For purposes of the Annual Combined Financial Statements, our income tax expense and deferred tax balances have been estimated as if we filed income tax returns on a stand-alone basis separate from Air Products.

The following table summarizes the income of U.S. and foreign operations before taxes:



	Year Ended September 30,
	2016		2015		2014
(In millions)
Income Before Taxes
United States	$	61.6	$	41.7	$	6.9
Foreign	217.1		181.2		155.7
Total	$	278.7	$	222.9	$	162.6

The following table shows the components of the provision for income taxes:



	Year Ended September 30,
	2016			2015			2014
(In millions)
Current Tax Provision
Federal	$	—		$	—		$	—
State	0.6			0.5			0.5
Foreign	58.3			31.6			28.0
	58.9			32.1			28.5
Deferred Tax Provision
Federal	1.3			1.4			0.9
State	0.1			0.1			0.2
Foreign	(1.5		)	(1.9		)	2.3
	(0.1		)	(0.4		)	3.4
Income Tax Provision	$	58.8		$	31.7		$	31.9

A reconciliation of the differences between the United States federal statutory tax rate and the effective tax rate is as follows:



	Year Ended September 30,
	2016		2015		2014
(Percent of income before taxes)
U.S. federal statutory tax rate	35.0	%	35.0	%	35.0	%
State taxes, net of federal benefit	0.8	%	0.6	%	—	%
Foreign tax differentials	(8.4	)%	(12.5	)%	(13.8	)%
Foreign tax holiday	(2.6	)%	(4.3	)%	(3.0	)%
U.S. taxes on foreign earnings	1.7	%	(0.9	)%	(0.3	)%
Other credit and incentives	(0.3	)%	(0.3	)%	(0.1	)%
Domestic production activities	(0.3	)%	—	%	—	%
Valuation allowance	(6.9	)%	(2.8	)%	1.8	%
Other	2.1	%	(0.6	)%	—	%
Effective Tax Rate	21.1	%	14.2	%	19.6	%

We maintained a valuation allowance in 2014, 2015 and 2016 against U.S. deferred tax accounts resulting primarily from restructuring charges taken in prior periods, as we determined that it was more likely than not that U.S. deferred tax assets would not be realized. These deferred tax assets related primarily to net operating loss and tax credit carryforwards derived from the stand-alone basis calculation. The valuation allowance benefits in 2015 and 2016 shown in the table above relate to the utilization of federal net operating losses as a result of favorable operations.

Foreign tax differentials represent the differences between foreign earnings subject to foreign tax rates lower than the U.S. federal statutory tax rate of 35.0%. Foreign earnings are subject to local country tax rates that are generally below the 35.0% U.S. federal statutory rate. As a result, our effective non-U.S. tax rate is typically lower than the U.S. statutory rate. If foreign pre-tax earnings increase relative to U.S. pre-tax earnings, this rate difference could increase. The primary jurisdictions in which we earn pre-tax earnings subject to lower foreign taxes than the U.S. statutory rate include South Korea, China, Taiwan, and Singapore. As substantially all of our undistributed earnings are in countries with a statutory tax rate of 17% or higher, we do not generate a disproportionate amount of taxable income in countries with very low tax rates. U.S. taxes on foreign earnings include the cost of foreign withholding taxes imposed on dividends paid to U.S. shareholders.

We have certain foreign subsidiaries that were granted seven-year tax holidays, the majority of which expire during the year ending September 30, 2017. The tax benefit of the holidays is reduced by 50% in the last two years of the holiday period. The net benefit of the tax holidays was $7.1 million, $9.6 million, and $4.9 million in 2016, 2015 and 2014, respectively.

The majority of the accrued U.S. federal, state and foreign current income tax balances are treated as settled with Air Products as of the end of each year. Therefore, they are included in Air Products’ net investment in the Annual Combined Financial Statements. Income tax payments made directly by certain foreign subsidiaries, net of refunds, were $9.6 million in 2016, $14.3 million in 2015, and $7.2 million in 2014.

