12. INCOME TAXES

Income before income taxes consisted of:


(millions)	2018		2017		2016
United States		$728.3		$847.3		$655.7
International		1,076.3		915.1		993.7
Total		$1,804.6		$1,762.4		$1,649.4

The provision (benefit) for income taxes consisted of:


(millions)	2018		2017		2016
Federal and state		$103.5		$241.8		$224.2
International		175.7		355.1		269.7
Total current		279.2		596.9		493.9
Federal and state		51.8		(331.4)		(49.6)
International		33.3		(21.7)		(41.4)
Total deferred		85.1		(353.1)		(91.0)
Provision for income taxes		$364.3		$243.8		$402.9

The Company’s overall net deferred tax assets and deferred tax liabilities were comprised of the following:


December 31 (millions)	2018		2017
Deferred tax assets
Other accrued liabilities		$130.9		$122.8
Loss carryforwards		217.2		67.3
Share-based compensation		60.5		58.9
Pension and other comprehensive income		145.8		195.2
Other, net		68.5		132.7
Valuation allowance		(184.4)		(21.3)
Total		438.5		555.6
Deferred tax liabilities
Property, plant and equipment basis differences		(268.5)		(178.4)
Intangible assets		(783.3)		(844.0)
Other, net		(46.2)		(63.2)
Total		(1,098.0)		(1,085.6)
Net deferred tax liabilities balance		$(659.5)		$(530.0)

Deferred tax assets and liabilities are recorded based on the rates at which they are expected to reverse in the future. At December 31, 2018 and 2017, U.S. deferred tax assets and liabilities were recorded at the U.S. federal tax rate of 21%. In response to the enactment of the Tax Cuts and Jobs Act on December 22, 2017, which reduced the U.S. federal tax rate from 35% to 21%, the Company recorded a provisional income tax benefit of $319.0 million as a result of recording U.S. deferred tax assets and liabilities at the enacted tax rate, which is a discrete tax item within income tax expense in 2017.

As of December 31, 2018, the Company has tax effected federal, state and international net operating loss carryforwards of $0.2 million, $21.7 million and $195.3 million, respectively, which will be available to offset future taxable income. The state loss carryforwards expire from 2019 to 2039. For the international loss carryforwards, $172.0 million expire from 2019 to 2039 and $23.3 million have no expiration.

The Company has valuation allowances on certain deferred tax assets of $184.4 million and $21.3 million at December 31, 2018 and 2017, respectively. The increase in valuation allowance from year end 2017 to year end 2018 was driven by changes in entity structure as part of an internal entity reorganization, which created net operating losses which are not expected to be realized and therefore a valuation allowance was recorded. Current year losses and foreign currency translation also increased the valuation allowance.

In 2018, the Company obtained tax benefits from tax holidays in two foreign jurisdictions, the Dominican Republic and Singapore. The Company received a permit of operation, which expires in July 2021, from the National Council of Free Zones of Exportation for the Dominican Republic. Companies operating under the Free Zones are not subject to income tax in the Dominican Republic on export income. The Company has two tax incentives awarded by the Singapore Economic Development Board which expire in January 2021. These incentives provide for a preferential 10% tax rate on certain headquarter income and a 0% tax rate on manufacturing profits generated at the Company’s facility located on Jurong Island. In 2016 one of the Company’s legal entities in China was entitled to the benefit of incentives provided by the Chinese government to technology companies in order to encourage development of the high-tech industry, including reduced tax rates and other measures. As a result, the Company was entitled to a preferential enterprise income tax rate of 15%. The Company did not recognize a benefit related to this China tax incentive in 2018 or 2017. The tax reduction as the result of the tax holidays for 2018 was $25.6 million ($0.09 per diluted share), 2017 was $16.9 million ($0.06 per diluted share) and 2016 was $6.4 million ($0.02 per diluted share).

A reconciliation of the statutory U.S. federal income tax rate to the Company’s effective income tax rate is as follows:


	2018		2017		2016
Statutory U.S. rate	21.0	%	35.0	%	35.0	%
One-time transition tax	3.7		9.1		-
State income taxes, net of federal benefit	1.2		0.4		0.9
Foreign operations	(13.5)		(7.4)		(8.0)
Domestic manufacturing deduction	-		(2.2)		(2.0)
R&D credit	(1.0)		(1.0)		(1.1)
Change in valuation allowance	9.1		0.2		(0.7)
Audit settlements and refunds	(0.8)		(0.1)		(0.2)
Excess stock benefits	(1.6)		(2.3)		-
Change in federal tax rate (deferred taxes)	(0.6)		(18.2)		-
Prior year adjustments	2.5		-		-
Worthless stock deduction	-		-		0.4
Other, net	0.2		0.3		0.1
Effective income tax rate	20.2	%	13.8	%	24.4	%

Prior to enactment of the Tax Act, the Company did not recognize a deferred tax liability related to unremitted foreign earnings because it overcame the presumption of the repatriation of foreign earnings. In 2017, the Company recorded a provisional amount for the income tax effects related to the one-time transition tax of $160.1 million which is subject to payment over eight years. The one-time transition tax was based on certain foreign earnings and profits for which earnings had been previously indefinitely reinvested, as well as estimates of assets and liabilities at future dates. The transition tax was based in part on the amount of those earnings held in cash and other specified assets. No additional income taxes have been provided for any remaining undistributed foreign earnings not subject to the transition tax and any additional outside basis differences inherent in these entities as these amounts continue to be indefinitely reinvested in foreign operations. The Company continues to assert permanent reinvestment of the undistributed earnings of international affiliates, and, if there are policy changes, the Company would record the applicable taxes. In 2018, the Company recorded additional discrete expense of $66.0 million, primarily due to the issuance of technical guidance, finalization of certain estimates as a result of filing the 2017 U.S. federal tax return and final balance sheet positions used in the calculation of the transition tax. As of December 31, 2018, we completed our accounting for the effects of the Tax Act as they relate to the repricing of deferred tax balances and the one-time transition tax.

