Income Taxes

On December 22, 2017, the United States enacted tax reform legislation commonly known as the Tax Cuts and Jobs Act (the “Tax Act”), resulting in significant modifications to existing U.S. tax law, including but not limited to, (1) lowering the corporate federal income tax rate from 35% to 21% effective January 1, 2018; (2) eliminating the domestic production activity deduction; (3) implementing a territorial tax system; and (4) imposing a one-time repatriation tax on deemed repatriated earnings of foreign subsidiaries.

Deferred tax assets and liabilities are determined based on the differences between the financial statement carrying amounts and tax bases of assets and liabilities as measured by the enacted tax rates that are expected to be in effect when these differences reverse. Deferred tax expense (benefit) is generally the result of changes in the assets or liabilities for deferred taxes. As a result of the reduction in the U.S. corporate income tax rate from 35% to 21% under the Tax Act, we revalued our ending net deferred tax liabilities at December 31, 2017 and recognized a provisional $22.1 million tax benefit in the Consolidated Statement of Income for the year ended December 31, 2017.

The Tax Act provides for a one-time deemed mandatory repatriation of post-1986 undistributed foreign subsidiary earnings and profits through the year ended December 31, 2017 (“Transition Tax”). We have estimated a provisional Transition Tax of $8.4 million, recorded to income tax expense in the Consolidated Statement of Income for the year ended December 31, 2017. The Transition Tax is payable over eight years and thus $7.3 million of the Transition Tax is reported as noncurrent on the Consolidated Balance Sheet.

The Tax Act provides for a new requirement, beginning in 2018, that certain income earned by controlled foreign corporations in excess of an allowable return on foreign subsidiary’s tangible assets is subject to U.S. income tax (the global intangible low-taxed income or “GILTI” provision). Also beginning in 2018, the Tax Act provides for a new base erosion and anti-abuse tax provision (“BEAT”) which eliminates the deduction of certain base-erosion payments made to related foreign corporations and imposes a minimum tax if greater than regular tax. We do not expect the GILTI or BEAT provisions to have a material impact to our financial statements and therefore, have not provided any tax impacts in our consolidated financial statements for the year ended December 31, 2017.

The SEC staff issued Staff Accounting Bulletin 118 (“SAB 118”) which provides additional clarification regarding situations where the Company does not have the necessary information available, prepared, or analyzed in reasonable detail to complete the accounting for certain income tax effects of the Tax Act for the reporting period in which the Tax Act was enacted. We have recognized the provisional tax impacts, based on reasonable estimates, related to the Transition Tax and the revaluation of deferred tax assets and liabilities and have included these amounts in our consolidated financial statements for the year ended December 31, 2017. The ultimate impact may differ from these provisional amounts, possibly materially, due to among other things, additional analysis, changes in interpretations and assumptions we have made, additional regulatory guidance that may be issued, and actions we may take as a result of the Tax Act. We intend to complete our accounting under the Tax Act within the measurement period set forth in SAB 118.

The following summarizes pretax income from continuing operations (in millions):



	Year Ended December 31,
	2017		2016		2015
U.S.	$	451.8	$	248.2	$	451.9
International	80.1		31.0		6.9
Total	$	531.9	$	279.2	$	458.8

Provision for income taxes (benefits) from continuing operations consists of the following components (in millions):



	Year Ended December 31,
	2017			2016			2015
Current
Federal	$	93.7		$	57.7		$	147.4
State and local	4.0			11.4			10.2
International	13.7			15.0			7.1
Total current	111.4			84.1			164.7
Deferred
Federal	(34.2		)	19.9			(13.5		)
State and local	2.4			(1.9		)	0.5
International	4.7			(1.0		)	(2.5		)
Total deferred	(27.1		)	17.0			(15.5		)
Total provision for income taxes	$	84.3		$	101.1		$	149.2

Following are the reconciliations of our effective income tax rates and the U.S. federal income tax statutory rate (in millions):



	Year Ended December 31,
	2017			2016			2015
Provision for income taxes using the statutory rate in effect	$	186.2		$	97.7		$	160.6
Tax effect of:
State and local income taxes, net	4.5			5.9			4.3
International income taxes, net	(9.5		)	2.5			(1.0		)
Earnings of U.S. unconsolidated affiliates	(1.0		)	(2.3		)	(1.5		)
Valuation allowance (reversal), net	(1.3		)	(0.9		)	1.2
Tax credits	(1.0		)	(5.0		)	(7.7		)
Uncertain tax positions (reversal), net	(2.8		)	1.7			(7.9		)
Dividend received deduction	(0.1		)	(0.8		)	(1.2		)
Domestic production activities deduction	(2.5		)	(1.7		)	(0.1		)
Repatriation	1.0			1.0			1.9
Tax Cuts and Jobs Act impact	(13.7		)	—			—
Tax impact of transactions	(71.4		)	—			—
Other	(4.1		)	3.0			0.6
Total provision for income taxes	$	84.3		$	101.1		$	149.2
Effective tax rate	15.8		%	36.2		%	32.5		%
Statutory federal tax rate	35.0		%	35.0		%	35.0		%

The federal and state deferred tax assets (liabilities) recorded on the Consolidated Balance Sheet are as follows (in millions):