The significant components of deferred tax assets and liabilities are as follows:



	September 30,
	2016			2015
(In millions)
Gross Deferred Tax Assets
Tax loss carryforwards	$	13.2		$	57.3
Tax credit carryforwards	64.2			49.6
Retirement benefits and compensation accruals	7.6			7.8
Reserves and accruals	8.4			7.7
Other	3.3			1.8
Valuation allowance	(55.6		)	(77.7		)
Deferred Tax Assets	41.1			46.5
Gross Deferred Tax Liabilities
Intangible assets	41.0			41.9
Plant and equipment	22.2			24.5
Unremitted earnings of foreign entities	2.3			4.3
Partnership investments	1.3			1.4
Other	6.3			6.7
Deferred Tax Liabilities	73.1			78.8
Net Deferred Income Tax Liability	$	32.0		$	32.1

Deferred tax assets and liabilities are included within the Annual Combined Financial Statements as follows:



	September 30,
	2016		2015
(In millions)
Other noncurrent assets	$	10.7	$	7.8
Deferred tax liabilities	42.7		39.9
Net Deferred Income Tax Liability	$	32.0	$	32.1

The federal foreign tax credit carryforward available as of September 30, 2016 was $65.8 million and expires between 2021 and 2026. Of the available $65.8 million of federal foreign tax carryforwards, $4.8 million relates to windfall benefits that will be recorded in additional paid in capital when realized. The federal research credit carryforward as of September 30, 2016 was $3.3 million and expires between 2031 and 2036. The federal foreign tax credit carryforward of $65.8 million netted with the $4.8 million of windfall benefit and the federal research credit of $3.3 million equal the total tax credit carryforwards of $64.2 million in the table above. State loss carryforwards as of September 30, 2016 were $85.6 million and expire between 2018 and 2034. Gross foreign loss carryforwards as of September 30, 2016 were $46.3 million. Foreign loss carryforwards of $26.8 million have expiration periods between 2017 and 2024; the remaining have unlimited carryforward periods.

The federal and state tax carryforwards and credits resulting from the stand-alone basis calculation were utilized against Air Products’ income and are not available as future deductions on tax returns. As such they were not transferred as part of the Separation from Air Products. Due to provisions of local tax law, certain foreign carryforwards were not transferred as part of the Separation from Air Products.

The valuation allowance as of September 30, 2016 is primarily related to the tax benefit of federal tax credit carryforwards and state and foreign loss carryforwards. The $22.1 million decrease in the valuation allowance was primarily due to the utilization of federal, state and foreign loss carryforwards against taxable income. As of September 30, 2016, we believed it would be more likely than not that future earnings and reversal of deferred tax liabilities would be sufficient to utilize the deferred tax asset reflected on the stand-alone financial statements, net of existing valuation allowance.

We record U.S. income and foreign withholding taxes on the undistributed earnings of our foreign subsidiaries and corporate joint ventures unless those earnings are indefinitely reinvested. These cumulative undistributed earnings that were considered to be indefinitely reinvested in foreign subsidiaries and corporate joint ventures is estimated to be $683 million as of September 30, 2016. An estimated $155 million in U.S. income and foreign withholding taxes would be due if these earnings were remitted as dividends after payment of all deferred taxes.

A reconciliation of the beginning and ending amount of the unrecognized tax benefits is as follows:



	Year Ended September 30,
(In millions)	2016			2015			2014
Unrecognized Tax Benefits
Balance at beginning of year	$	10.3		$	16.0		$	21.6
Additions for tax positions of the current year	1.9			1.6			2.0
Additions for tax positions of prior years	1.0			0.1			0.4
Reductions for tax positions of prior years	(0.1		)	(4.7		)	(2.8		)
Statute of limitations expiration	(0.2		)	(2.7		)	(5.2		)
Balance at End of Year	$	12.9		$	10.3		$	16.0

At September 30, 2016 and 2015, we had $12.9 million and $10.3 million of unrecognized tax benefits, excluding interest and penalties, of which $12.6 million and $10.0 million, respectively, would impact the tax rate, if recognized.

Interest and penalties related to unrecognized tax benefits are recorded as a component of income tax expense and were not material in 2016, 2015, and 2014.

We are currently under examination in a number of tax jurisdictions, some of which may be resolved in the next twelve months. As a result, it is reasonably possible that a change in the unrecognized tax benefits may occur during the next twelve months. However, quantification of an estimated range cannot be made at this time.

We generally remain subject to examination in the following major tax jurisdictions for the years indicated below:



	Open Tax Years
Major Tax Jurisdiction
United States	2011-2016
China	2006-2016
South Korea	2010-2016
Taiwan	2011-2016