Income Taxes

(Loss) income from continuing operations, before taxes for the years ended December 31 was as follows:



	2016			2015			2014
United States	$	(403.0	)	$	(230.3	)	$	(185.0	)
Foreign	434.2			253.0			385.8
Total	$	31.2		$	22.7		$	200.8

The U.S. loss before taxes, for the years ended December 31, 2016, 2015 and 2014, does not include dividend income from foreign subsidiaries. The provision for income taxes for the years ended December 31 was as follows:



	2016			2015			2014
Federal:
Current	$	—		$	—		$	—
Deferred	—			668.3			207.9
Total Federal	—			668.3			207.9
Foreign:
Current	128.5			173.9			309.3
Deferred	(4.2		)	(24.3		)	(11.4		)
Total Foreign	124.3			149.6			297.9
State and Local:
Current	.3			.7			(.4		)
Deferred	—			.6			39.9
Total State and other	.3			1.3			39.5
Total	$	124.6		$	819.2		$	545.3

The presentation of the federal and foreign tax provisions for the years ended December 31, 2015 and 2014 have been revised to reflect certain taxes, primarily withholding taxes, as foreign taxes, which were previously reported as federal taxes. While the withholding taxes associated with remittances to the U.S. parent from foreign subsidiaries is a tax paid to a foreign government on behalf of our U.S. entity, since our U.S. entity is not benefiting from the credit for those foreign taxes paid as it is in a loss position, we believe that the categorization as foreign taxes is a better presentation of these taxes. The amounts now reflected as foreign taxes, previously reported as federal taxes, were $41.6 and $57.3 for the years ended December 31, 2015 and 2014, respectively. This change in presentation did not have an impact on the Consolidated Statements of Operations.

The effective tax rate for the years ended December 31 was as follows:



	2016		2015		2014
Statutory federal rate	35.0	%	35.0	%	35.0	%
State and local taxes, net of federal tax benefit	.6		2.5		7.0
Tax on foreign income	(24.4	)	141.4		(6.5	)
Tax on uncertain tax positions	34.1		8.2		17.3
Venezuela deconsolidation, devaluation and highly inflationary accounting	23.9		168.1		27.4
FCPA accrual	—		—		(7.1	)
Reorganizations	(93.6	)	(173.5	)	—
Net change in valuation allowances	375.1		3,395.6		193.9
Imputed royalties and associated non-deductible expenses	50.3		41.2		4.7
Research credits	(5.4	)	(8.9	)	(1.0	)
Other	3.8		(.8	)	.9
Effective tax rate	399.4	%	3,608.8	%	271.6	%

In the fourth quarter of 2015, the Company recognized a benefit of $18.7 associated with the initial stages of implementation of foreign tax planning strategies which is reflected within the "Reorganizations" line above. We completed the implementation of these tax planning strategies and recognized an additional benefit of $29.3 in the first quarter of 2016.

Deferred tax assets (liabilities) resulting from temporary differences in the recognition of income and expense for tax and financial reporting purposes at December 31 consisted of the following:



	2016			2015
Deferred tax assets:
Tax loss and deduction carryforwards	$	2,033.0		$	899.9
Tax credit carryforwards	874.0			746.1
Accrued expenses and reserves	219.4			183.4
Capitalized expenses	124.5			171.0
Pension and postretirement benefits	44.3			129.2
All other	355.8			234.9
Valuation allowance	(3,296.0		)	(2,090.1		)
Total deferred tax assets	355.0			274.4
Deferred tax liabilities	$	(215.1	)	$	(123.8	)
Net deferred tax assets	$	139.9		$	150.6

The presentation of the deferred tax balances at December 31, 2015 has been revised to include a foreign net operating loss deferred tax asset of $118.0 and a related valuation allowance of $118.0. This change in presentation did not have an impact on the Consolidated Balance Sheets.

