INCOME TAXES

Earnings from continuing operations before income taxes for the years ended December 31 were as follows ($ in millions):



	2017		2016		2015
United States	$	927.2	$	647.7	$	505.5
International	2,011.6		1,963.6		1,533.9
Total	$	2,938.8	$	2,611.3	$	2,039.4

The provision for income taxes from continuing operations for the years ended December 31 were as follows ($ in millions):



	2017			2016			2015
Current:
Federal U.S.	$	448.3		$	237.2		$	213.4
Non-U.S.	457.2			542.9			273.0
State and local	(9.6		)	61.7			(9.5		)
Deferred:
Federal U.S.	(424.7		)	(237.5		)	(83.8		)
Non-U.S.	(61.5		)	(104.2		)	(121.5		)
State and local	59.3			(42.2		)	21.1
Income tax provision	$	469.0		$	457.9		$	292.7

Noncurrent deferred tax assets and noncurrent deferred tax liabilities are included in other assets and other long-term liabilities, respectively, in the accompanying Consolidated Balance Sheets. Deferred income tax assets and liabilities as of December 31 were as follows ($ in millions):



	2017			2016
Deferred tax assets:
Allowance for doubtful accounts	$	18.6		$	22.4
Inventories	95.9			102.8
Pension and postretirement benefits	250.6			392.4
Environmental and regulatory compliance	26.8			29.9
Other accruals and prepayments	345.8			211.1
Stock-based compensation expense	63.9			89.3
Tax credit and loss carryforwards	673.4			1,095.9
Valuation allowances	(324.6		)	(306.5		)
Total deferred tax asset	1,150.4			1,637.3
Deferred tax liabilities:
Property, plant and equipment	(63.4		)	(41.4		)
Insurance, including self-insurance	(696.2		)	(786.4		)
Basis difference in LYONs	(12.9		)	(13.1		)
Goodwill and other intangibles	(2,711.2		)	(3,645.3		)
Unrealized gains on marketable securities	—			(2.9		)
Total deferred tax liability	(3,483.7		)	(4,489.1		)
Net deferred tax liability	$	(2,333.3	)	$	(2,851.8	)

The Company evaluates the future realizability of tax credits and loss carryforwards considering the anticipated future earnings of the Company’s subsidiaries as well as tax planning strategies in the associated jurisdictions. Deferred taxes associated with U.S. entities consist of net deferred tax liabilities of approximately $2.0 billion and $2.5 billion as of December 31, 2017 and 2016, respectively. Deferred taxes associated with non-U.S. entities consist of net deferred tax liabilities of $301 million and $374 million as of December 31, 2017 and 2016, respectively. During 2017, the Company’s valuation allowance increased by $18 million through the tax provision due to certain tax benefits triggered in 2017 that are not expected to be realized. As of December 31, 2017, the total amount of the basis difference in investments outside the United States for which deferred taxes have not been provided is approximately $8.0 billion. As of December 31, 2017, the Company had no plans which would subject these basis differences to income taxes in the U.S. or elsewhere.

On December 22, 2017, the TCJA was enacted, substantially changing the U.S. tax system and affecting the Company in a number of ways. Notably, the TCJA:


•	establishes a flat corporate income tax rate of 21.0% on U.S. earnings;


•	imposes a one-time tax on unremitted cumulative non-U.S. earnings of foreign subsidiaries (“Transition Tax”);


•	imposes a new minimum tax on certain non-U.S. earnings, irrespective of the territorial system of taxation, and generally allows for the repatriation of future earnings of foreign subsidiaries without incurring additional U.S. taxes by transitioning to a territorial system of taxation;


•	subjects certain payments made by a U.S. company to a related foreign company to certain minimum taxes (Base Erosion Anti-Abuse Tax);


•	eliminates certain prior tax incentives for manufacturing in the United States and creates an incentive for U.S. companies to sell, lease or license goods and services abroad by allowing for a reduction in taxes owed on earnings related to such sales;


•	allows the cost of investments in certain depreciable assets acquired and placed in service after September 27, 2017 to be immediately expensed; and


•	reduces deductions with respect to certain compensation paid to specified executive officers.

