19.INCOME TAXES

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



	Year Ended September 30,
	2018		2017		2016
(In millions)
Income Before Taxes
United States	$	71.0	$	29.3	$	58.9
Foreign	252.6		223.9		217.1
Total	$	323.6	$	253.2	$	276.0

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



	Year Ended September 30,
	2018			2017		2016
(In millions)
Current Tax Provision
Federal	$	44.5		$	2.4	$	—
State	4.0			0.6		0.6
Foreign	68.9			47.0		58.3
	117.4			50.0		58.9
Deferred Tax Provision
Federal	0.4			1.3		1.3
State	(0.3		)	0.1		0.1
Foreign	1.4			1.6		(1.5		)
	1.5			3.0		(0.1		)
Income Tax Provision	$	118.9		$	53.0	$	58.8

Income tax expense (benefit) differs from the expected amounts based on the statutory U.S. federal tax rate for the years ended September 30, 2018, 2017 and 2016 as follows:



	Year Ended September 30,
	2018			2017			2016
(In millions)
U.S. federal tax	$	79.4		$	88.4		$	97.5
State taxes, net of federal benefit	0.8			0.5			2.2
Foreign tax differentials	(3.6		)	(34.7		)	(30.7		)
U.S. taxes on foreign earnings	(0.9		)	(0.3		)	4.7
Other credit and incentives	(1.7		)	(0.8		)	(0.8		)
U.S. tax law change	41.7			—			—
Valuation allowance	0.6			0.9			(19.2		)
Other	2.6			(1.0		)	5.1
Income Tax Expense (Benefit)	$	118.9		$	53.0		$	58.8

On December 22, 2017, the Tax Act was enacted in the U.S. Certain provisions of the Tax Act are effective for the company’s fiscal year 2018, whereas other material provisions of the Tax Act will not apply to the company until the company’s fiscal year 2019.

For fiscal year ended September 30, 2018, the company’s statutory U.S. federal income tax rate was 24.5% which represents a blending of the 35.0% statutory rate under prior law and the new 21.0% statutory rate effective January 1, 2018, prorated based on the number of days during the company’s current fiscal year that each rate was effective. For fiscal years 2019 and later, the company’s statutory U.S. federal income tax rate will be 21.0%.

As a result of the Tax Act, and shown in the table above, the company recorded a provisional net one-time charge of $41.7 million for year ended September 30, 2018. This charge includes a $53.8 million charge for federal and state taxes on the mandatory deemed repatriation of certain of the company’s foreign accumulated earnings. We expect to elect to pay the federal portion of the resulting liability, net of available tax credits, over the eight-year period provided in the Tax Act, with $3.2 million of the federal liability payable in connection with our fiscal year 2018. The deemed repatriation charge was partially offset by a $12.1 million tax benefit related to the estimated revaluation of the company’s deferred tax assets and liabilities using the U.S. statutory federal and state income tax rates and compensation deductibility rules that are anticipated to apply when the deferred tax assets and liabilities will become current.

The methodology used in calculating these provisional items incorporates assumptions about required tax adjustments to book earnings, foreign taxes paid, future executive compensation levels, estimated temporary book to tax differences, pending guidance and other items. We will continue to obtain information, actively monitor factual and legal developments, complete our tax compliance cycles, analyze and review the available information, and expect to adjust the provisional tax accrual consistent with the SEC’s Staff Accounting Bulletin No. 118. The company has elected to account for GILTI tax in the period in which it is incurred, and therefore has not provided any deferred tax impacts of GILTI in its consolidated financial statements for the year ended September 30, 2018.

For the three months ended September 30, 2018, the adjustment to the provisional tax accrual recorded in nine months ended June 30, 2018, was a tax charge of $7.2 million. This resulted in an increase of 2.2% to the company’s effective tax rate for the twelve months ended September 30, 2018. The adjustment was primarily due to a change in estimated cumulative earnings and profits, aggregate foreign cash position, and tax pools in foreign jurisdictions that reduced the company’s tax on the mandatory deemed repatriation.

