Income Taxes

The provision for income taxes consisted of the following (U.S. dollars in millions):



	Year ended
	December 29, 2017			December 30, 2016			January 1, 2016
Current:
U.S. federal income tax	$	8.4		$	7.6		$	4.7
State	1.5			1.4			0.5
Non-U.S.	13.4			11.0			7.6
	23.3			20.0			12.8
Deferred:
U.S. federal income tax	2.1			(3.3		)	1.6
State	0.5			(0.6		)	0.3
Non-U.S.	(1.0		)	(4.3		)	(1.0		)
	1.6			(8.2		)	0.9
	$	24.9		$	11.8		$	13.7

Income (loss) before income taxes consisted of the following (U.S. dollars in millions):



	Year ended
	December 29, 2017		December 30, 2016		January 1, 2016
U.S.	$	31.1	$	16.0	$	(49.4	)
Non-U.S.	113.0		221.4		129.5
	$	144.1	$	237.4	$	80.1

10. Income Taxes (continued)

The differences between the reported provision for income taxes and income taxes computed at the U.S. statutory federal income tax rate are explained in the following reconciliation (U.S. dollars in millions):



	Year ended
	December 29, 2017			December 30, 2016			January 1, 2016
Income tax provision (benefit) computed at the U.S. statutory federal rate	$	50.4		$	83.1		$	28.0
Effect of tax rates on non-U.S. operations	(67.4		)	(98.8		)	(112.9		)
Provision for uncertain tax positions	0.7			(0.5		)	0.6
Non-deductible interest	2.4			2.0			—
Foreign exchange	2.3			15.1			(17.2		)
Non-deductible intercompany charges	—			1.2			(0.3		)
Non-deductible differences	6.0			1.7			0.6
Non-taxable income/loss	0.3			11.8			(2.2		)
Non-deductible goodwill impairment	—			0.4			23.1
Adjustment to deferred balances	0.1			—			(1.2		)
Other	(0.9		)	0.9			(0.4		)
Other taxes in lieu of income	1.8			1.9			1.3
Change in deferred rate	11.7			(3.4		)	1.4
Increase (decrease) in valuation allowance ⁽¹⁾	17.5			(3.6		)	92.9
Provision for income taxes	$	24.9		$	11.8		$	13.7

_____________

⁽¹⁾ The increase in valuation allowance includes effects of foreign exchange and adjustments to deferred tax balances which were fully offset by valuation allowance.

10. Income Taxes (continued)

Deferred income tax assets and liabilities consisted of the following (U.S. dollars in millions):



		December 29,			December 30,
Deferred tax liabilities:		2017			2016
	Allowances and other accrued liabilities	$	—		$	(2.1	)
	Inventories	(15.3		)	(14.8		)
	Property, plant and equipment	(63.2		)	(63.9		)
	Equity in earnings of unconsolidated companies	(0.1		)	(0.2		)
	Pension obligations	(2.1		)	(2.6		)
	Other noncurrent deferred tax liabilities	(5.6		)	(8.1		)

Total noncurrent deferred tax liabilities		$	(86.3	)	$	(91.7	)

Deferred tax assets:
	Allowances and other accrued assets	$	10.6		$	12.8
	Inventories	5.3			7.1
	Pension obligations	24.9			22.9
	Property, plant and equipment	1.5			1.6
	Post-retirement benefits other than pension	1.1			1.1
	Net operating loss carryforwards	249.7			225.5
	Capital loss carryover	2.6			2.4
	Other noncurrent assets	20.5			24.9
	Total noncurrent deferred tax assets	316.2			298.3
	Valuation allowance	(257.1		)	(232.1		)

Total deferred tax assets, net		$	59.1		$	66.2

Net deferred tax liabilities		$	(27.2	)	$	(25.5	)

The valuation allowance increased by $25.0 million in 2017 and by $6.3 million in 2016. The increase in 2017 and 2016 relates primarily to valuation allowance on additional net operating loss carryforwards offset by the effect of a change in judgment about our ability to realize deferred tax assets in future years, due to our current and foreseeable operations.

At December 29, 2017, the valuation allowance includes $0.4 million for which subsequently recognized tax benefits will be recognized directly in contributed capital.

