16.

Income Taxes

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


	For the Years Ended December 31,
	2016			2015			2014
United States operations	$	(251.8	)	$	(246.2	)	$	403.3
Foreign operations		651.4			399.4			536.1

Total	$	399.6		$	153.2		$	939.4


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

Current:
Federal	$	134.2		$	55.8		$	178.2
State		12.4			18.9			16.5
Foreign		101.6			96.3			116.0

		248.2			171.0			310.7

Deferred:
Federal		(108.5	)		(120.6	)		(54.8	)
State		2.3			(20.0	)		(6.6	)
Foreign		(47.0	)		(23.4	)		(29.1	)

		(153.2	)		(164.0	)		(90.5	)

Provision for income taxes	$	95.0		$	7.0		$	220.2

Income taxes paid	$	269.6		$	193.6		$	340.1

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


	For the Years Ended December 31,
	2016			2015			2014
U.S. statutory income tax rate		35.0	%		35.0	%		35.0	%
State taxes, net of federal deduction		2.0			(1.7	)		0.8
Tax impact of foreign operations, including foreign tax credits		(11.0	)		(62.3	)		(14.2	)
Change in valuation allowance		–			(3.7	)		–
Non-deductible expenses		0.9			2.4			–
Tax impact of certain significant transactions		1.6			21.6			1.4
Tax benefit relating to U.S. manufacturer’s deduction and export sales		(4.7	)		(6.2	)		(1.9	)
R&D credit		(1.9	)		(4.2	)		(0.2	)
Share based compensation		(2.9	)		1.1			0.2
Net uncertain tax positions, including interest and penalties		4.2			22.9			2.2
Other		0.6			(0.3	)		0.1

Effective income tax rate		23.8	%		4.6	%		23.4	%

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,
	2016			2015
Deferred tax assets:
Inventory	$	260.3		$	159.7
Net operating loss carryover		181.3			117.4
Tax credit carryover		110.4			207.8
Capital loss carryover		2.3			4.2
Accrued liabilities		182.2			190.2
Share-based compensation		60.3			59.0
Accounts receivable		22.3			23.7
Other		101.9			133.6

Total deferred tax assets		921.0			895.6
Less: Valuation allowances		(88.3	)		(72.7	)

Total deferred tax assets after valuation allowances		832.7			822.9

Deferred tax liabilities:
Fixed assets	$	138.7		$	144.6
Intangible assets		2,343.7			2,337.2
Unremitted earnings of foreign subsidiaries		1,159.4			1,374.8
Other		–			4.3

Total deferred tax liabilities		3,641.8			3,860.9

Total net deferred income taxes	$	(2,809.1	)	$	(3,038.0	)

Net operating loss carryovers are available to reduce future federal, state and foreign taxable earnings. At December 31, 2016, $157.1 million of these net operating loss carryovers generally expire within a period of 1 to 20 years and $24.2 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 $70.8 million and $47.0 million at December 31, 2016 and 2015, respectively.

Deferred tax assets related to tax credit carryovers are available to offset future federal, state and foreign tax liabilities. At December 31, 2016, the Company’s total tax credit carryovers of $110.4 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 $11.9 million and $14.4 million at December 31, 2016 and 2015, respectively.

Deferred tax assets related to capital loss carryovers are also available to reduce future federal capital gains. At December 31, 2016, the Company’s capital loss carryovers of $2.3 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 $0.2 million and $4.2 million at December 31, 2016 and 2015, respectively. The remaining valuation allowances booked against deferred tax assets of $5.4 million and $7.1 million at December 31, 2016 and 2015, respectively, relate primarily to intangible assets and potential capital losses that management believes, more likely than not, will not be realized.

At December 31, 2016, we had an aggregate of approximately $4,677.0 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 portion 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,
	2016			2015			2014
Balance at January 1	$	591.9		$	321.7		$	311.0
Increases related to business combinations*		70.2			247.6			–
Increases related to prior periods		36.7			1.3			0.9
Decreases related to prior periods		(94.7	)		–			(3.8	)
Increases related to current period		53.0			25.7			18.3
Decreases related to settlements with taxing authorities		(3.2	)		(1.4	)		(3.0	)
Decreases related to lapse of statute of limitations		(4.6	)		(3.0	)		(1.7	)

Balance at December 31	$	649.3		$	591.9		$	321.7

Amounts impacting effective tax rate, if recognized balance at December 31*	$	511.5		$	443.7		$	186.3

* Subject to change during measurement period of business combinations.

We recognize accrued interest and penalties related to unrecognized tax benefits as income tax expense. During 2016, we accrued interest and penalties of $19.3 million, and as of December 31, 2016, had a recognized liability for interest and penalties of $110.8 million, which included a $8.6 million increase from December 31, 2015 related to the Biomet merger.

During 2015, we accrued interest and penalties of $4.8 million, and as of December 31, 2015, had recognized a liability for interest and penalties of $82.9 million, which included an increase of $29.8 million 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.

We operate on a global basis and are subject to numerous and complex tax laws and regulations. Additionally, tax laws have and continue to undergo rapid changes in both application and interpretation by various countries, including state aid interpretations and the Organization for Economic Cooperation and Development led initiatives. Our income tax filings are subject to examinations by taxing authorities throughout the world. Income tax audits may require an extended period of time to reach resolution and may result in significant income tax adjustments when interpretation of tax laws or allocation of company profits is disputed.

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 U.S. federal income tax returns of the acquired Biomet consolidated group have been audited through fiscal 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 2009 or later.

Although ultimate timing is uncertain, 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. Management’s best estimate of such change is within the range of $300 million decrease to $50 million increase.