Beginning in the company’s fiscal year 2019, Versum will be subject to additional provisions in accordance with the Tax Act. These provisions include income inclusions, deductions, limitations on interest expense and other deductions and our ability to utilize certain tax credits, and minimum taxes, among other things.

Foreign tax differentials represent the differences between foreign earnings subject to foreign tax rates lower than the U.S. federal statutory tax rate of 24.5% for September 30, 2018. Foreign earnings are subject to local country tax rates that are generally below the 24.5% U.S. federal statutory rate. As a result, our effective non-U.S. tax rate varies from the U.S. statutory rate. The decrease in foreign tax rate differential as shown in the table above is the result of the decreased statutory U.S. tax rate from 35.0% to 24.5%. As substantially all of our undistributed earnings are in countries with a statutory tax rate of 17.0% 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 net of available US foreign tax credits.

We accrue 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 $795.0 million as of September 30, 2018. An estimated $79.5 million in foreign withholding taxes would be due if these earnings were remitted as dividends.

We have certain foreign subsidiaries that were granted seven-year tax holidays, the majority of which expired 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 $1.1 million, $8.0 million, and $7.1 million in 2018, 2017 and 2016, respectively.

We maintained a valuation allowance in 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 benefit in 2016 shown in the table above relate to the utilization of federal net operating losses as a result of favorable operations. These net operating losses and tax credit carryforwards were utilized against Air Products’ income and are not available as future deductions on Versum tax returns. The fiscal years 2017 and 2018 effective tax rates, therefore, includes no valuation allowance benefit related to U.S. deferred tax assets. The valuation allowance cost for 2017 and 2018 relates to certain foreign tax credits accrued outside the U.S.

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



	September 30,
	2018			2017
(In millions)
Gross Deferred Tax Assets
Tax loss carryforwards	$	0.4		$	0.5
Tax credit carryforwards	3.1			0.9
Retirement benefits and compensation accruals	9.3			10.9
Reserves and accruals	6.2			—
Other	4.0			1.5
Valuation allowance	(1.4		)	(0.9		)
Deferred Tax Assets	21.6			12.9
Gross Deferred Tax Liabilities
Intangible assets	4.1			9.1
Reserves and accruals	—			1.6
Plant and equipment	35.2			22.9
Unremitted earnings of foreign entities	—			0.7
Partnership investments	0.3			0.8
Accounting method change	4.6			—
Other	0.4			0.2
Deferred Tax Liabilities	44.6			35.3
Net Deferred Income Tax Liability	$	23.0		$	22.4

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



	September 30,
	2018		2017
(In millions)
Other non-current assets	$	18.3	$	18.1
Deferred tax liabilities	41.3		40.5
Net Deferred Income Tax Liability	$	23.0	$	22.4

The federal and state research credit carryforwards as of September 30, 2018 were $1.7 million, which begin to expire in 2032. Gross foreign net operating loss carryforwards as of September 30, 2018 were $1.3 million, and expire in 2026.

The valuation allowance as of September 30, 2018 is related to the tax benefit of foreign tax credits accrued in jurisdictions outside the U.S. As of September 30, 2018, 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 financial statements, net of existing valuation allowance.

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



	Year Ended September 30,
(In millions)	2018			2017
Unrecognized Tax Benefits
Balance at beginning of year	$	15.7		$	12.9
Additions for tax positions for the current year	2.8			2.1
Additions for tax positions of prior years	1.8			1.0
Reductions for tax positions of prior years	(4.9		)	(0.2		)
Statute of limitations expiration	(1.9		)	(0.1		)
Balance at End of Year	$	13.5		$	15.7

At September 30, 2018 and 2017, we had $13.5 million and $15.7 million of unrecognized tax benefits of which $13.5 million and $15.7 million, respectively, would impact the tax rate, if recognized. The current year decrease in unrecognized tax benefits relates, primarily, to an income tax audit settlement in a foreign jurisdiction. Interest and penalties related to unrecognized tax benefits are recorded as a component of income tax expense. The cumulative amount of interest and penalties accrued on the balance sheet as of September 30, 2018 was $1.3 million.

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	2017-2018
China	2008-2018
South Korea	2010-2018
Taiwan	2013-2018