While the changes from the TCJA are generally effective beginning in 2018, U.S. GAAP accounting for income taxes requires the effect of a change in tax laws or rates to be recognized in income from continuing operations for the period that includes the enactment date. Due to the complexities involved in accounting for the enactment of the TCJA, the SEC Staff Accounting Bulletin No. 118 (“SAB No. 118”) allowed the Company to record provisional amounts in earnings for the year ended December 31, 2017. Where reasonable estimates can be made, the provisional accounting should be based on such estimates. When no reasonable estimate can be made, the provisional accounting may be based on the tax law in effect before the TCJA. The Company is required to complete its tax accounting for the TCJA within a one year period when it has obtained, prepared, and analyzed the information to complete the income tax accounting.

The Company has not completed its accounting for the tax effects of enactment of the TCJA; however, as described below, the Company has made reasonable estimates of the effects of the TCJA on its Consolidated Financial Statements which are included as a component of income tax expense from continuing operations:

•

Deferred tax assets and liabilities: U.S. deferred tax assets and liabilities were remeasured based on the rates at which they are expected to reverse in the future, which is generally 21.0%, resulting in an income tax benefit of approximately $1.2 billion. The Company will continue to analyze certain aspects of the TCJA which could potentially affect the tax basis of the reported amounts. Additionally, the Company’s U.S. tax returns for 2017 will be filed during the fourth quarter of 2018 and any changes to the tax positions for temporary differences compared to the estimates used will result in an adjustment of the estimated tax benefit recorded as of December 31, 2017.

•

Transition Tax effects: The Transition Tax is based on the Company’s total post-1986 earnings and profits that were previously deferred from U.S. income taxes. The Company recorded a provisional amount for the Transition Tax expense resulting in an increase in income tax expense of approximately $1.2 billion. The Company will continue to evaluate the TCJA and any future guidance from the U.S. Treasury Department and Internal Revenue Service (“IRS”) in the determination of the Transition Tax which could result in adjustment of the estimate recorded as of December 31, 2017.

•

Indefinite reinvestment: As of December 31, 2017, the Company held $593 million of cash and approximately $656 million of cash equivalents (as defined by the TCJA, including trade accounts receivable net of trade accounts payable balances and certain accrued expenses) outside the United States. While repatriation of some cash held outside the United States may be restricted by local laws, most of the Company’s foreign cash could be repatriated to the United States. Following enactment of the TCJA and the associated Transition Tax, in general, repatriation of cash to the United States can be completed with no incremental U.S. tax; however, repatriation of cash could subject the Company to non-U.S. jurisdictional taxes on distributions. The cash that the Company’s non-U.S. subsidiaries hold for indefinite reinvestment is generally used to finance foreign operations and investments, including acquisitions. The income taxes applicable to such earnings are not readily determinable or practicable. The Company continues to evaluate the impact of the TCJA on its election to indefinitely reinvest certain of its non-U.S. earnings.

The Company will continue to analyze the effects of the TCJA on its Consolidated Financial Statements and operations. Additional impacts from the enactment of the TCJA will be recorded as they are identified during the measurement period as provided for in SAB No. 118, which extends up to one year from the enactment date.

The effective income tax rate from continuing operations for the years ended December 31 varies from the U.S. statutory federal income tax rate as follows:



	Percentage of Pretax Earnings
	2017		2016		2015
Statutory federal income tax rate	35.0	%	35.0	%	35.0	%
Increase (decrease) in tax rate resulting from:
State income taxes (net of federal income tax benefit)	0.8	%	0.6	%	0.7	%
Foreign income taxed at lower rate than U.S. statutory rate	(11.6	)%	(10.2	)%	(17.1	)%
Resolution and expiration of statutes of limitation of uncertain tax positions	(6.5	)%	(3.1	)%	(0.7	)%
Permanent foreign exchange losses	(0.6	)%	(8.2	)%	(4.6	)%
Research credits, uncertain tax positions and other	(1.0	)%	3.4	%	1.1	%
Revaluation of U.S. deferred income taxes	(41.5	)%	—	%	—	%
TCJA - Transition Tax	41.4	%	—	%	—	%
Effective income tax rate	16.0	%	17.5	%	14.4	%

