10. Income Taxes

Income Tax Expense

Our income tax expense was as follows:

	For the year ended December 31,
	2015			2014			2013
	(in millions)
Current income taxes:
U.S. federal	$	225.9		$	242.1		$	109.5
State		12.3			4.7			7.7
Foreign		32.6			67.6			69.7
Tax benefit of operating loss carryforward		(52.0	)		(163.0	)		(134.1	)

Total current income taxes		218.8			151.4			52.8
Deferred income taxes (benefits):
U.S. federal		79.1			148.0			155.1
State		(1.0	)		(32.8	)		(3.1	)
Foreign		(119.3	)		51.9			(16.9	)

Total deferred income taxes (benefits)		(41.2	)		167.1			135.1

Total income taxes	$	177.6		$	318.5		$	187.9

Effective Income Tax Rate

Our provision for income taxes may not have the customary relationship of taxes to income. A reconciliation between the U.S. corporate income tax rate and the effective income tax rate was as follows:

	For the year ended December 31,
	2015			2014			2013
U.S. corporate income tax rate		35	%		35	%		35	%
Dividends received deduction		(11	)		(10	)		(10	)
Merger of Chilean legal entities		(7	)		—			—
Impact of equity method presentation		(3	)		(2	)		(3	)
Tax credits		(2	)		(2	)		—
Interest exclusion from taxable income		(1	)		(1	)		(2	)
Foreign tax rate differential		—			(2	)		(2	)
Impact of court ruling on some uncertain tax positions		3			—			—
Impact of enactment of tax legislation		—			4			1
Other		(2	)		(1	)		(2	)

Effective income tax rate		12	%		21	%		17	%

Unrecognized Tax Benefits

A summary of the changes in unrecognized tax benefits follows.

	For the year ended December 31,
	2015			2014
	(in millions)
Balance at beginning of period	$	172.4		$	108.9
Additions based on tax positions related to the current year		12.9			12.9
Additions for tax positions of prior years		45.9			62.5
Reductions for tax positions related to the current year		(8.7	)		(8.4	)
Reductions for tax positions of prior years		(3.5	)		(0.2	)
Settlements		—			(3.3	)

Balance at end of period (1)	$	219.0		$	172.4


(1)	Of this amount, $79.5 million, if recognized, would reduce the 2015 effective income tax rate. We recognize interest and penalties related to uncertain tax positions in operating expenses.

As of December 31, 2015 and 2014, we had recognized $137.9 million and $100.4 million of accumulated pre-tax interest and penalties related to unrecognized tax benefits, respectively.

Net Deferred Income Taxes

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. Significant components of our net deferred income taxes were as follows:

	December 31,
	2015			2014
	(in millions)
Deferred income tax assets:
Insurance liabilities	$	85.8		$	390.8
Investments, including derivatives		368.8			395.1
Net operating loss carryforwards		80.9			128.4
Tax credit carryforwards		227.4			163.2
Employee benefits		534.8			506.6
Foreign currency translation		123.4			61.8
Other deferred income tax assets		64.3			94.5

Gross deferred income tax assets		1,485.4			1,740.4
Valuation allowance		(11.9	)		(4.1	)

Total deferred income tax assets		1,473.5			1,736.3
Deferred income tax liabilities:
Deferred acquisition costs		(866.1	)		(774.2	)
Investments, including derivatives		(379.6	)		(411.1	)
Net unrealized gains on available-for-sale securities		(431.2	)		(1,004.6	)
Real estate		(123.1	)		(133.9	)
Intangible assets		(235.4	)		(314.2	)
Other deferred income tax liabilities		(39.3	)		(42.8	)

Total deferred income tax liabilities		(2,074.7	)		(2,680.8	)

Total net deferred income tax liabilities	$	(601.2	)	$	(944.5	)

Net deferred income taxes by jurisdiction were as follows:

	December 31,
	2015			2014
	(in millions)
Deferred income tax assets:
State	$	53.3		$	35.3
Foreign		42.7			55.5

Net deferred income tax assets		96.0			90.8
Deferred income tax liabilities:
U.S. federal		(459.5	)		(663.7	)
Foreign		(237.7	)		(371.6	)

Net deferred income tax liabilities		(697.2	)		(1,035.3	)

Total net deferred income tax liabilities	$	(601.2	)	$	(944.5	)

In management's judgment, total deferred income tax assets are more likely than not to be realized. Included in the deferred income tax asset are tax carryforwards available to offset future taxable income or income taxes. As of December 31, 2015 and 2014, we have tax credit carryforwards for U.S. federal income tax purposes of $227.4 million and $163.2 million, respectively. Alternative minimum, foreign and general business tax credit carryovers were generated during the period we utilized net operating losses, primarily attributable to our captive reinsurance companies that joined our consolidated U.S. federal income tax return beginning in 2012 and 2013. Some of these tax credit carryforwards will expire in 2023 while others never expire. As of December 31, 2015, all accumulated U.S. federal tax credit carryforwards are anticipated to be utilized before expiration; therefore, no valuation allowance has been provided for the related deferred income tax assets.

