Note 8: Income Taxes

The source of earnings before income taxes and equity earnings consisted of the following:


(Amounts in millions)	2017		2016		2015
United States	$	645.5	$	644.0	$	578.4
Foreign		176.4		157.4		132.1

Total	$	821.9	$	801.4	$	710.5

The provision (benefit) for income taxes consisted of the following:


(Amounts in millions)	2017		2016		2015
Current:
Federal	$	166.9	$	175.9	$	165.8
Foreign		41.1		39.9		40.8
State		30.6		27.2		19.7

Total current		238.6		243.0		226.3


Deferred:
Federal		8.7		6.3		(8.7)
Foreign		2.9		(6.7)		3.9
State		0.7		1.7		(0.3)

Total deferred		12.3		1.3		(5.1)

Total income tax provision	$	250.9	$	244.3	$	221.2

The following is a reconciliation of the statutory federal income tax rate to Snap-on’s effective tax rate:


	2017		2016		2015
Statutory federal income tax rate		35.0%		35.0%		35.0%
Increase (decrease) in tax rate resulting from:
State income taxes, net of federal benefit		2.4		2.4		2.3
Noncontrolling interests		(0.6)		(0.6)		(0.6)
Repatriation of foreign earnings		(1.2)		(0.1)		(3.0)
Change in valuation allowance for deferred tax assets		0.1		(1.0)		0.1
Adjustments to tax accruals and reserves		(0.3)		0.3		0.8
Foreign rate differences		(2.4)		(2.1)		(1.9)
Domestic production activities deduction		(2.1)		(1.9)		(1.9)
Excess tax benefits related to equity compensation		(1.4)		(1.8)		–
U.S. tax reform, net impact		0.9		–		–
Other		0.1		0.3		0.3

Effective tax rate		30.5%		30.5%		31.1%

Snap-on’s effective income tax rate on earnings attributable to Snap-on Incorporated was 31.1% in 2017, 31.0% in 2016, and 31.7% in 2015. The effective tax rate for 2017 included the one-time net tax costs associated with the newly enacted “H.R.1”, formerly known as the Tax Cuts and Jobs Act (the “Tax Act”), which was signed into law in the fourth quarter of 2017, as well as tax benefits associated with certain legal matters. The effective tax rate for 2016 included tax benefits from the reversal of deferred tax asset valuation allowances that are now expected to be realized in future years, as well as tax benefits associated with the January 3, 2016 adoption of ASU No. 2016-09, Compensation – Stock Compensation (Topic 718) – Improvements to Employee Share-Based Payment Accounting; these tax benefits were partially offset by tax contingency reserves established for certain non-U.S. tax audits.

On December 22, 2017, the U.S. government passed the Tax Act. The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to: (i) reducing the future U.S. federal corporate tax rate from 35 percent to 21 percent; (ii) requiring companies to pay a one-time transition tax on certain unremitted earnings of foreign subsidiaries; and (iii) bonus depreciation that will allow for full expensing of qualified property.

The Tax Act also established new tax laws that will affect 2018, including, but not limited to: (i) the reduction of the U.S. federal corporate tax rate discussed above; (ii) a general elimination of U.S. federal income taxes on dividends from foreign subsidiaries; (iii) a new provision designed to tax global intangible low-taxed income (“GILTI”); (iv) the repeal of the domestic production activity deductions; (v) limitations on the deductibility of certain executive compensation; (vi) limitations on the use of foreign tax credits to reduce the U.S. income tax liability; and (vii) a new provision that allows a domestic corporation an immediate deduction for a portion of its foreign derived intangible income (“FDII”).

The Securities and Exchange Commission staff issued Staff Accounting Bulletin (“SAB”) 118, which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the related accounting under ASC 740, Accounting for Income Taxes. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for a certain income tax effect of the Tax Act is incomplete, but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.

The company’s accounting for certain elements of the Tax Act is incomplete. However, the company was able to make reasonable estimates of the effects and, therefore, recorded provisional estimates for these items. In connection with its initial analysis of the impact of the Tax Act, the company has recorded a provisional discrete net tax expense of $7.0 million in the period ended December 30, 2017. This provisional estimate consists of a net expense of $13.7 million for the one-time transition tax and a net benefit of $6.7 million related to revaluation of deferred tax assets and liabilities, caused by the new lower corporate tax rate. To determine the transition tax, the company must determine the amount of post-1986 accumulated earnings and profits of the relevant subsidiaries, as well as the amount of non-U.S. income taxes paid on such earnings. While the company was able to make a reasonable estimate of the transition tax, it is continuing to gather additional information to more precisely compute the final amount. Likewise, while the company was able to make a reasonable estimate of the impact of the reduction to the corporate tax rate, it may be affected by other analyses related to the Tax Act, including, but not limited to, the state tax effect of adjustments made to federal temporary differences. Due to the complexity of the new GILTI tax rules, the company is continuing to evaluate this provision of the Tax Act and the application of ASC 740. Under GAAP, the company is allowed to make an accounting policy choice to either: (1) treat taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred (the “period cost method”); or (2) factor in such amounts into a company’s measurement of its deferred taxes (the “deferred method”). The company’s selection of an accounting policy with respect to the new GILTI tax rules is dependent on additional analysis and potential future modifications to existing structure, which are not currently known. Accordingly, the company has not made any adjustments related to potential GILTI tax in our financial statements and have not made a policy decision regarding whether to record deferred taxes on GILTI. The company will continue to analyze the full effects of the Tax Act on its financial statements. The impact of the Tax Act may differ from the current estimate, possibly materially, due to changes in interpretations and assumptions the company has made, future guidance that may be issued and actions the company may take as a result of the law.

