and refining our calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. The provisional amount recorded related to the re-measurement of our deferred tax balance was $24 million.

Foreign tax effects: The one-time transition tax is based on our total post-1986 earnings and profits (E&P) that we previously deferred from U.S. income taxes. We recorded a provisional amount for our one-time transition tax for all, save two, of our foreign subsidiaries resulting in an increase of income tax expense of $41 million, which includes U.S. expense allocations. We have not yet completed our calculation of the total post-1986 E&P for these foreign subsidiaries. Further, the transition tax is based in part on the amount of those earnings held in cash and other specified assets. We are continuing to gather additional information to more precisely compute the amount of the transition tax to complete our calculation of E&P and to make the final determination of non-U.S. income taxes paid. Therefore, this provisional amount may change when we finalize the calculation of post-1986 foreign E&P previously deferred from U.S. federal income taxation, finalize the amounts held in cash or other specified assets and determine the U.S. state income tax impact. No additional income taxes have been provided for any remaining undistributed foreign earnings not subject to the transition tax, or any additional outside basis difference inherent in these entities, as these amounts continue to be indefinitely reinvested in foreign operations. Determining the amount of unrecognized deferred tax liability relating to any remaining outside basis difference in these entities (i.e., basis difference in excess of that subject to the one-time transition tax) is not practical.

We have not completed the analysis on the E&P for the remaining two foreign subsidiaries to reasonably estimate the effects of the one-time transition tax and, therefore, have not recorded provisional amounts. We continue to apply ASC 740 based on the provisions of the tax laws that were in effect immediately prior to the Tax Act being enacted. Because we have previously determined these amounts were indefinitely reinvested, no deferred taxes have been recorded. It is impractical to determine unrecognized deferred tax liabilities related to these entities.

The accounting for the following element of the Tax Act is incomplete, and we have not yet been able to make reasonable estimates of the effect of this item. Therefore, no provisional amounts were recorded:

Global Intangible Low Taxed Income (“GILTI”): The Tax Act creates a new requirement that certain income (i.e., GILTI) earned by foreign subsidiaries must be included currently in the gross income of the U.S. shareholder. Due to the complexity of the new GILTI tax rules, we are continuing to evaluate this provision of the Tax Act and the application of ASC 740. Under U.S. GAAP, we are permitted to make an accounting policy election to either treat taxes due on future inclusions in U.S. taxable income related to GILTI as a current-period expense when incurred or to factor such amounts into our measurement of our deferred taxes. We have not yet completed the analysis of the GILTI tax rules primarily due to a lack of guidance from the U.S. Treasury Department and are not yet able to reasonably estimate the effect of this provision of the Tax Act or make an accounting policy election for ASC 740 treatment of the GILTI tax. Therefore, we have not recorded any amounts related to potential GILTI tax in our financial statements and have not yet made a policy decision regarding whether to record deferred taxes on GILTI.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. On December 31, 2017, the Company had net operating loss carryforwards (NOL’s) of approximately $417 million, of which approximately $299 million have no expiration date. The remaining losses expire on various dates through 2029. The Company also has $24 million of U.S. Foreign Tax Credit carry forwards, which begin to expire in 2025 and $7 million of non-U.S. Foreign Tax Credit carryforwards which begin to expire in 2021.

Valuation allowances have been established which partially offset the related deferred assets. Such allowances are primarily provided against NOL’s of companies that have perennially incurred losses, as well as the NOL’s of companies that are start-up operations and have not established a pattern of profitability. The Company assesses all available evidence, both positive and negative, to determine the amount of any required valuation allowance. In 2017, the Company recognized a tax benefit of $117 million due to the reversal of valuation allowances. This consisted primarily of the reversal of valuation allowances on $43 million of deferred tax assets in France and on $55 million of U.S. foreign tax credits as a result of deemed mandatory repatriation as discussed above.

The foreign tax rate variance reflects the fact that approximately two-thirds of the Company’s non-U.S. pre-tax income is generated by business operations located in tax jurisdictions where the tax rate is between 20-30%. The tax rate from quarter to quarter and from year to year is also impacted by the mix of earnings and tax rates in various jurisdictions compared to the same periods or prior years. Although a significant portion of the goodwill is deductible in certain jurisdictions the nondeductible portion of the goodwill impairment is contributing to the increase in effective income tax rate.