The Company’s effective tax rate for each of 2017, 2016 and 2015 differs from the U.S. federal statutory rate of 35.0% due principally to the Company’s earnings outside the United States that are indefinitely reinvested and taxed at rates lower than the U.S. federal statutory rate. In addition:

•

The effective tax rate of 16.0% in 2017 includes 500 basis points of net tax benefits related to the revaluation of net U.S. deferred tax liabilities from 35.0% to 21.0% due to the TCJA and release of reserves upon statute of limitation expiration, partially offset by income tax expense related to the Transition Tax on foreign earnings due to the TCJA and changes in estimates associated with prior period uncertain tax positions.

•

The effective tax rate of 17.5% in 2016 includes 350 basis points of net tax benefits from permanent foreign exchange losses and the release of reserves upon the expiration of statutes of limitation and audit settlements, partially offset by income tax expense related to repatriation of earnings and legal entity realignments associated with the Separation and changes in estimates associated with prior period uncertain tax positions.


•	The effective tax rate of 14.4% in 2015 includes 290 basis points of net tax benefits from permanent foreign exchange losses, releases of valuation allowances related to foreign operating losses and the release of reserves upon the expiration of statutes of limitation, partially offset by changes in estimates associated with prior period uncertain tax positions.

The Company made income tax payments related to both continuing and discontinued operations of $689 million, $767 million and $584 million in 2017, 2016 and 2015, respectively. Current income taxes payable related to both continuing and discontinued operations has been reduced by $85 million, $99 million, and $147 million in 2017, 2016 and 2015, respectively, for tax deductions attributable to stock-based compensation, of which, the excess tax benefit over the amount recorded for financial reporting purposes for both continuing and discontinued operations was $55 million, $50 million and $88 million, respectively. The excess tax benefits realized have been recorded as increases to additional paid-in capital for the years ended December 31, 2016 and 2015 and are reflected as a financing cash inflow in the accompanying Consolidated Statements of Cash Flows. As a result of the adoption of ASU 2016-09, Compensation—Stock Compensation, the excess tax benefit for the year ended December 31, 2017 has been recorded as a reduction to the current income tax provision and is reflected as an operating cash inflow in the accompanying Consolidated Statement of Cash Flows.

Included in deferred income taxes related to continuing operations as of December 31, 2017 are tax benefits for U.S. and non-U.S. net operating loss carryforwards totaling $502 million ($283 million of which the Company does not expect to realize and have corresponding valuation allowances). Certain of the losses can be carried forward indefinitely and others can be carried forward to various dates from 2018 through 2037. In addition, the Company had general business and foreign tax credit carryforwards related to continuing operations of $171 million ($30 million of which the Company does not expect to realize and have corresponding valuation allowances) as of December 31, 2017, which can be carried forward to various dates from 2018 to 2027. In addition, as of December 31, 2017, the Company had $12 million of valuation allowances related to other deferred tax asset balances that are not more likely than not of being realized.

As of December 31, 2017, gross unrecognized tax benefits related to continuing operations totaled $737 million ($736 million, net of the impact of $104 million of indirect tax benefits offset by $103 million associated with potential interest and penalties). As of December 31, 2016, gross unrecognized tax benefits related to both continuing and discontinued operations totaled $992 million ($933 million, net of the impact of $179 million of indirect tax benefits offset by $120 million associated with potential interest and penalties). The Company recognized approximately $41 million, $47 million and $39 million in potential interest and penalties related to both continuing and discontinued operations associated with uncertain tax positions during 2017, 2016 and 2015, respectively. To the extent unrecognized tax benefits (including interest and penalties) are not assessed with respect to uncertain tax positions, $691 million would reduce the tax expense and effective tax rate in future periods. The Company recognized interest and penalties related to unrecognized tax benefits within income taxes in the accompanying Consolidated Statement of Earnings. Unrecognized tax benefits and associated accrued interest and penalties are included in taxes, income and other accrued expenses as detailed in Note 8.