Temporary differences that give rise to the net deferred income tax asset (liability) as of 2017, 2016 and 2015 year end are as follows:



(Amounts in millions)	2017		2016		2015
Long-term deferred income tax assets (liabilities):
Inventories		$ 28.8		$33.3		$29.4
Accruals not currently deductible		61.7		77.7		71.1
Tax credit carryforward		2.1		15.1		10.2
Employee benefits		56.8		108.1		101.2
Net operating losses		44.0		42.8		44.4
Depreciation and amortization		(161.3)		(209.8)		(199.3)
Valuation allowance		(25.2)		(21.7)		(32.0)
Equity-based compensation		17.1		24.3		22.7
Cash flow hedge		(0.3)		(5.5)		–
Other		(0.1)		(4.6)		(1.6)

Net deferred income tax asset		$ 23.6		$ 59.7		$ 46.1

As of 2017 year end, Snap-on had tax net operating loss carryforwards totaling $240.3 million as follows:


(Amounts in millions)	State		Federal		Foreign		Total
Year of expiration:
2018-2022		$ 0.1		$ –		$ 45.8		$ 45.9
2023-2027		0.2		–		8.0		8.2
2028-2032		107.1		–		38.1		145.2
2033-2037		–		–		–		–
Indefinite		–		–		41.0		41.0

Total net operating loss carryforwards		$ 107.4		$ –		$ 132.9		$ 240.3

A valuation allowance totaling $25.2 million, $21.7 million and $32.0 million as of 2017, 2016 and 2015 year end, respectively, has been established for deferred income tax assets primarily related to certain subsidiary loss carryforwards that may not be realized. For the year ended December 31, 2016, the net valuation allowance decreased by $10.3 million primarily due to a non-U.S. subsidiary having, in part, attained three years of cumulative pretax income and, as a result, management concluded there is sufficient positive evidence that it is more-likely-than-not that additional deferred taxes are realizable. Realization of the net deferred income tax assets is dependent on generating sufficient taxable income prior to their expiration. Although realization is not assured, management believes it is more-likely-than-not that the net deferred income tax assets will be realized. The amount of the net deferred income tax assets considered realizable, however, could change in the near term if estimates of future taxable income during the carryforward period fluctuate.

The following is a reconciliation of the beginning and ending amounts of unrecognized tax benefits for 2017, 2016 and 2015:


(Amounts in millions)	2017		2016		2015
Unrecognized tax benefits at beginning of year		$ 9.4		$ 7.2		$ 6.4
Gross increases – tax positions in prior periods		1.4		2.5		1.7
Gross decreases – tax positions in prior periods		–		(0.3)		(0.5)
Gross increases – tax positions in the current period		1.0		0.5		0.5
Settlements with taxing authorities		(3.6)		–		–
Lapsing of statutes of limitations		(0.5)		(0.5)		(0.9)

Unrecognized tax benefits at end of year		$ 7.7		$ 9.4		$ 7.2

The unrecognized tax benefits of $7.7 million, $9.4 million and $7.2 million as of 2017, 2016 and 2015 year end, respectively, would impact the effective income tax rate if recognized. As of December 30, 2017, unrecognized tax benefits of $1.8 million, $2.4 million and $3.5 million were included in “Deferred income tax assets,” “Other accrued liabilities” and “Other long-term liabilities,” respectively, on the accompanying Consolidated Balance Sheet. Interest and penalties related to unrecognized tax benefits are recorded in income tax expense. As of 2017, 2016 and 2015 year end, the company had provided for $0.6 million, $0.9 million and $0.5 million, respectively, of accrued interest and penalties related to unrecognized tax benefits. During 2017, the company decreased the reserve attributable to interest and penalties associated with unrecognized tax benefits by a net $0.3 million. As of December 30, 2017, $0.1 million and $0.5 million of accrued interest and penalties were included in “Other accrued liabilities” and “Other long-term liabilities,” respectively, on the accompanying Consolidated Balance Sheet.

Snap-on and its subsidiaries file income tax returns in the United States and in various state, local and foreign jurisdictions. It is reasonably possible that certain unrecognized tax benefits may either be settled with taxing authorities or the statutes of limitations for such items may lapse within the next 12 months, causing Snap-on’s gross unrecognized tax benefits to decrease by a range of zero to $3.2 million. Over the next 12 months, Snap-on anticipates taking certain tax positions on various tax returns for which the related tax benefit does not meet the recognition threshold. Accordingly, Snap-on’s gross unrecognized tax benefits may increase by a range of zero to $1.3 million over the next 12 months for uncertain tax positions expected to be taken in future tax filings.

With few exceptions, Snap-on is no longer subject to U.S. federal and state/local income tax examinations by tax authorities for years prior to 2012, and Snap-on is no longer subject to non-U.S. income tax examinations by tax authorities for years prior to 2012.

The undistributed earnings of all non-U.S. subsidiaries totaled $876.7 million, $800.6 million and $624.1 million as of 2017, 2016 and 2015 year end, respectively. As a result of the Tax Act, the company is currently analyzing its global working capital and cash requirements and the potential tax liabilities attributable to any future repatriation, but the company has yet to determine whether it plans to change its prior assertion and repatriate earnings. Accordingly, the company has not recorded any deferred taxes attributable to its investments in foreign subsidiaries. The company will record the tax effects of any change in its prior assertion in the period that it has completed the analysis and is able to make a reasonable estimate, and disclose any unrecognized deferred tax liability for temporary differences related to its foreign investments, if practicable.