15.	Income Taxes

2017 Tax Act: The President signed U.S. tax reform legislation (“2017 Tax Act”) on December 22, 2017, which is considered the enactment date. The 2017 Tax Act includes a broad range of provisions, many of which significantly differ from those contained in previous U.S. tax law. Changes in tax law are accounted for in the period of enactment. As such, our 2017 consolidated financial statements reflect the immediate tax effect of the 2017 Tax Act.

The 2017 Tax Act contains several key provisions including, among other things:

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a one-time tax on the mandatory deemed repatriation of post-1986 untaxed foreign earnings and profits (E&P), referred to as the toll charge;

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a reduction in the corporate income tax rate from 35 percent to 21 percent for tax years beginning after December 31, 2017;

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the introduction of a new U.S. tax on certain off-shore earnings referred to as global intangible low-taxed income (GILTI) at an effective tax rate of 10.5 percent for tax years beginning after December 31, 2017 (increasing to 13.125 percent for tax years beginning after December 31, 2025), with a partial offset by foreign tax credits; and

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the introduction of a territorial tax system beginning in 2018 by providing a 100 percent dividend received deduction on certain qualified dividends from foreign subsidiaries.

During the fourth quarter of 2017, we recorded an income tax benefit of $1,272.4 million, which was comprised of the following:

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income tax benefit of $715.0 million for the one-time deemed repatriation of foreign earnings. This is composed of a $1,181.0 million benefit from the removal of a deferred tax liability we had recorded for the repatriation of foreign earnings prior to the 2017 Tax Act offset by $466.0 million for the toll charge recognized under the 2017 Tax Act. In accordance with the 2017 Tax Act, we expect to elect to pay the toll charge in installments over eight years. As of December 31, 2017, we have recorded current and non-current income tax liabilities related to the toll charge of $82.0 million and $384.0 million, respectively.

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an income tax benefit of $557.4 million, primarily related to the remeasurement of our deferred tax assets and liabilities at the enacted corporate income tax rate of 21 percent.

The net benefit recorded was based on currently available information and interpretations made in applying the provisions of the 2017 Tax Act as of the time of filing this Annual Report on Form 10-K. We further refined our estimates related to the impact of the 2017 Tax Act subsequent to the issuance of our earnings release for the fourth quarter of 2017. In accordance with authoritative guidance issued by the SEC, the income tax effect for certain aspects of the 2017 Tax Act represent provisional amounts for which our accounting is incomplete, but with respect to which a reasonable estimate could be determined and recorded during the fourth quarter of 2017. The actual effects of the 2017 Tax Act and final amounts recorded may differ materially from our current estimate of provisional amounts due to, among other things, further interpretive guidance that may be issued by U.S. tax authorities or regulatory bodies, including the SEC and the FASB. We will continue to analyze the 2017 Tax Act and any additional guidance that may be issued so we can finalize the full effects of applying the new legislation on our financial statements in the measurement period, which ends in the fourth quarter of 2018.

We continue to evaluate the impacts of the 2017 Tax Act and consider the amounts recorded to be provisional. In addition, we are still evaluating the GILTI provisions of the 2017 Tax Act and their impact, if any, on our consolidated financial statements as of December 31, 2017. The FASB allows companies to adopt an accounting policy to either recognize deferred taxes for GILTI or treat such as a tax cost in the year incurred. We have not yet determined which accounting policy to adopt because determining the impact of the GILTI provisions requires analysis of our existing legal entity structure, the reversal of our U.S. GAAP and U.S. tax basis differences in the assets and liabilities of our foreign subsidiaries, and our ability to offset any tax with foreign tax credits. As such, we did not record a deferred income tax expense or benefit related to the GILTI provisions in our consolidated statement of earnings for the year ended December 31, 2017, and we plan to finalize this during the measurement period.

We recorded a provisional amount for the toll charge, which represents our reasonable estimate of the liability due for the one-time mandatory deemed repatriation of our post-1986 untaxed foreign E&P. Determining the provisional toll charge liability required a significant effort based on a number of factors including:

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analyzing our accumulated untaxed foreign E&P since 1986, including historical practices and assertions made in determining such E&P;

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determining the composition, including intercompany receivables and payables of specified foreign corporations, of our post-1986 untaxed foreign E&P that is held in cash or liquid assets and other assets at several measurement dates, as a different tax rate is applied to each when determining the toll charge liability;

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assessing the potential impact of existing uncertain tax positions in determining our accumulated undistributed E&P; and

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assessing the impact of November 30 tax year end entities which have measurement dates into 2018.

