22. INCOME TAXES

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



	2017		2016		2015
Income from Continuing Operations before Taxes
United States	$	669.8	$	631.7	$	507.5
Foreign	666.2		775.9		606.3
Income from equity affiliates	80.1		147.0		152.3
Total	$	1,416.1	$	1,554.6	$	1,266.1

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



	2017			2016		2015
Current Tax Provision
Federal	$	62.8		$	171.0	$	117.0
State	7.0			21.2		8.1
Foreign	229.1			178.6		165.7
	298.9			370.8		290.8
Deferred Tax Provision
Federal	1.4			45.0		1.5
State	6.0			2.8		17.8
Foreign	(45.4		)	14.0		(9.9		)
	(38.0		)	61.8		9.4
Income Tax Provision	$	260.9		$	432.6	$	300.2

The effective tax rate equals the income tax provision divided by income from continuing operations before taxes. A reconciliation of the differences between the United States federal statutory tax rate and the effective tax rate is as follows:



(Percent of income before taxes)	2017		2016		2015
U.S. federal statutory tax rate	35.0	%	35.0	%	35.0	%
State taxes, net of federal benefit	1.0		1.2		1.1
Income from equity affiliates	(2.0	)	(3.3	)	(4.0	)
Foreign tax differentials	(7.9	)	(6.6	)	(5.9	)
U.S. taxes on foreign earnings	(2.2	)	(3.1	)	(2.1	)
Domestic production activities	(.8	)	(.8	)	(1.0	)
Non-deductible goodwill impairment charge	3.6		—		—
Non-U.S. subsidiary tax election	(7.7	)	—		—
Business separation costs	.2		4.2		.2
Share-based compensation	(1.2	)	—		—
Other	.4		1.2		.4
Effective Tax Rate	18.4	%	27.8	%	23.7	%

Total company income tax payments, net of refunds, were $1,348.8 in 2017, $440.8 in 2016, and $392.9 in 2015.

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 and include tax holidays and incentives. 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 jurisdictions in which we earn pre-tax earnings subject to lower foreign taxes than the U.S. statutory rate include South Korea, Taiwan, the United Kingdom, China, Canada, Spain and Belgium. As approximately 80% of the undistributed earnings are in countries with a statutory tax rate of 24% 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 are a tax benefit primarily due to foreign tax credits on the repatriation of foreign earnings to the U.S.

In 2017, the effective tax rate was impacted by a tax election made with respect to a Chilean holding company resulting in an income tax benefit of $111.4 on tax losses related to investments in Chile. The effective tax rate was also impacted by a goodwill impairment charge of $145.3 for which no tax benefits were available. See Note 10, Goodwill, for additional information regarding the impairment charge.

During the first quarter of fiscal year 2017, we adopted new accounting guidance that requires excess tax benefits and deficiencies from share-based compensation to be recognized in the income statement rather than in additional paid-in capital on the balance sheet. As a result of applying this change prospectively, we recognized $17.6 of excess tax benefits in our provision for income taxes during fiscal year 2017. See Note 2, New Accounting Guidance, for additional information.

In 2016, the effective tax rate was impacted by tax costs of $51.8 incurred in anticipation of the tax-free spin-off of Versum, primarily for a dividend declared during the third quarter of 2016 to repatriate $443.8 from a subsidiary in South Korea to the U.S. Previously, most of these foreign earnings were considered to be indefinitely reinvested. In addition, a tax benefit was not available on a significant portion of the business separation costs. See Note 4, Materials Technologies Separation, for additional information.

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



30 September	2017			2016
Gross Deferred Tax Assets
Retirement benefits and compensation accruals	$	370.1		$	527.6
Tax loss carryforwards	64.5			101.1
Tax credits and other tax carryforwards	76.1			56.0
Reserves and accruals	88.2			74.9
Partnership and other investments	—			5.8
Currency losses	20.7			—
Other	37.2			19.3
Valuation allowance	(107.7		)	(165.1		)
Deferred Tax Assets	549.1			619.6
Gross Deferred Tax Liabilities
Plant and equipment	1,035.6			985.1
Currency gains	—			46.8
Unremitted earnings of foreign entities	20.9			5.4
Partnership and other investments	5.4			—
Intangible assets	81.9			91.0
Other	9.2			16.7
Deferred Tax Liabilities	1,153.0			1,145.0
Net Deferred Income Tax Liability	$	603.9		$	525.4

