14. Income Taxes

The following table presents the provision for income taxes and our effective tax rate for the three and six months ended January 31, 2016 and 2015:


	Three Months Ended						Six Months Ended
	January 31,						January 31,
(in millions except percentages)	2016			2015			2016			2015
Provision for income taxes	$	1.0		$	2.3		$	1.1		$	3.7
Effective tax rate		-51	%		19	%		-244	%		22	%

The effective income tax rate on operations is based upon the estimated income for the year, the composition of the income in different countries, and adjustments, if any, in the applicable quarterly periods for the potential tax consequences, benefits, resolutions of tax audits or other tax contingencies.

A reconciliation of income taxes at the U.S. statutory rate to the effective tax rate follows:


	Six Months Ended			Six Months Ended
	January 31,			January 31,
(in %)	2016			2015
U.S. Federal statutory tax rate (%)		35			35
State income taxes, net of federal tax benefit		(2	)		(1	)
Domestic production benefit		—			(1	)
General business credit (U.S. R&D)		81			(6	)
Valuation allowance		1			1
Effect of international operations		(106	)		(8	)
(Increase) decrease in tax reserves		(332	)		—
Other items, net		79			2

Effective tax rate (%)		(244	)		22

Our effective tax rate for the three and six months ended January 31, 2016 differs from the statutory rate of 35% primarily due to non-deductible and reserve items related to the BK Medical matter. Additional impacts to our rate resulted from income generated outside the United States in countries with lower tax rates, and from tax credits in the United States and Canada. The tax provision for the three and six months ended January 31, 2016 includes discrete tax provisions totaling $1.4 million and $1.3 million, respectively. The BK Medical matter is discussed in more detail in Note 16, Guarantees, Commitments and Contingencies.

Our effective tax rate for the three and six months ended January 31, 2015 is lower than the statutory rate of 35% due primarily to income generated outside the United States in countries with lower tax rates, the U.S. manufacturing deduction, and tax credits in the U.S. and Canada.

We are subject to U.S. Federal income tax as well as the income tax of multiple state and foreign jurisdictions. As of January 31, 2016, we have concluded all U.S. Federal income tax matters through the year ended July 31, 2011.

We accrue interest and, if applicable, penalties for any uncertain tax positions. This interest and penalty expense is treated as a component of income tax expense. At January 31, 2016 and July 31, 2015, we had approximately $0.4 million and $0.3 million, respectively, accrued for interest and penalties on unrecognized tax benefits.

At January 31, 2016, we had $6.2 million of unrecognized tax benefits for uncertain tax positions and $0.4 million of related accrued interest and penalties. We are unable to reasonably estimate the amount and period in which these liabilities might be paid.

As discussed in Note 2, Recent Accounting Pronouncements, during the second quarter of fiscal year 2016 ended January 31, 2016, we retrospectively adopted ASU No. 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes.” The effects of the accounting change on the July 31, 2015 Consolidated Balance Sheets were as follows:


	July 31,
(in millions)	2015
	Revised		Reported
Current deferred tax asset	$	—	$	7,987
Non-current deferred tax asset		9,904		5,308
Non-current deferred tax liability		—		(3,391	)

Net deferred tax assets	$	9,904	$	9,904