Deferred tax assets (liabilities) at December 31 were classified as follows:



	2016			2015
Deferred tax assets:
Other assets	$	162.1		$	172.8
Total deferred tax assets	162.1			172.8
Deferred tax liabilities:
Long-term income taxes	$	(22.2	)	$	(22.2	)
Total deferred tax liabilities	(22.2		)	(22.2		)
Net deferred tax assets	$	139.9		$	150.6

At December 31, 2016, we had recognized deferred tax assets of $874.0 relating to U.S. tax credit carryforwards (foreign tax credits, minimum tax credits, research and experimentation credits and investment tax credits) for which a valuation allowance of $874.0 has been provided. The U.S. tax credit carryforwards consist of foreign tax credits of $815.8 which are subject to expiration between 2018 and 2026; minimum tax credits of $35.9 which are not subject to expiration; research and experimentation credits of $18.0 which are subject to expiration between 2027 and 2036 and U.S. investment tax credits of $4.3 which are subject to expiration between 2020 and 2031.

At December 31, 2016, we had recognized deferred tax assets of $2,033.0 relating to foreign, state tax and federal loss carryforwards for which a valuation allowance of $1,994.1 has been provided. The deferred tax assets relating to tax loss carryforwards consist of $1,935.3 of foreign tax loss carryforwards, for which a valuation allowance of $1,896.4 has been provided, and state tax loss carryforwards of $97.7, for which a valuation allowance of $97.7 has been provided.

The foreign tax loss carryforwards at December 31, 2016 were $7,510.7, of which $7,118.3 are not subject to expiration and $392.4 are subject to expiration between 2017 and 2031. The state tax loss carryforwards at December 31, 2016, after taking into consideration the estimated effects of pre-apportionment states, were $1,579.6 which are subject to expiration between 2017 and 2036.

At December 31, 2016, as a result of our U.S. liquidity profile, we continue to assert that our foreign earnings are not indefinitely reinvested. Accordingly, we adjusted our deferred tax liability to account for the balance of our undistributed earnings of foreign subsidiaries and for the tax effect of earnings that were actually repatriated to the U.S. during the year. The deferred tax liability associated with the Company’s undistributed earnings decreased by $2.2, resulting in a deferred tax liability balance of $87.0 related to the incremental tax cost on $1.4 billion of undistributed foreign earnings at December 31, 2016. This deferred income tax liability amount is net of the estimated foreign tax credits that would be generated upon the repatriation of such earnings. The repatriation of foreign earnings may result in the utilization of a portion of our excess foreign tax credit carryforwards in the year of repatriation; therefore the utilization of our foreign tax credit carryforwards is dependent on the amount, timing and jurisdictional source of dividend repatriations.

At December 31, 2016, the valuation allowance primarily represents amounts for all U.S. deferred tax assets, certain foreign tax loss carryforwards and certain other foreign deferred tax assets. The recognition of deferred tax assets was based on the evaluation of current and estimated future profitability of the operations, reversal of deferred tax liabilities and the likelihood of utilizing tax credit and/or loss carryforwards. Tax planning strategies were also considered and evaluated as support for the realization of deferred tax assets. Where these sources of income existed along with sufficient positive evidence that indicated it was more likely than not that such sources of income could be relied upon, then the deferred tax assets were not reduced by a valuation allowance.

During 2015, the Company recorded an additional valuation allowance for the remaining U.S. deferred tax assets of $669.7. The increase in the valuation allowance resulted from management’s determination that it was no longer more likely than not to realize the tax benefits expected to be obtained from tax planning strategies associated with an anticipated accelerated receipt in the U.S. of foreign source income. As the U.S. dollar had further strengthened against currencies of some of our key markets during 2015, the benefits associated with the Company’s tax planning strategies were no longer sufficient for the Company to continue to conclude that its tax planning strategies were prudent. In the absence of any alternative prudent tax planning strategies and other sources of future taxable income, it was determined that a full valuation allowance should be recorded. Although the Company continues to expect that it will generate taxable income and tax liability in the U.S., the Company is expected to offset its current and future tax liability with foreign tax credits, and as a result, the expected level of future taxable income and tax liability is not adequate to realize the benefit of previously recorded deferred tax assets. Although the Company may not be able to recognize a financial statement benefit associated with its deferred tax assets, the Company will continue to manage and plan for the utilization of its deferred tax assets to avoid the expiration of deferred tax assets that have limited lives.

