13. 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, 2018 and 2017:

	Three Months Ended						Six Months Ended
	January 31,						January 31,
(in millions except percentages)	2018			2017			2018			2017
Provision for income taxes	$	10.1		$	2.0		$	12.6		$	2.9
Effective tax rate		61	%		21	%		51	%		23	%

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.

The Tax Cuts and Jobs Act (the “Act”) was enacted on December 22, 2017. The Act reduces the U.S. federal corporate tax rate from 35% to 21%, as of January 1, 2018, requires companies to pay a one-time transition tax on earnings of foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings. We are required to calculate our statutory rate based on the number of days in our fiscal year in which the 35% and 21% rates applied. We have calculated that our statutory rate for the year is 27%.

As of January 31, 2018, we have not completed our accounting for the tax effects of enactment of the Act; however, in certain cases, as described below, we have made a reasonable estimate of the effects of the Act, including the effects on our existing deferred tax balances and the one-time transition tax as permitted by the SEC Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB 118). For the items for which we were able to determine a reasonable estimate, we recognized a provisional amount of $6.5 million for the one-time transition tax, which is included as a component of income tax expense from continuing operations.

Our effective tax rate for the three and six months ended January 31, 2018 is higher than the statutory rate of 27% primarily due to tax effects of the Act. Our statutory U.S. federal tax rate in fiscal 2018 is 27% since the 21% tax is effective January 1, 2018, resulting in a blended tax rate for our fiscal year. With the exception of the one-time transition tax, our effective tax rate was lower than the statutory rate of 27% primarily due to income generated outside the United States in countries with lower tax rates, and due to tax credits in the United States and Canada, offset by certain discrete tax expense. The tax provision for the three and six months ended January 31, 2018 includes discrete tax expense totaling $7.0 million, of which $6.5 million is considered a provisional estimate of one-time transition tax on our accumulated earnings of foreign subsidiaries under SAB 118 and $0.5 tax expense for a net shortfall on exercise of stock compensation. The Company’s provisional estimate of $6.5 million includes approximately $6.5 million of one-time transition tax. The provisional amount recorded related to the remeasurement of our deferred tax balance was tax expense of $3.0 million, which was fully offset by a corresponding remeasurement of the valuation allowance we have recorded against our net U.S. deferred tax assets.

Provisional amounts

Deferred tax assets and liabilities: We remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future. However, we are still analyzing certain aspects of the Act and refining our calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. The provisional amount recorded related to the remeasurement of our deferred tax balance was tax expense of $3.0 million, which was fully offset by a corresponding remeasurement of the valuation allowance we have recorded against our net U.S. deferred tax assets.

Foreign tax effects: The one-time transition tax is based on our total post-1986 earnings and profits (E&P) in all foreign subsidiaries which we have previously deferred from US income taxes. We recorded a provisional amount for our one-time transition tax liability for all of our foreign subsidiaries, resulting in an increase in income tax expense of $6.5 million, which will be paid over the next eight years. We are refining our calculation of the total post-1986 foreign E&P for these foreign subsidiaries. Further, the transition tax is based in part on the amount of those earnings held in cash and other specified assets. This amount may change when we finalize the calculation of post-1986 foreign E&P previously deferred from US federal taxation and finalize the amounts held in cash or other specified assets. No additional income taxes have been provided for any remaining undistributed foreign earnings not subject to the transition tax, specifically earnings of the foreign subsidiaries earned after December 31, 2017 and before July 31, 2018, and any additional outside basis difference inherent in these entities as these amounts continue to be indefinitely reinvested in foreign operations.

Our effective tax rate for the three and six months ended January 31, 2017 was lower than the statutory rate of 35% primarily due to income generated outside the United States in countries with lower tax rates, tax credits in the United States and Canada, and the manufacturing deduction in the United States. The tax provision for the three and six months ended January 31, 2017 includes discrete tax benefits totaling less than $0.4 million.

We are subject to US Federal income tax as well as the income tax of multiple state and foreign jurisdictions. As of January 31, 2018, we have concluded all US Federal income tax matters through the year ended July 31, 2013. We are currently under income tax audits in the U.S., Canada, and Denmark.

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, 2018 and July 31, 2017, we had approximately $0.2 million and $0.1 million accrued for interest and penalties on unrecognized tax benefits, respectively.

At January 31, 2018, we had $4.5 million of unrecognized tax benefits for uncertain tax positions and $0.2 million of related accrued interest and penalties. We are unable to reasonably estimate the amount and period in which these liabilities might be paid.

We do not provide for US Federal income taxes on undistributed earnings of consolidated foreign subsidiaries, as such earnings are intended to be indefinitely reinvested in those operations. Determination of the potential deferred income tax liability on these undistributed earnings is not practicable because such liability, if any, is dependent on circumstances that exist if and when remittance occurs. The circumstances that would affect the calculations would be the source location and amount of the distribution, the underlying tax rate already paid on the earnings, foreign withholding taxes and the opportunity to use foreign tax credits.