As of December 31, 2015 and 2014, domestic state net operating loss carryforwards were $387.7 million and $408.7 million, respectively, and expired or will expire between 2015 and 2034. As of December 31, 2015 and 2014, foreign net operating loss carryforwards generated primarily in Chile were $197.1 million and $231.9 million, respectively, with some expiring in 2016 while others never expire. We maintain valuation allowances by jurisdiction against the deferred income tax assets related to certain of these carryforwards and other items, as utilization of these income tax benefits fail the more likely than not criteria in certain jurisdictions. As of December 31, 2015 and 2014, valuation allowances of $11.9 million and $4.1 million, respectively, have been recorded against the income tax benefits associated primarily with foreign net operating loss carryforwards. Adjustments to the valuation allowance will be made if there is a change in management's assessment of the amount of the deferred income tax assets that are more likely than not to be realized.

Tax legislation increasing the Brazilian tax rate was enacted in September 2015. The three-year rate increase did not have a material impact on our consolidated results. Tax legislation transitioning an increase in the Chilean tax rate over five years was enacted in September, 2014. Our net deferred tax liabilities increased $58.1 million in the third quarter of 2014 as a result of the legislation in Chile.

We are a U.S. shareholder in various foreign entities classified as controlled foreign corporations ("CFCs") for U.S. tax purposes. U.S. shareholders of CFCs are generally required to take into account as gross income in the U.S. certain passive income earned by the CFCs ("Subpart F income") even if the income is not currently distributed. Temporary exceptions (the "active financing" and "look through" exceptions) were applicable for tax years beginning before January 1, 2015, to avoid the current recognition of Subpart F income derived in either the active conduct of a banking, financing, insurance or similar business or for certain payments between related corporations in different foreign jurisdictions. The U.S. Congress passed and the President enacted legislation on December 18, 2015, retroactive to January 1, 2015, permanently extending the active financing exception and extending the look-through exception for five years. This legislation did not have a material impact on our consolidated results.

As of December 31, 2015 and 2014, U.S. federal and state deferred income taxes have not been provided on approximately $1,004.6 million and $824.8 million, respectively, of accumulated but undistributed earnings from operations of foreign subsidiaries. These earnings are considered to be indefinitely reinvested in the business. It is not practicable to determine the amount of the unrecognized deferred tax liability that would arise if these earnings were remitted due to foreign tax credits and exclusions that may become available at the time of remittance. At December 31, 2015, deferred taxes were also not provided on the approximately $106.2 million of excess book carrying value over tax basis with respect to the original investment of our foreign subsidiaries. A tax liability will be recognized when we no longer plan to indefinitely reinvest a portion or all of these earnings or when we plan to sell a portion or all of our ownership interest.

Other Tax Information

Income tax returns are filed in the U.S. federal jurisdiction as well as various states and foreign jurisdictions where we and one or more of our subsidiaries conduct business. Although determined by jurisdiction, with few exceptions our tax uncertainties relate primarily to the U.S. federal jurisdiction. The Internal Revenue Service ("IRS") has completed examination of our consolidated U.S. federal income tax returns for years prior to 2009. We are contesting certain issues and have filed suit in the Court of Federal Claims, requesting refunds for the years 1995-2003. We believe there is a reasonable possibility this litigation can be resolved within the next twelve months. As of December 31, 2015 and 2014, we had $229.9 million and $298.3 million, respectively, of current income tax receivables associated with outstanding audit issues reported as other assets in our consolidated statements of financial position.

We filed claims for refund for tax years 2006 through 2008 in 2015. The IRS commenced audit of our U.S. federal income tax return for 2009 in the fourth quarter of 2011, 2010 in the first quarter of 2012, 2011 in the first quarter of 2013, and 2012 in the third quarter of 2015. We do not expect the results of these audits or developments in other tax areas for all open tax years to significantly change the possible increase in the amount of unrecognized tax benefits, but the outcome of tax reviews is uncertain and unforeseen results can occur.

The U.S. Court of Federal Claims denied cross-motions for partial summary judgment on February 4, 2015, and ordered a trial on the previously taxed income issue in the case of Principal Life Insurance Company and Subsidiaries ("Principal Life") v. the United States. Previously, in the same case, on May 9, 2014, the court ruled against Principal Life's tax treatment of transactions involving the purchase and sale of principal-only certificates. These recent events caused the re-evaluation of all our pending uncertain tax positions, which resulted in a $30.3 million reduction in net income in the first quarter of 2015 and a $47.5 million reduction in net income in the second quarter of 2014. We believe that we have adequate defenses against, or sufficient provisions for, the contested issues, but final resolution could take several years while legal remedies are pursued. Consequently, we do not expect the ultimate resolution of issues from tax years 1995-2003 or those that might arise in tax years subsequent to 2003 to have a material impact on our net income. We do not believe there is a reasonable possibility the total amount of uncertain tax benefits will significantly increase or decrease in the next twelve months.