Income Taxes

12 Months Ended

Dec. 31, 2016

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes:

Income from continuing operations before income taxes and equity in net income of unconsolidated investments, and current and deferred income tax expense (benefit) are composed of the following (in thousands):

	Year Ended December 31,
	2016			2015			2014
Income from continuing operations before income taxes and equity in net income of unconsolidated investments:
Domestic	$	49,630		$	(15,861	)	$	45,689
Foreign	465,634			326,605			167,490
Total	$	515,264		$	310,744		$	213,179
Current income tax expense (benefit):
Federal	$	7,717		$	76,778		$	36,708
State	1,407			(983		)	3,209
Foreign	63,957			58,710			25,700
Total	$	73,081		$	134,505		$	65,617
Deferred income tax expense (benefit):
Federal	$	12,230		$	(127,212	)	$	(32,890	)
State	(1,715		)	(1,267		)	(1,139		)
Foreign	12,667			5,108			(13,104		)
Total	$	23,182		$	(123,371	)	$	(47,133	)
Total income tax expense	$	96,263		$	11,134		$	18,484

The reconciliation of the U.S. federal statutory rate to the effective income tax rate is as follows:

	% of Income Before Income Taxes
	2016		2015		2014
Federal statutory rate	35.0	%	35.0	%	35.0	%
State taxes, net of federal tax benefit	(0.1	)	1.4		0.2
Change in valuation allowance	3.7		5.7		1.0
Impact of foreign earnings, net(a)	(19.3	)	(22.0	)	(24.8	)
Subpart F income	0.2		7.8		1.2
Deemed repatriation of foreign income(b)	—		105.5		—
Undistributed earnings of foreign subsidiaries(a)(b)	0.1		(114.8	)	(0.3	)
Nondeductible transaction costs	—		2.0		—
Depletion	(1.0	)	(1.8	)	(2.4	)
Revaluation of unrecognized tax benefits/reserve requirements(c)	(0.4	)	(14.4	)	(0.6	)
Domestic manufacturing tax deduction	(0.9	)	(0.5	)	(2.2	)
Other items, net	1.4		(0.3	)	1.6
Effective income tax rate	18.7	%	3.6	%	8.7	%

(a) During 2016, 2015 and 2014, we received actual and deemed distributions of $308.4 million, $1.4 billion and $12.6 million, respectively, from various foreign subsidiaries and joint ventures, and realized an expense, net of foreign tax credits, of $67.5 million, $350.2 million and $2.8 million, respectively, related to the repatriation of these earnings, which impacted our effective tax rate. Our statutory rate is decreased by of our share of the income of JBC, a Free Zones company under the laws of the Hashemite Kingdom of Jordan. The applicable provisions of the Jordanian law, and applicable regulations thereunder, do not have a termination provision and the exemption is indefinite. As a Free Zones company, JBC is not subject to income taxes on the profits of products exported from Jordan, and currently, substantially all of the profits are from exports. This gave us a rate benefit of 7.3%, 8.2%, and 12.4% for 2016, 2015, and 2014, respectively.

(b) In prior years, we designated the undistributed earnings of substantially all of our foreign subsidiaries as indefinitely reinvested. In 2015, we were not indefinitely reinvested in a portion of earnings from legacy Rockwood entities that were part of the repatriation planning, for which a deferred tax liability of $387.0 million was established in the opening balance sheet. This liability reversed upon the completion of the repatriation with $356.2 million impacting earnings and $30.8 million from foreign exchange differences. The reversal of this liability offsets the tax amount of $327.9 million from legacy Rockwood entities included in the deemed repatriation of foreign income.

(c) During 2014, we released various tax reserves primarily related to the expiration of the applicable U.S. federal statute of limitations for 2009 through 2010 which provided a net benefit of approximately $2.5 million. In 2015, the main impact is from the release of reserves on the close of a U.S. federal audit, and lapse of statute of limitations. These releases provided a net benefit of approximately $42.7 million.