At December 29, 2017, undistributed earnings of the Company’s foreign subsidiaries amounted to $1,544.1 million. Those earnings are considered to be either indefinitely reinvested, or the earnings could be distributed tax free. Accordingly, no taxes have been provided thereon. To the extent the earnings are considered indefinitely reinvested, determination of the amount of unrecognized deferred tax liability is not practicable due to the complexities associated with its hypothetical calculation.

10. Income Taxes (continued)

At December 29, 2017, we had approximately $918.8 million of federal and foreign tax operating loss carryforwards expiring as follows (U.S. dollars in millions):



Expires:
2018	$	3.4
2019	4.4
2020	16.5
2021	12.8
2022 and beyond	13.9
No expiration	867.8
	$	918.8

A reconciliation of the beginning and ending amount of uncertain tax positions excluding interest and penalties is as follows (U.S. dollars in millions):



	December 29, 2017			December 30, 2016			January 1, 2016
Beginning balance	$	3.2		$	3.9		$	3.5
Gross decreases - tax position in prior period	—			—			—
Gross increases - current-period tax positions	0.1			0.1			0.8
Settlements	—			—			—
Lapse of statute of limitations	(0.1		)	(0.8		)	(0.4		)
Ending balance	$	3.2		$	3.2		$	3.9

We had accrued $4.2 million in 2017 and $3.6 million in 2016, for uncertain tax positions, including interest and penalties that, if recognized would affect the effective income tax rate.

The tax years 2012-2016 remain subject to examination by taxing authorities throughout the world in major jurisdictions, such as Costa Rica, Luxembourg, Switzerland and the United States.

We classify interest and penalties on uncertain tax positions as a component of income tax expense in the Consolidated Statements of Income. Accrued interest and penalties related to uncertain tax positions are $1.1 million and $0.9 million for December 29, 2017 and December 30, 2016, respectively and are included in other noncurrent liabilities.

In connection with a current examination of the tax returns in two foreign jurisdictions, the taxing authorities have issued income tax deficiencies related to transfer pricing of approximately $134.6 million (including interest and penalties) for tax years 2012 through 2015. We strongly disagree with the proposed adjustments and have filed a protest with each of the taxing authorities as we believe that the proposed adjustments are without technical merit. We will continue to vigorously contest the adjustments and expect to exhaust all administrative and judicial remedies necessary to resolve the matters, which could be a lengthy process. We regularly assesses the likelihood of adverse outcomes resulting from examinations such as these to determine the adequacy of our tax reserves. Accordingly, we have not accrued any additional amounts based upon the proposed adjustments. There can be no assurance that these matters will be resolved in our favor, and an adverse outcome of either matter, or any future tax examinations involving similar assertions, could have a material effect on our financial condition, results of operations and cash flows.

Tax reform

On December 22, 2017, the United States enacted significant changes to tax law following the passage and signing of The Tax Cuts and Jobs Act (“the Act”).

10. Income Taxes (continued)

We are subject to the provisions of the ASC guidance on Income Taxes, which requires that the effect on deferred tax assets and liabilities of a change in tax rates be recognized in the period the tax rate change was enacted. Among other items, the legislation permanently reduces the U.S. federal corporate tax rate from 35% to 21% effective January 1, 2018. As a result, this caused our U.S. net deferred tax assets to be revalued. Our deferred tax assets represent a decrease in corporate taxes expected to be paid in the future. The reduction in the federal corporate tax rate reduces these benefits. As a result of the decrease in the U.S. corporate tax rate, in the fourth quarter we incurred a one-time, non-cash increase to income tax expense of $2.1 million for the year ended December 29, 2017.

The Act includes a transition rule that provides for a mandatory repatriation tax imposed on U.S. Companies with certain foreign subsidiaries (the "Transition Tax").

We have two subsidiaries for which the Transition Tax may apply. The SEC has issued Staff Accounting Bulletin ("SAB") No. 118 which allows us to record provisional amounts during a measurement period which is similar to the measurement period used when accounting for business combinations. Due to the fact that these two subsidiaries are equity-method investments which have not historically been material, there is a lack of information available to us at this time in order to calculate this Transition Tax. Therefore, no tax liability for the repatriation tax has been recorded at this time. We will continue to analyze available data for these subsidiaries as it becomes available, and will revise the provisional estimate for Transition Tax if needed as required by SAB 118.