Income Taxes

12 Months Ended

Dec. 31, 2019

A summary of consolidated income before provision for income taxes and equity in net income of affiliates and the components of provision for income taxes is shown below (in millions):



For the year ended December 31,	2019			2018			2017
Consolidated income before provision for income taxes and equity in net income of affiliates:
Domestic	$	317.4		$	726.2		$	449.5
Foreign	636.2			812.2			1,077.2
	$	953.6		$	1,538.4		$	1,526.7
Domestic (benefit) provision for income taxes:
Current provision	$	24.2		$	35.0		$	25.8
Deferred (benefit) provision	(52.6		)	91.5			(46.1		)
Total domestic (benefit) provision	(28.4		)	126.5			(20.3		)
Foreign provision for income taxes:
Current provision	160.1			190.2			253.0
Deferred (benefit) provision	14.4			(4.8		)	(35.2		)
Total foreign provision	174.5			185.4			217.8
Provision for income taxes	$	146.1		$	311.9		$	197.5

The Tax Cuts and Jobs Act (the "Act") was enacted on December 22, 2017. The Act reduced the U.S. federal corporate income tax rate from 35% to 21% beginning in 2018, required companies to pay a one-time transition tax on all offshore earnings that were previously tax deferred and created new taxes on certain foreign sourced earnings. In March 2018, the Financial Accounting Standards Board ("FASB") issued ASU 2018-05, "Income Taxes - Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118." The guidance provided for a provisional one-year measurement period for entities to finalize their accounting for certain tax effects related to the Act. Accordingly, for the year ended December 31, 2018, the Company recognized a favorable adjustment to the 2017 income tax expense of $5.3 million related to the remeasurement of the December 31, 2017 deferred tax balances, the one-time transition tax and numerous other items included in the Act. The Company also analyzed the impact of several new provisions of the Act that became effective as of January 1, 2018, such as global intangible low-tax income ("GILTI") provision, foreign-derived intangible income ("FDII") deduction, a new minimum tax related to payments to foreign subsidiaries and affiliates known as base erosion anti-abuse tax ("BEAT"), interest expense limitations under Internal Revenue Code ("IRC") section 163(j), executive compensation limitations under IRC section 162(m) and various other provisions.

The domestic (benefit) provision includes withholding taxes related to dividends and royalties paid by the Company’s foreign subsidiaries, as well as state and local taxes. In 2019, 2018 and 2017, the foreign deferred (benefit) provision includes the benefit of prior unrecognized net operating loss carryforwards of $1.8 million, $7.1 million and $11.5 million, respectively.

A summary of the differences between the provision for income taxes calculated at the United States federal statutory income tax rate of 21% in 2019 and 2018 and 35% in 2017 and the consolidated provision for income taxes is shown below (in millions):



For the year ended December 31,	2019			2018			2017
Consolidated income before provision for income taxes and equity in net income of affiliates multiplied by the United States federal statutory income tax rate	$	200.2		$	323.1		$	534.4
Differences in income taxes on foreign earnings, losses and remittances	13.8			56.6			(128.9		)
Valuation allowance adjustments	1.2			(52.4		)	(56.8		)
Research and development and other tax credits	(40.8		)	(9.9		)	(26.8		)
Foreign-derived intangible income ("FDII") deduction	(29.3		)	(27.6		)	—
U.S. expenses apportioned to GILTI and foreign branches ⁽¹⁾	10.4			17.6			—
Tax audits and assessments	0.4			6.9			(1.4		)
Change in the tax status of certain affiliates	(18.1		)	—			—
Transition tax on accumulated foreign earnings	—			(15.1		)	131.0
U.S. tax rate change and other tax reform items	—			9.8			42.5
Repatriation of certain foreign earnings	—			—			(289.7		)
Other	8.3			2.9			(6.8		)
Provision for income taxes	$	146.1		$	311.9		$	197.5


(1)	Reflects the U.S. tax impact of apportioning U.S. expenses against the GILTI and foreign branch baskets in calculating the foreign tax credit limitation resulting in no tax benefit for these expenses due to the Company’s excess foreign tax credit position in the GILTI basket for 2019 and 2018 and foreign branch basket for 2018.

In 2019, the Company completed a U.S. research and development ("R&D") tax credit study for the years 2013 to 2018, the results of which were accepted by the Internal Revenue Service and pursuant to which the Company recognized a tax benefit of $28.6 million. The tax benefit is reflected in the table above in research and development and other tax credits.

For the years ended December 31, 2019, 2018 and 2017, income in foreign jurisdictions with tax holidays was $87.0 million, $107.1 million and $124.1 million, respectively. Such tax holidays generally expire from 2020 through 2027.

Deferred income taxes represent temporary differences in the recognition of certain items for financial reporting and income tax purposes. A summary of the components of the net deferred income tax asset is shown below (in millions):



December 31,	2019			2018
Deferred income tax assets (liabilities):
Tax loss carryforwards	$	419.7		$	420.2
Tax credit carryforwards	294.0			260.6
Retirement benefit plans	59.1			54.2
Accrued liabilities	136.1			136.9
Self-insurance reserves	5.8			5.3
Current asset basis differences	43.7			37.8
Long-term asset basis differences	(65.4		)	(77.7		)
Deferred compensation	27.2			35.9
Recoverable customer engineering, development and tooling	(10.5		)	0.1
Undistributed earnings of foreign subsidiaries	(76.7		)	(75.0		)
Derivative instruments and hedging activities	(5.2		)	0.3
Other	(5.8		)	(2.7		)
	822.0			795.9
Valuation allowance	(344.8		)	(350.4		)
Net deferred income tax asset	$	477.2		$	445.5

As of December 31, 2019 and 2018, the valuation allowance with respect to the Company’s deferred tax assets was $344.8 million and $350.4 million, respectively, a net decrease of $5.6 million.