During 2014, the Company’s expected net foreign source income was reduced significantly, primarily due to the strengthening of the U.S. dollar against currencies for some of our key markets and, to a lesser extent, the finalization of the Foreign Corrupt Practices Act ("FCPA") settlements. This strengthening of the U.S. dollar reduced the expected dividends and royalties that could be remitted to the U.S. by our foreign subsidiaries, particularly Russia, Brazil, Mexico and Colombia. The effectiveness of our tax planning strategies, including the repatriation of foreign earnings and the acceleration of royalties from our foreign subsidiaries, was also negatively impacted by the strengthening of the U.S. dollar. In addition, the finalization of the FCPA settlements, which included a $68 fine related to Avon China in connection with the U.S. Department of Justice (the "DOJ") settlement and $67 in disgorgement and prejudgment interest related to Avon Products, Inc. in connection with the U.S. Securities and Exchange Commission (the "SEC") settlement, negatively impacted expected future repatriation of foreign earnings and reduced current U.S. taxable income, respectively. As a result of these developments, we determined that we may not generate sufficient taxable income to realize all of our U.S. deferred tax assets. As such, we recorded a valuation allowance of $441 to reduce our U.S. deferred tax assets to an amount that is "more likely than not" to be realized, of which $367 was recorded to income taxes in the Consolidated Statements of Income and the remainder was recorded to various components of other comprehensive (loss) income.

Uncertain Tax Positions

At December 31, 2016, we had $58.7 of total gross unrecognized tax benefits of which approximately $43.1 would favorably impact the provision for income taxes, if recognized.

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




Balance at December 31, 2013	$	26.0
Additions based on tax positions related to the current year	1.4
Additions for tax positions of prior years	37.7
Reductions for tax positions of prior years	(4.7		)
Reductions due to lapse of statute of limitations	(1.7		)
Reductions due to settlements with tax authorities	(2.0		)
Balance at December 31, 2014	56.7
Additions based on tax positions related to the current year	3.5
Additions for tax positions of prior years	5.7
Reductions for tax positions of prior years	(1.5		)
Reductions due to lapse of statute of limitations	(.4		)
Reductions due to settlements with tax authorities	(11.0		)
Balance at December 31, 2015	53.0
Additions based on tax positions related to the current year	1.8
Additions for tax positions of prior years	9.4
Reductions for tax positions of prior years	(2.8		)
Reductions due to lapse of statute of limitations	(.7		)
Reductions due to settlements with tax authorities	(2.0		)
Balance at December 31, 2016	$	58.7

We accrue interest and penalties related to unrecognized tax benefits in the provision for income taxes. We recorded expense of $2.5, $2.8 and $.9 for interest and penalties, net of taxes during 2016, 2015 and 2014, respectively. At December 31, 2016 and December 31, 2015 we had $9.3 and $6.6, respectively, recorded for interest and penalties, net of tax benefit.

We file income tax returns in the U.S. and foreign jurisdictions. As of December 31, 2016, the tax years that remained subject to examination by major tax jurisdiction for our most significant subsidiaries were as follows:



Jurisdiction	Open Years
Brazil	2010-2016
Mexico	2011-2016
Philippines	2013-2016
Poland	2011-2016
Russia	2014-2016
United States (Federal)	2014-2016

We anticipate that it is reasonably possible that the total amount of unrecognized tax benefits could decrease in the range of $14 to $30 within the next twelve months due to the closure of tax years by expiration of the statute of limitations, audit closures and settlements.