16.

Income Taxes

The components of earnings before income taxes consisted of the following (in millions):


For the Years Ended December 31,	2015			2014			2013
United States operations	$	(246.2	)	$	403.3		$	412.4
Foreign operations		399.4			536.1			595.7

Total	$	153.2		$	939.4		$	1,008.1


The provision for income taxes and the income taxes paid consisted of (in millions):

Current:
Federal	$	55.8		$	178.2		$	207.2
State		18.9			16.5			20.8
Foreign		96.3			116.0			127.7

		171.0			310.7			355.7

Deferred:
Federal		(120.6	)		(54.8	)		(91.8	)
State		(20.0	)		(6.6	)		(8.4	)
Foreign		(23.4	)		(29.1	)		(26.0	)

		(164.0	)		(90.5	)		(126.2	)

Provision for income taxes	$	7.0		$	220.2		$	229.5

Income taxes paid	$	193.6		$	340.1		$	272.3

A reconciliation of the U.S. statutory income tax rate to our effective tax rate is as follows:


For the Years Ended December 31,	2015			2014			2013
U.S. statutory income tax rate		35.0	%		35.0	%		35.0	%
State taxes, net of federal deduction		(2.4	)		0.7			0.8
Tax impact of foreign operations, including foreign tax credits		(40.2	)		(11.7	)		(12.1	)
Change in valuation allowance		(3.7	)		–			–
Non-deductible expenses		2.4			–			–
Tax impact of certain significant transactions		21.6			1.4			1.6
Tax benefit relating to U.S. manufacturer’s deduction and export sales		(6.2	)		(1.9	)		(1.8	)
R&D credit		(2.5	)		(0.2	)		(0.6	)
Other		0.6			0.1			(0.1	)

Effective income tax rate		4.6	%		23.4	%		22.8	%

Our operations in Puerto Rico and Switzerland benefit from various tax incentive grants. These grants expire between fiscal years 2019 and 2029.

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. Valuation allowances are recorded to reduce deferred income tax assets when it is more likely than not that an income tax benefit will not be realized.

The components of deferred taxes consisted of the following (in millions):


As of December 31,	2015			2014
Deferred tax assets:
Inventory	$	159.7		$	275.1
Net operating loss carryover		117.4			116.9
Tax credit carryover		207.8			185.5
Capital loss carryover		4.2			7.4
Accrued liabilities		190.2			106.7
Share-based compensation		59.0			59.9
Accounts receivable		23.7			–
Unremitted earnings of foreign subsidiaries		–			32.3
Other		133.6			50.3

Total deferred tax assets		895.6			834.1
Less: Valuation allowances		(72.7	)		(122.8	)

Total deferred tax assets after valuation allowances		822.9			711.3

Deferred tax liabilities:
Fixed assets	$	(144.6	)	$	(104.3	)
Intangible assets		(2,337.2	)		(95.9	)
Unremitted earnings of foreign subsidiaries		(1,374.8	)		–
Other		(4.3	)		–

Total deferred tax liabilities		(3,860.9	)		(200.2	)

Total net deferred income taxes	$	(3,038.0	)	$	511.1

Net operating loss carryovers are available to reduce future federal, state and foreign taxable earnings. At December 31, 2015, $103.9 million of these net operating loss carryovers generally expire within a period of 1 to 20 years and $13.5 million of these net operating loss carryovers have an indefinite life. Valuation allowances for net operating loss carryovers have been established in the amount of $47.0 million and $99.0 million at December 31, 2015 and 2014, respectively.

Deferred tax assets related to tax credit carryovers are available to offset future federal, state and foreign tax liabilities. At December 31, 2015, the Company’s total tax credit carryovers of $207.8 million generally expire within a period of 1 to 10 years. Valuation allowances for certain tax credit carryovers have been established in the amount of $14.4 million and $11.5 million at December 31, 2015 and 2014, respectively.

Deferred tax assets related to capital loss carryovers are also available to reduce future federal capital gains. At December 31, 2015, the Company’s capital loss carryovers of $4.2 million generally expire within a period of 2 to 4 years. Valuation allowances for certain capital loss carryovers have been established in the amount of $4.2 million and $7.4 million at December 31, 2015 and 2014, respectively. The remaining valuation allowances booked against deferred tax assets of $7.1 million and $4.9 million at December 31, 2015 and 2014, respectively, relate primarily to intangible assets and potential capital losses that management believes, more likely than not, will not be realized.

At December 31, 2015, we had an aggregate of approximately $3,853 million of unremitted earnings of foreign subsidiaries that have been, or are intended to be, indefinitely reinvested for continued use in foreign operations. If the total undistributed earnings of foreign subsidiaries were remitted, a significant amount of the additional tax would be offset by the allowable foreign tax credits. It is not practical for us to determine the additional tax related to remitting these earnings.

The following is a tabular reconciliation of the total amounts of unrecognized tax benefits (in millions):


For the Years Ended December 31,	2015			2014			2013
Balance at January 1	$	321.7		$	311.0		$	293.9
Increase related to the merger*		247.6			–			–
Increases related to prior periods		1.3			0.9			16.5
Decreases related to prior periods		–			(3.8	)		(17.3	)
Increases related to current period		25.7			18.3			20.8
Decreases related to settlements with taxing authorities		(1.4	)		(3.0	)		(2.9	)
Decreases related to lapse of statute of limitations		(3.0	)		(1.7	)		–

Balance at December 31	$	591.9		$	321.7		$	311.0

Amounts impacting effective tax rate, if recognized balance at December 31*	$	526.6		$	186.3		$	191.2

* Subject to change during measurement period of the merger.

We recognize accrued interest and penalties related to unrecognized tax benefits as income tax expense. During 2015, we accrued interest and penalties of $4.8 million, and as of December 31, 2015, had a recognized liability for interest and penalties of $82.9 million, which included a $29.8 million increase from December 31, 2014 related to the Biomet merger.

During 2014, we accrued interest and penalties of $5.9 million, and as of December 31, 2014, had recognized a liability for interest and penalties of $48.3 million. During 2013, we accrued interest and penalties of $8.1 million, and as of December 31, 2013, had recognized a liability for interest and penalties of $42.4 million.

We operate on a global basis and are subject to examinations by taxing authorities throughout the world, including major jurisdictions such as: Australia, Canada, China, France, Germany, Ireland, Italy, Japan, Luxembourg, the Netherlands, Puerto Rico, Spain, Switzerland, the United Kingdom and the United States.

Our U.S. Federal income tax returns have been audited through 2009 and are currently under audit for years 2010-2014. The IRS has proposed adjustments for years 2005-2009, reallocating profits between certain of our U.S. and foreign subsidiaries. We have disputed these adjustments and intend to continue to vigorously defend our positions. For years 2005-2007, we have filed a petition with the U.S. Tax Court. For years 2008-2009, we are pursuing resolution through the IRS Administrative Appeals Process. The acquired Biomet consolidation group has been audited through financial year 2008.

State income tax returns are generally subject to examination for a period of 3 to 5 years after filing of the respective return. The state impact of any federal changes generally remains subject to examination by various states for a period of up to one year after formal notification to the states. We have various state income tax return positions in the process of examination, administrative appeals or litigation.

In other major jurisdictions, open years are generally 2008 or later.

The net amount of tax liability for unrecognized tax benefits may change within the next twelve months due to changes in audit status, expiration of statutes of limitations, settlements of tax assessments and other events which could impact our determination of unrecognized tax benefits. Currently, we cannot reasonably estimate the amount by which our unrecognized tax benefits will change.