Concluding that a valuation allowance is not required is difficult when there is significant negative evidence, such as cumulative losses in recent years, which is objective and verifiable. When measuring cumulative losses in recent years, the Company uses a rolling three-year period of pretax book income, adjusted for permanent differences between book and taxable income and certain other items. As of December 31, 2019, the Company continues to maintain a valuation allowance of $11.8 million with respect to certain of its U.S. deferred tax assets that, due to their nature, are not likely to be realized. In addition, the Company continues to maintain a valuation allowance of $333.0 million with respect to its deferred tax assets in several international jurisdictions.

The classification of the net deferred income tax asset is shown below (in millions):



December 31,	2019			2018
Long-term deferred income tax assets	$	563.8		$	528.8
Long-term deferred income tax liabilities	(86.6		)	(83.3		)
Net deferred income tax asset	$	477.2		$	445.5

As of December 31, 2019, deferred income taxes have not been provided on the undistributed earnings of the Company’s foreign subsidiaries since these earnings will not be taxable upon repatriation to the United States. These earnings will be primarily treated as previously taxed income from either the one-time transition tax or GILTI, or they will be offset with a 100% dividend received deduction. However, the Company continues to provide a deferred tax liability for foreign withholding tax that will be incurred with respect to the undistributed foreign earnings that are not permanently reinvested.

As of December 31, 2019, the Company had tax loss carryforwards of $1.8 billion. Of the total tax loss carryforwards, $1.5 billion have no expiration date, and $265.0 million expire between 2020 and 2036. In addition, the Company had tax credit carryforwards of $294.0 million, comprised principally of U.S. foreign tax credits of $137.0 million that expire between 2023 and 2028, U.S. research and development credits of $110.0 million that expire between 2024 and 2039 and other tax credits primarily in international jurisdictions of $47.0 million that generally expire between 2020 and 2037.

On January 1, 2018, the Company adopted ASU 2016-16, "Income Taxes - Intra-Entity Transfers of Assets Other than Inventory." The new standard requires the recognition of the income tax effects of intercompany sales and transfers of assets other than inventory in the period in which the sale or transfer occurs. The standard also requires modified retrospective adoption. Accordingly, the Company recognized a deferred tax asset of $2.3 million and a corresponding credit to retained earnings in conjunction with the adoption. The effects of adopting the other provisions of ASU 2016-16 were not significant.

On January 1, 2017, the Company adopted ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting." The new standard requires that the tax impact related to the difference between share-based compensation for book and tax purposes be recognized as income tax benefit or expense in the Company’s consolidated statement of income in the reporting period in which such awards vest. The standard also required a modified retrospective adoption for previously unrecognized excess tax benefits. Accordingly, the Company recognized a deferred tax asset of $52.9 million and a corresponding credit to retained earnings in conjunction with the adoption. The effects of adopting the other provisions of ASU 2016-09 were not significant.

As of December 31, 2019, the Company’s gross unrecognized tax benefits were $31.6 million (excluding interest and penalties), of which $0.7 million is recorded in other current liabilities and $30.9 million is recorded in other long-term liabilities in the accompanying consolidated balance sheet. As of December 31, 2018, the Company’s gross unrecognized tax benefits were $36.7 million (excluding interest and penalties), all of which is recorded in other long-term liabilities in the accompanying consolidated balance sheet. If recognized, all of the Company’s gross unrecognized tax benefits would affect the Company’s effective tax rate.

A summary of the changes in gross unrecognized tax benefits is shown below (in millions):



For the year ended December 31,	2019			2018			2017
Balance at beginning of period	$	36.7		$	33.2		$	29.5
Additions (reductions) based on tax positions related to current year	(0.3		)	7.9			5.4
Additions (reductions) based on tax positions related to prior years	2.0			0.1			(0.3		)
Settlements	(3.7		)	—			(0.8		)
Statute expirations	(2.8		)	(2.7		)	(2.2		)
Foreign currency translation	(0.3		)	(1.8		)	1.6
Balance at end of period	$	31.6		$	36.7		$	33.2

The Company recognizes interest and penalties with respect to unrecognized tax benefits as income tax expense. As of December 31, 2019 and 2018, the Company had recorded gross reserves of $11.5 million and $11.8 million, respectively, related to interest and penalties, all of which, if recognized, would affect the Company’s effective tax rate.

The Company operates in multiple jurisdictions throughout the world, and its tax returns are periodically audited or subject to review by both domestic and foreign tax authorities. During the next twelve months, it is reasonably possible that, as a result of audit settlements, the conclusion of current examinations and the expiration of the statute of limitations in multiple jurisdictions, the Company may decrease the amount of its gross unrecognized tax benefits by $5.8 million, all of which, if recognized, would affect the Company’s effective tax rate. The gross unrecognized tax benefits subject to potential decrease involve issues related to transfer pricing and various other tax items in multiple jurisdictions. However, as a result of ongoing examinations, tax proceedings in certain countries, additions to the gross unrecognized tax benefits for positions taken and interest and penalties, if any, arising in 2020, it is not possible to estimate the potential net increase or decrease to the Company’s gross unrecognized tax benefits during the next twelve months.

The Company considers its significant tax jurisdictions to include China, Germany, Italy, Mexico, Morocco, Poland, Spain, the United Kingdom and the United States. The Company or its subsidiaries generally remain subject to income tax examination in certain U.S. state and local jurisdictions for years after 2012. Further, the Company or its subsidiaries remain subject to income tax examination in Spain for years after 2005, in Mexico for years after 2006, in Morocco for years after 2014, in Italy and Poland for years after 2013, in China and the United Kingdom for years after 2015 and in the United States generally for years after 2017.