Deferred tax assets and liabilities are included within the consolidated financial statements as follows:



	2017		2016
Deferred Tax Assets
Other noncurrent assets	$	174.5	$	185.0
Deferred Tax Liabilities
Deferred income taxes	778.4		710.4
Net Deferred Income Tax Liability	$	603.9	$	525.4

Gross federal tax credit carryforwards as of 30 September 2017 were $53.9. The federal tax carryforwards have expiration periods between 2025 and 2027. Gross state loss and tax credit carryforwards as of 30 September 2017 were $75.2 and $1.2, respectively. The state tax carryforwards have expiration periods between 2024 and 2034. Gross foreign loss and tax credit carryforwards as of 30 September 2017 were $247.3 and $21.0, respectively. Foreign tax carryforwards of $221.7 have expiration periods between 2018 and 2027; the remainder have unlimited carryforward periods.

The valuation allowance as of 30 September 2017 of $107.7, primarily related to the tax benefit of foreign loss carryforwards of $52.4 as well as foreign capital assets of $49.1 that were generated from the loss recorded on the exit from the Energy-from-Waste business in 2016. If events warrant the reversal of the valuation allowance, it would result in a reduction of tax expense. We believe it is more likely than not that future earnings and reversal of deferred tax liabilities will be sufficient to utilize our deferred tax assets, net of existing valuation allowance, at 30 September 2017. The reduction in the valuation allowances and tax loss carryforwards in 2017 was primarily due to the gain on sale of the PMD business, which resulted in the utilization of federal capital loss carryforwards as well as certain state loss carryforward balances from the prior year. See Note 3, Discontinued Operations, for additional information. This reduction was offset in part by an increase in foreign tax loss carryforwards. Retirement benefits and compensation accruals are impacted significantly by the changes in plan assets and benefit obligation that have been recognized in other comprehensive income. See Note 16, Retirement Benefits, for additional information. The repayment of a Eurobond of €300 million ($317.2) that matured on 15 March 2017, resulted in a significant reduction of the deferred tax liabilities related to currency gains.

We record U.S. income taxes on the undistributed earnings of our foreign subsidiaries and corporate joint ventures unless those earnings are indefinitely reinvested outside of the U.S. These cumulative undistributed earnings that are considered to be indefinitely reinvested in foreign subsidiaries and corporate joint ventures are included in retained earnings on the consolidated balance sheets and amounted to $6,032.5 as of 30 September 2017. An estimated $1,443.9 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:



Unrecognized Tax Benefits	2017			2016			2015
Balance at beginning of year	$	90.2		$	83.8		$	93.1
Additions for tax positions of the current year	47.5			12.5			4.7
Additions for tax positions of prior years	16.1			2.9			3.0
Reductions for tax positions of prior years	(4.0		)	—			(2.2		)
Settlements	(2.0		)	(5.6		)	(.6		)
Statute of limitations expiration	(3.2		)	(2.9		)	(8.3		)
Foreign currency translation	1.8			(.5		)	(5.9		)
Balance at End of Year	$	146.4		$	90.2		$	83.8

At 30 September 2017 and 2016, we had $146.4 and $90.2 of unrecognized tax benefits, excluding interest and penalties, of which $73.8 and $46.5, respectively, would impact the effective tax rate if recognized.

Interest and penalties related to unrecognized tax benefits are recorded as a component of income tax expense and totaled $3.7 in 2017, $1.8 in 2016, and $(1.9) in 2015. Our accrued balance for interest and penalties was $12.1 and $8.4 as of 30 September 2017 and 2016, respectively. The additions to unrecognized tax benefits in 2017 include unrecognized tax positions of $34.1 in various jurisdictions related to the sale of the PMD business and the spin-off of the EMD business. See Note 3, Discontinued Operations, and Note 4, Materials Technologies Separation, for additional information.

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:



Major Tax Jurisdiction	Open Tax Years
North America
United States	2011-2017
Canada	2013-2017
Europe
France	2014-2017
Germany	2012-2017
Netherlands	2012-2017
Spain	2011-2017
United Kingdom	2014-2017
Asia
China	2012-2017
South Korea	2010-2017
Taiwan	2012-2017
Latin America
Chile	2013-2017