The annualized effective tax rate on 2016 forecasted income from continuing operations is estimated to be 38.0% as of September 30, 2016, compared with 36.0% for the year ended December 31, 2015. The 2016 tax rate includes a $12.8 million discrete charge for an increase in the valuation allowance associated with Grace's state NOL carryforwards, of which $8.8 million related to a Separation-related change in Grace's outlook for being able to use these NOLs and $4.0 million related to a Louisiana tax law change, partially offset by a discrete benefit of $6.3 million for share-based compensation deductions related to the early adoption of ASU 2016-09.

Grace generated approximately $1,800 million in U.S. federal tax deductions relating to its emergence from bankruptcy. These deductions generated a U.S. federal and state NOL in 2014, which Grace has carried forward and expects to utilize in subsequent years. Under U.S. federal income tax law, a corporation is generally permitted to carry forward NOLs for a 20-year period for deduction against future taxable income. Grace also expects to generate a U.S. federal tax deduction of $30 million upon payment of the ZAI PD deferred payment obligation in 2017. (See Note 8.)

The following table summarizes the balance of deferred tax assets, net of deferred tax liabilities, at September 30, 2016, of $714.6 million:



	Deferred Tax Asset (Net of Liabilities)		Valuation Allowance			Net Deferred Tax Asset
United States—Federal(1)	$	660.7	$	(20.8	)	$	639.9
United States—States(1)	55.2		(18.1		)	37.1
Germany	30.9		—			30.9
Other foreign	9.3		(2.6		)	6.7
Total	$	756.1	$	(41.5	)	$	714.6

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(1)	The U.S. federal deductions generated relating to emergence of $1,800 million, plus the $30 million ZAI PD deferred payment obligation, account for a majority of the U.S. federal and state deferred tax assets.

Grace will need to generate approximately $1,800 million of U.S. federal taxable income by 2035 (or approximately $95 million per year during the carryforward period) to fully realize the U.S. federal net deferred tax assets.

As discussed in Notes 1 and 15, the Separation of Grace and GCP was completed on February 3, 2016. In conjunction with the Separation, approximately $85 million of Grace’s deferred tax assets were transferred to GCP. As a result of the early adoption of ASU 2016-09, Grace recognized excess tax benefits in the Consolidated Balance Sheets which were previously not recognized. This increased Grace's deferred tax assets as of January 1, 2016, by $70.4 million, which is net of a $20.5 million valuation allowance.

The following table summarizes expiration dates in jurisdictions where Grace has, or will have, material tax loss and credit carryforwards:



	Expiration Dates
United States—Federal (NOLs)	2034 - 2035
United States—Federal (Credits)	2019 - 2025
United States—States (NOLs)	2016 - 2035

In evaluating its ability to realize its deferred tax assets, Grace considers all reasonably available positive and negative evidence, including recent earnings experience, expectations of future taxable income and the tax character of that income, the period of time over which the temporary differences become deductible and the carryforward and/or carryback periods available to Grace for tax reporting purposes in the related jurisdiction. In estimating future taxable income, Grace relies upon assumptions and estimates about future activities, including the amount of future federal, state and international pretax operating income that Grace will generate; the reversal of temporary differences; and the implementation of feasible and prudent tax planning strategies. Grace records a valuation allowance to reduce deferred tax assets to the amount that it believes is more likely than not to be realized. Through September 30, 2016, Grace increased its valuation allowance by $12.8 million related to state NOL carryforwards and $20.5 million primarily for foreign tax credits recognized upon the adoption of ASU 2016-09.

As of December 31, 2014, Grace had the intent and ability to indefinitely reinvest undistributed earnings of its foreign subsidiaries outside the United States. However, in connection with the Separation, Grace repatriated a total of $173.1 million of foreign earnings from foreign subsidiaries transferred to GCP pursuant to the Separation. Such amount was determined based on an analysis of each non-U.S. subsidiary's requirements for working capital, debt repayment and strategic initiatives. Grace also considered local country legal and regulatory restrictions. Grace included tax expense in discontinued operations of $19.0 million in 2015 for repatriation and $1.7 million in 2016 for deemed repatriation attributable to both current and prior years' earnings. The tax effect of the repatriation is determined by several variables including the tax rate applicable to the entity making the distribution, the cumulative earnings and associated foreign taxes of the entity and the extent to which those earnings may have already been taxed in the U.S.

Grace believes that the Separation was a one-time, non-recurring event and that recognition of deferred taxes on undistributed earnings would not have occurred if not for the Separation. Subsequent to separation, Grace expects undistributed prior-year earnings of its foreign subsidiaries to remain permanently reinvested except in certain instances where repatriation of such earnings would result in minimal or no tax. Grace bases this assertion on:


(1)	the expectation that it will satisfy its U.S. cash obligations in the foreseeable future without requiring the repatriation of prior-year foreign earnings;


(2)	plans for significant and continued reinvestment of foreign earnings in organic and inorganic growth initiatives outside the U.S.; and


(3)	remittance restrictions imposed by local governments.

Grace will continually analyze and evaluate its cash needs to determine the appropriateness of its indefinite reinvestment assertion.