A reconciliation of the beginning and ending amount of unrecognized tax benefits, excluding amounts accrued for potential interest and penalties related to both continuing and discontinued operations, is as follows ($ in millions):



	2017			2016			2015
Unrecognized tax benefits, beginning of year	$	992.2		$	990.2		$	728.5
Additions based on tax positions related to the current year	53.0			80.0			73.3
Additions for tax positions of prior years	39.8			154.3			135.3
Reductions for tax positions of prior years	(14.5		)	(7.0		)	(10.0		)
Acquisitions, divestitures and other	13.4			(41.5		)	140.6
Lapse of statute of limitations	(246.7		)	(124.0		)	(26.3		)
Settlements	(124.8		)	(45.3		)	(18.9		)
Effect of foreign currency translation	24.4			(14.5		)	(32.3		)
Unrecognized tax benefits, end of year	$	736.8		$	992.2		$	990.2

The Company conducts business globally, and files numerous consolidated and separate income tax returns in the U.S. federal, state and foreign jurisdictions. The countries in which the Company has a material presence that have had significantly lower statutory tax rates than the United States include China, Denmark, Germany, Singapore, Switzerland and the United Kingdom. The Company’s ability to obtain a tax benefit from lower statutory tax rates outside of the United States depends on its levels of taxable income in these foreign countries and the amount of foreign earnings which are indefinitely reinvested in those countries. The Company believes that a change in the statutory tax rate of any individual foreign country would not have a material effect on the Company’s Consolidated Financial Statements given the geographic dispersion of the Company’s taxable income.

The Company and its subsidiaries are routinely examined by various domestic and international taxing authorities. The IRS has completed substantially all of the examinations of the Company’s federal income tax returns through 2011 and is currently examining certain of the Company’s federal income tax returns for 2012 through 2015. In addition, the Company has subsidiaries in Austria, Belgium, Canada, China, Denmark, Finland, France, Germany, Hong Kong, India, Italy, Japan, New Zealand, Sweden, Switzerland, the United Kingdom and various other countries, states and provinces that are currently under audit for years ranging from 2004 through 2015.

Tax authorities in Denmark have raised significant issues related to interest accrued by certain of the Company’s subsidiaries. On December 10, 2013, the Company received assessments from the Danish tax authority (“SKAT”) totaling approximately DKK 1.5 billion (approximately $245 million based on exchange rates as of December 31, 2017) including interest through December 31, 2017, imposing withholding tax relating to interest accrued in Denmark on borrowings from certain of the Company’s subsidiaries for the years 2004-2009. The Company is currently in discussions with SKAT and anticipates receiving an assessment for years 2010-2012 totaling approximately DKK 895 million (approximately $144 million based on exchange rates as of December 31, 2017) including interest through December 31, 2017. Management believes the positions the Company has taken in Denmark are in accordance with the relevant tax laws and is vigorously defending its positions. The Company appealed these assessments with the National Tax Tribunal in 2014 and intends on pursuing this matter through the European Court of Justice should this appeal be unsuccessful. The ultimate resolution of this matter is uncertain, could take many years, and could result in a material adverse impact to the Company’s financial statements, including its effective tax rate.

Management estimates that it is reasonably possible that the amount of unrecognized tax benefits related to continuing operations may be reduced by approximately $130 million within 12 months as a result of resolution of worldwide tax matters, payments of tax audit settlements and/or statute of limitations expirations. Future resolution of uncertain tax positions related to discontinued operations may result in additional charges or credits to earnings from discontinued operations in the Consolidated Statement of Earnings (refer to Note 3).

The Company operates in various non-U.S. jurisdictions where income tax incentives and rulings have been granted for specific periods of time. In Switzerland, the Company has various tax rulings and tax holiday arrangements which reduce the overall effective tax rate of the Company. The tax holidays expire between 2018 and 2020. In Singapore, the Company operates under various tax incentive agreements that provide for reduced tax rates. Subject to the Company satisfying certain requirements, the agreements expire in 2022. The Company has satisfied the conditions enumerated in these agreements to date. Included in the accompanying Consolidated Financial Statements are tax benefits of $62 million, $61 million, and $33 million (or $0.09, $0.09 and $0.05 per diluted share) for 2017, 2016, and 2015, respectively, from these rulings and tax holidays.