The Company files U.S. federal income tax returns and income tax returns in various U.S. state and non- U.S. jurisdictions. With few exceptions, the Company is no longer subject to state and foreign income tax examinations by tax authorities for years before 2014. The IRS has completed examinations of the Company’s U.S. federal income tax returns (Ecolab and Nalco) through 2014, and the years 2015 and 2016 are currently under audit. In addition to the U.S. federal examination, there is ongoing audit activity in several U.S. state and foreign jurisdictions. The Company anticipates changes to its uncertain tax positions due to closing of various audit years mentioned above. The Company does not believe these changes will result in a material impact during the next twelve months. Decreases in the Company’s gross liability could result in offsets to other balance sheet accounts, cash payments, and/or adjustments to tax expense. The occurrence of these events and/or other events not included above within the next twelve months could change depending on a variety of factors and result in amounts different from above.

The Company’s 2018 reported tax rate includes $66.0 million of net tax expense associated with the Tax Act, $33.5 million of net tax benefits on special (gains) and charges, and net tax benefits of $61.3 million associated with discrete tax items. During 2018, the Company recorded a discrete tax benefit of $28.1 million related to excess tax benefits resulting from the adoption of accounting changes regarding the treatment of tax benefits on share-based compensation. The extent of excess tax benefits is subject to variation in stock price and stock option exercises. In addition, the Company recorded net discrete benefit of $39.9 million related to adjustments from filing the 2017 U.S. federal income tax return and IRS approved method change. Included within the 2018 provision for income taxes is $44.2 million of discrete charges recorded in the fourth quarter to correct immaterial errors in prior years. The remaining discrete expense was primarily related to changes in reserves, audit settlements, international and U.S. changes in estimates, and accounting for internal entity reorganization.

The Company’s 2017 reported tax rate includes $158.9 million of net tax benefits associated with the Tax Act, $6.2 million of net tax benefits on special (gains) and charges, and net tax benefits of $25.3 million associated with discrete tax items. In connection with the Company’s initial analysis of the impact of the Tax Act, as noted above, a provisional net discrete tax benefit of $158.9 million was recorded in the period ended December 31, 2017, which includes $319.0 million tax benefit for recording deferred tax assets and liabilities at the U.S. enacted tax rate, and a net expense for the one-time transition tax of $160.1 million.

Special (gains) and charges represent the tax impact of special (gains) and charges, as well as additional tax benefits utilized in anticipation of U.S. tax reform of $7.8 million. During 2017, the Company recorded a discrete tax benefit of $39.7 million related to excess tax benefits, resulting from the adoption of accounting changes regarding the treatment of tax benefits on share-based compensation. The extent of excess tax benefits is subject to variation in stock price and stock option exercises. In addition, the Company recorded net discrete expenses of $14.4 million related to recognizing adjustments from filing the 2016 U.S. federal income tax return and international adjustments due to changes in estimates, partially offset by the release of reserves for uncertain tax positions due to the expiration of statute of limitations in state tax matters.

During 2016, the Company recognized net expense related to discrete tax items of $3.9 million. The net expenses were driven primarily by recognizing adjustments from filing the Company’s 2015 U.S. federal income tax return, partially offset by settlement of international tax matters and remeasurement of certain deferred tax assets and liabilities resulting from the application of updated tax rates in international jurisdictions. Net expense was also impacted by adjustments to deferred tax asset and liability positions and the release of reserves for uncertain tax positions due to the expiration of statute of limitations in non-U.S. jurisdictions.

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


(millions)	2018		2017		2016
Balance at beginning of year		$61.5		$75.9		$74.6
Additions based on tax positions related to the current year		3.0		3.2		8.8
Additions for tax positions of prior years		2.0		-		2.1
Reductions for tax positions of prior years		(8.7)		(4.9)		(1.0)
Reductions for tax positions due to statute of limitations		(5.8)		(14.0)		(5.5)
Settlements		(0.8)		(10.8)		(2.0)
Assumed in connection with acquisitions		-		10.0		-
Foreign currency translation		(1.5)		2.1		(1.1)
Balance at end of year		$49.7		$61.5		$75.9

The total amount of unrecognized tax benefits, if recognized would have affected the effective tax rate by $36.4 million as of December 31, 2018, $47.1 million as of December 31, 2017 and $57.5 million as of December 31, 2016.

The Company recognizes interest and penalties related to unrecognized tax benefits in its provision for income taxes. During 2018, 2017 and 2016 the Company released $1.2 million, $0.9 million and $2.9 million related to interest and penalties, respectively. The Company had $8.1 million, $9.3 million and $10.2 million of accrued interest, including minor amounts for penalties, at December 31, 2018, 2017, and 2016, respectively.