For the aforementioned factors, as well as the proximity of the enactment of the 2017 Tax Act to our year-end, we had limited time to understand the 2017 Tax Act and its various interpretations (including any additional guidance issued through the time of filing this Annual Report on Form 10-K), to assess how to apply the new law to our specific facts and circumstances and determine the toll charge. These factors also contributed to the tax effects recorded being provisional amounts. In addition, we made certain assumptions in determining the provisional toll charge that may result in adjustments when we finalize our analysis and accounting for the 2017 Tax Act, which will include, but will not be limited to, the following:

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finalizing our analysis of our post-1986 untaxed foreign E&P;

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finalizing the impact of November 30 tax year ends of certain entities, including 2018 results;

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finalizing our analysis as to the amounts and nature of, among other items, our intercompany transactions and balances as of various dates to determine the appropriate composition of our post-1986 untaxed E&P as either cash / liquid assets or other assets; and

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finalizing our analysis of the impacts on our accounting of the GILTI provisions of the 2017 Tax Act.

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

	For the Years Ended December 31,
	2017			2016			2015
United States operations	$	(114.0	)	$	(251.8	)	$	(246.2	)
Foreign operations		578.6			651.4			399.4
Total	$	464.6		$	399.6		$	153.2

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

Current:
Federal	$	438.5		$	134.2		$	55.8
State		2.4			12.4			18.9
Foreign		(13.7	)		101.6			96.3
		427.2			248.2			171.0
Deferred:
Federal		(1,728.5	)		(108.5	)		(120.6	)
State		(95.5	)		2.3			(20.0	)
Foreign		48.0			(47.0	)		(23.4	)
		(1,776.0	)		(153.2	)		(164.0	)
(Benefit) provision for income taxes	$	(1,348.8	)	$	95.0		$	7.0
Income taxes paid	$	266.9		$	269.6		$	193.6

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

	For the Years Ended December 31,
	2017				2016				2015
U.S. statutory income tax rate		35.0		%		35.0		%		35.0		%
State taxes, net of federal deduction		1.8				2.0				(1.7	)
Tax impact of foreign operations, including U.S. taxes on international income and foreign tax credits		(32.0	)			(11.0	)			(62.3	)
Change in valuation allowance		0.8				-				(3.7	)
Non-deductible expenses		2.7				0.9				2.4
Goodwill impairment		22.5				-				-
Tax rate change		(24.0	)			-				-
Tax impact of certain significant transactions		-				1.6				21.6
Tax benefit relating to U.S. manufacturer’s deduction		(1.7	)			(4.7	)			(6.2	)
R&D tax credit		(1.2	)			(1.9	)			(4.2	)
Share-based compensation		(2.6	)			(2.9	)			1.1
Net uncertain tax positions, including interest and penalties		(17.0	)			4.2				22.9
U.S. tax reform		(273.8	)			-				-
Other		(0.8	)			0.6				(0.3	)
Effective income tax rate		(290.3	)	%		23.8		%		4.6		%

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. As a result of the 2017 Tax Act, we recorded a provisional income tax benefit of $1,738.4 million, primarily related to the remeasurement of our deferred tax assets and liabilities at the enacted corporate income tax rate of 21 percent and the removal of the deferred tax liability for repatriation of foreign earnings due to the toll charge provisions.