The Company has reserves for income taxes that may become payable in future periods as a result of tax audits. These reserves represent the Company’s best estimate of the potential liability for tax exposures. Inherent uncertainties exist in estimates of tax exposures due to changes in tax law, both legislated and concluded through the various jurisdictions’ court systems. The Company files income tax returns in the United States federal jurisdiction, and various states and non-U.S. jurisdictions.

At any given time, the Company is undergoing tax audits in several tax jurisdictions, covering multiple years. The Company is no longer subject to income tax examination by the U.S. Federal tax authorities for years prior to 2014. With few exceptions, the Company is no longer subject to income tax examination by U.S. state or local tax authorities or by non-U.S. tax authorities for years before 2009. The Company is undergoing tax audits in several non-U.S. jurisdictions and several U.S. state jurisdictions, covering multiple years. As of December 31, 2017, as a result of those tax examinations, the Company is not aware of any proposed income tax adjustments that would have a material impact on the Company’s financial statements, however, other audits could result in additional increases or decreases to the unrecognized tax benefits in some future period or periods.

The Company recognizes interest and potential penalties accrued related to unrecognized tax benefits in tax expense. As of December 31, 2016, the Company had recorded $30.3 million for unrecognized tax benefits related to prior years, including $6.9 million of accrued interest and penalties. During 2017, the Company recorded a net increase of $4.3 million to income tax reserves for unrecognized tax benefits based on tax positions related to the current and prior years. The Company had $6.3 million accrued for the payment of interest and penalties as of December 31, 2017. Of the total unrecognized tax benefits of $34.6 million recorded at December 31, 2017, $8.0 million is classified as current income tax payable, and $26.6 million is classified as non-current tax payable included in Other Non-Current Liabilities on the Consolidated Balance Sheets. Substantially all of these reserves would impact the effective tax rate if released into income. The following table summarizes the activity related to the Company’s unrecognized tax benefits:

UNRECOGNIZED TAX BENEFITS	2017			2016			2015
Unrecognized tax benefits at beginning of year	$	27.2		$	25.2		$	21.5
Increases as a result of tax positions taken during a prior Period		2.0			4.5			2.5
Decreases as a result of tax positions taken during a prior Period		0.0			(0.2	)		(0.1	)
Increases as a result of tax positions taken during the current Period		6.8			5.8			5.7
Decreases as a result of tax positions taken during the current period		0.0			(1.7	)		0.0
Decreases relating to settlements with taxing authorities		(7.1	)		(1.3	)		(0.7	)
Decreases resulting from the lapse of the applicable statute of limitations		(0.3	)		(3.5	)		(2.0	)
Translation Difference		1.0			(1.6	)		(1.7	)
Total unrecognized tax benefits at end of year	$	29.6		$	27.2		$	25.2

The tax effect of temporary differences and carryforwards that comprise significant portions of deferred tax assets and liabilities were as follows.

DEFERRED TAXES
DECEMBER 31	2017			2016			2015
Assets
Provisions	$	113.4		$	110.8		$	90.6
Costs capitalized for tax		35.9			19.1			21.3
Property, plant and equipment		25.0			14.8			15.5
Retirement Plans		50.8			66.8			60.8
Tax receivables, principally NOL’s		187.2			222.1			192.8
Deferred tax assets before allowances	$	412.3		$	433.6		$	381.0
Valuation allowances		(147.6	)		(210.0	)		(177.7	)
Total	$	264.7		$	223.6		$	203.3

Liabilities
Acquired intangibles	$	(6.5	)	$	(12.2	)	$	(18.4	)
Statutory tax allowances		0.3			(0.0	)		(0.6	)
Insurance deposit		0.0			(0.0	)		(3.3	)
Distribution taxes		(29.1	)		(29.4	)		(29.8	)
Other		(4.2	)		(4.9	)		(2.9	)
Total	$	(39.5	)	$	(46.5	)	$	(55.0	)
Net deferred tax asset	$	225.2		$	177.1		$	148.3

The following table summarizes the activity related to the Company’s valuation allowances:

VALUATION ALLOWANCES AGAINST DEFERRED TAX ASSETS DECEMBER 31	2017			2016			2015
Allowances at beginning of year	$	210.0		$	177.7		$	150.1
Benefits reserved current year		49.1			43.5			53.7
Benefits recognized current year		(117.0	)		(13.8	)		(5.2	)
Write-offs and other changes		(0.0	)		(0.5	)		(0.2	)
Translation difference		5.5			3.1			(20.7	)
Allowances at end of year	$	147.6		$	210.0		$	177.7