	December 31,
	2017			2016
Liabilities:
Deferred cancellation of debt income	$	(11.7	)	$	(36.4	)
Investments in available-for-sale securities	(0.6		)	(62.2		)
Unconsolidated affiliates and investments	(19.7		)	(27.9		)
Accumulated depreciation and amortization	(62.8		)	(65.3		)
Prepaid expenses	—			(5.5		)
Other	(3.5		)	—
Total deferred tax liabilities	(98.3		)	(197.3		)
Assets:
Deferred compensation and other employee benefits	24.4			23.2
Net operating loss	14.9			8.5
Accrued liabilities	16.2			26.9
Prepaid expenses	4.4			—
Other	—			1.4
Total deferred tax assets	59.9			60.0
Valuation allowance	(7.1		)	(6.0		)
Net deferred tax liability	$	(45.5	)	$	(143.3	)

We have approximately $4.1 million of federal net operating losses as of December 31, 2017 as a result of prior year business combinations. These net operating losses begin to expire in 2034 and are available to reduce future income taxes. Since these net operating losses were generated by an entity prior to its acquisition by DST, our utilization is subject to certain limitations imposed by the Internal Revenue Code. We do not anticipate that such limitations will prohibit the utilization of the federal net operating loss carryforwards prior to their expiration. We have approximately $48.4 million of state net operating losses as of December 31, 2017. These net operating losses begin to expire in 2023.

We have approximately $53.9 million of net operating loss carryforwards in foreign jurisdictions as of December 31, 2017. The carryforwards of $23.4 million in the U.K. do not expire but their utilization may be limited to offset only income with certain characteristics. The carryforwards of $13.1 million and $13.0 million in Ireland and Australia, respectively, do not expire. The carryforwards of $4.4 million in Canada begin to expire in 2032.

A valuation allowance is recorded against deferred tax assets if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. In evaluating the realizability of certain international net deferred tax assets, we also anticipate that limitations may result in the benefit of these amounts not being realized and have established corresponding valuation allowances as of December 31, 2017 and 2016 of $6.9 million and $5.7 million, respectively. In evaluating certain state net operating losses, we anticipate that limitations may result in the benefit of these amounts not being realized and have established a corresponding valuation allowance as of December 31, 2017 and 2016 of $0.2 million and $0.3 million, respectively.

We provide deferred taxes for unremitted earnings of U.S. unconsolidated affiliates net of the 80% dividends received deduction provided for under current tax law. In connection with the acquisition of the remaining interest in BFDS during March 2017, the corresponding deferred tax balance related to unremitted earnings of U.S. unconsolidated affiliates was reduced and no balance remains as of December 31, 2017. Deferred taxes provided on unremitted earnings through December 31, 2016 were $6.5 million.

We record U.S. tax on the undistributed earnings of foreign subsidiaries unless the subsidiaries’ earnings are considered indefinitely reinvested outside the U.S. Distributions in 2017, 2016, and 2015 resulted in incremental taxes of $1.0 million, $1.0 million and $1.9 million, respectively. We recorded approximately $2.3 million and $2.6 million of related income tax liability, net of credits, on unremitted earnings in 2017 and 2016, respectively.

We intend to indefinitely reinvest the earnings in the businesses of our other foreign subsidiaries. As of December 31, 2017, accumulated undistributed earnings considered indefinitely reinvested were $186.2 million. The Tax Act generally eliminates U.S. federal income taxes on dividends from foreign subsidiaries after December 31, 2017. As a result, the accumulated undistributed earnings would only be subject to other taxes, such as withholding taxes and local taxes, on distribution of such earnings. Due to the uncertainty of the manner in which the undistributed earnings would be brought back to the U.S. and the withholding and local tax laws in effect at that time, it is not practicable for us to determine the income tax we would incur, if any, if such earnings were distributed.

A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows (in millions):



	Year Ended December 31,
	2017			2016			2015
Balance at beginning of year	$	57.6		$	60.3		$	69.8
Additions based on tax positions related to the current year	3.0			3.5			9.0
Additions for tax positions of prior years	8.0			2.7			2.2
Reductions for tax positions of prior years	(5.3		)	(7.7		)	(19.5		)
Settlements	(0.2		)	(1.2		)	(0.4		)
Statute expirations	(10.7		)	—			(0.8		)
Balance at end of year	$	52.4		$	57.6		$	60.3

Included in the net unrecognized tax benefit at December 31, 2017, 2016 and 2015 were $43.6 million, $40.9 million and $42.0 million, respectively, of tax positions which, if recognized, would affect the effective tax rate. We recognize interest and penalties accrued related to unrecognized tax benefits in income taxes, which is consistent with the recognition of these items in prior reporting periods. The liability for interest and penalties associated with unrecognized tax benefits increased $2.7 million during the year ended December 31, 2017 to $13.1 million. The liability for interest and penalties decreased $1.1 million during the year ended December 31, 2016.

Although it is difficult to predict when all uncertain tax positions will reverse due to the unknown timing of the completion of examination periods, it is possible that aggregate income tax amounts of approximately $5.0 million to $7.0 million may reverse during 2017.

We file income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. An IRS examination for the tax year ended December 31, 2010 was completed in September 2015. Federal tax years 2012 through 2017 are subject to examination while various years from 2007 through 2017 are under or are subject to various state, local, and foreign income tax examinations by taxing authorities. We do not believe that the outcome of any examination will have a material impact on our financial statements.

During 2015, the IRS completed its examination of the previously filed federal income tax refund claims for Domestic Manufacturing Deductions, research and experimentation credits and capital losses for the period 2010. As a result, during 2015 we recognized income tax benefits of $11.9 million, resulting from the reversal of previously reserved tax positions related to these matters as well as other remeasurements during the period.

An IRS examination for the tax year ended December 31, 2014 began during 2017. An IRS examination of BFDS for the tax year ended December 31, 2015 (when BFDS was an unconsolidated affiliate) began during 2017.