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

	As of December 31,
	2017			2016
Deferred tax assets:
Inventory	$	246.8		$	260.3
Net operating loss carryover		165.1			181.3
Tax credit carryover		163.8			110.4
Capital loss carryover		6.9			2.3
Accrued liabilities		102.5			182.2
Share-based compensation		26.8			60.3
Accounts receivable		17.3			22.3
Other		84.9			101.9
Total deferred tax assets		814.1			921.0
Less: Valuation allowances		(140.6	)		(88.3	)
Total deferred tax assets after valuation allowances		673.5			832.7
Deferred tax liabilities:
Fixed assets	$	85.6		$	138.7
Intangible assets		1,423.0			2,343.7
Unremitted earnings of foreign subsidiaries		-			1,159.4
Other		18.2			-
Total deferred tax liabilities		1,526.8			3,641.8
Total net deferred income taxes	$	(853.3	)	$	(2,809.1	)

Net operating loss carryovers are available to reduce future federal, state and foreign taxable earnings. At December 31, 2017, $107.4 million of these net operating loss carryovers generally expire within a period of 1 to 20 years and $57.7 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 $105.0 million and $70.8 million at December 31, 2017 and 2016, respectively.

Deferred tax assets related to tax credit carryovers are available to offset future federal, state and foreign tax liabilities. At December 31, 2017, $163.7 million of these tax credit carryovers generally expire within a period of 1 to 19 years and $0.1 million of these tax credit carryovers have an indefinite life. Valuation allowances for certain tax credit carryovers have been established in the amount of $18.5 million and $11.9 million at December 31, 2017 and 2016, respectively.

Deferred tax assets related to capital loss carryovers are also available to reduce future federal and foreign capital gains. At December 31, 2017, $2.7 million of these capital loss carryovers generally expire within a period of 1 to 4 years and $4.2 million of these capital loss carryovers have an indefinite life. Valuation allowances for certain capital loss carryovers have been established in the amount of $5.5 million and $0.2 million at December 31, 2017 and 2016, respectively. The remaining valuation allowances booked against deferred tax assets of $11.6 million and $5.4 million at December 31, 2017 and 2016, respectively, relate primarily to accrued liabilities and intangible assets that management believes, more likely than not, will not be realized.

Many of our operations are conducted outside the United States. Under the 2017 Tax Act, a company’s post-1986 previously untaxed foreign E&P are mandatorily deemed to be repatriated and taxed, which is also referred to as the toll charge. The toll charge is assessed regardless of whether or not a company has cash in its foreign subsidiaries. In prior years, we recorded U.S. deferred tax liabilities of $1,159.4 million for certain offshore earnings that were expected to be remitted to our domestic operations. These deferred tax liabilities reduced the income tax expense recorded in the fourth quarter of 2017 for the toll charge. We intend to repatriate at least $3.6 billion of unremitted earnings, in line with our prior year assertion. The remaining amounts earned overseas were expected to be permanently reinvested outside of the United States, and therefore, no accrual for U.S. taxes was recorded. We continue to evaluate our assertions on any remaining outside basis differences in our foreign subsidiaries as of December 31, 2017 and have not completed our analysis. In accordance with authoritative guidance issued by the SEC, we expect to finalize our accounting related to the toll charge and any remaining outside basis differences in our foreign subsidiaries during later periods as we complete our analysis, computations and assertions.

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

	For the Years Ended December 31,
	2017			2016			2015
Balance at January 1	$	649.3		$	591.9		$	321.7
Increases related to business combinations		70.2			70.2			247.6
Increases related to prior periods		172.8			36.7			1.3
Decreases related to prior periods		(262.2	)		(94.7	)		-
Increases related to current period		24.8			53.0			25.7
Decreases related to settlements with taxing authorities		(21.7	)		(3.2	)		(1.4	)
Decreases related to lapse of statute of limitations		(6.4	)		(4.6	)		(3.0	)
Balance at December 31	$	626.8		$	649.3		$	591.9
Amounts impacting effective tax rate, if recognized balance at December 31	$	499.6		$	511.5		$	443.7

We recognize accrued interest and penalties related to unrecognized tax benefits as income tax expense. During 2017, we released interest and penalties of $38.3 million, and as of December 31, 2017, had a recognized liability for interest and penalties of $75.7 million, which included an increase of $3.0 million from December 31, 2016 related to business combinations.

During 2016, we accrued interest and penalties of $19.3 million, and as of December 31, 2016, had recognized a liability for interest and penalties of $110.8 million, which included an $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.

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. 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 a $115 million decrease to a $25 million increase.

Our U.S. Federal income tax returns have been audited through 2009 and are currently under audit for years 2010-2015. The IRS has proposed adjustments for years 2005-2012, 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.

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.