Deferred income tax assets and liabilities recorded on the consolidated balance sheets as of December 31, 2016 and 2015 consist of the following (in thousands):

	December 31,
	2016			2015
Deferred tax assets:
Accrued employee benefits	$	32,622		$	25,519
Accrued expenses	10,065			24,581
Operating loss carryovers	91,934			116,686
Pensions	96,635			96,133
Tax credit carryovers	1,029			2,555
Other	34,866			35,557
Gross deferred tax assets	267,151			301,031
Valuation allowance	(69,900		)	(84,137		)
Deferred tax assets	197,251			216,894
Deferred tax liabilities:
Depreciation	(379,161		)	(364,657		)
Intangibles	(99,969		)	(108,047		)
Hedge of Net Investment of Foreign Subsidiary	(51,192		)	(36,537		)
Other	(18,536		)	(16,692		)
Deferred tax liabilities	(548,858		)	(525,933		)
Net deferred tax liabilities	$	(351,607	)	$	(309,039	)
Classification in the consolidated balance sheets:
Noncurrent deferred tax assets	$	61,132		$	75,813
Noncurrent deferred tax liabilities	(412,739		)	(384,852		)
Net deferred tax liabilities	$	(351,607	)	$	(309,039	)

Changes in the balance of our deferred tax asset valuation allowance are as follows (in thousands):

	Year Ended December 31,
	2016			2015			2014
Balance at January 1	$	(84,137	)	$	(30,768	)	$	(33,757	)
Additions(a)	(20,568		)	(59,889		)	(1,895		)
Deductions	34,805			6,520			4,884
Balance at December 31	$	(69,900	)	$	(84,137	)	$	(30,768	)

(a) Additions for the year ended December 31, 2015 includes $42.0 million related to the acquisition of Rockwood.

At December 31, 2016, we had approximately $1.6 million of domestic credits available to offset future payments of income taxes, expiring in varying amounts between 2017 and 2026. We have established valuation allowances for $0.4 million of those domestic credits since we believe that it is more likely than not that the related deferred tax assets will not be realized. We believe that sufficient taxable income will be generated during the carryover period in order to utilize the other remaining credit carryovers.

At December 31, 2016, we have on a pre-tax basis, domestic state net operating losses of $114.6 million, expiring between 2017 and 2036, which have pre-tax valuation allowances of $32.2 million established, and domestic state capital losses of $55.6 million expiring in 2017, which have pre-tax valuation allowances of $55.6 million established. In addition, we have on a pre-tax basis $307.8 million of foreign net operating losses of which a majority have an indefinite life, which have pre-tax valuation allowances for $197.5 million established. We have established valuation allowances for these deferred tax assets since we believe that it is more likely than not that the related deferred tax assets will not be realized. For the same reason, we established pre-tax valuation allowances for $77.2 million related to foreign deferred tax assets not related to net operating losses. The realization of the deferred tax assets is dependent on the generation of sufficient taxable income in the appropriate tax jurisdictions. Although realization is not assured, we believe it is more likely than not that the remaining deferred tax assets will be realized. However, the amount considered realizable could be reduced if estimates of future taxable income change. We believe that it is more likely than not that the Company will generate sufficient taxable income in the future to fully utilize all other deferred tax assets.

As of December 31, 2016, we have not recorded U.S. income taxes on approximately $3.6 billion of cumulative undistributed earnings of our non-U.S. subsidiaries and joint ventures, which includes the estimated effect of the Chemetall Surface Treatment business divestiture foreign gain of $2.3 billion, as these earnings are intended to be either indefinitely reinvested or subject to a tax-free liquidation and do not give rise to significant incremental taxes. If it is determined that cash can be repatriated with little to no tax consequences, we may choose to repatriate cash at that time. If in the foreseeable future we can no longer demonstrate that these earnings are indefinitely reinvested, a deferred tax liability will be recognized. A determination of the amount of the unrecognized deferred tax liability related to these undistributed earnings is not practicable.

Liabilities related to uncertain tax positions were $27.9 million and $101.7 million at December 31, 2016 and 2015, respectively, inclusive of interest and penalties of $3.0 million and $6.5 million at December 31, 2016 and 2015, respectively, and are reported in Other noncurrent liabilities as provided in Note 16, “Other Noncurrent Liabilities.” These liabilities at December 31, 2016 and 2015 were reduced by $15.1 million and $50.9 million, respectively, for offsetting benefits from the corresponding effects of potential transfer pricing adjustments, state income taxes and rate arbitrage related to foreign structure. These offsetting benefits are recorded in Other assets as provided in Note 11, “Other Assets.” The resulting net liabilities of $9.8 million and $44.3 million at December 31, 2016 and 2015, respectively, if recognized and released, would favorably affect earnings.

The liabilities related to uncertain tax positions, exclusive of interest, were $25.4 million and $95.7 million at December 31, 2016 and 2015, respectively. The following is a reconciliation of our total gross liability related to uncertain tax positions for 2016, 2015 and 2014 (in thousands):

	Year Ended December 31,
	2016			2015			2014
Balance at January 1	$	95,715		$	24,969		$	29,143
Acquisition of Rockwood	—			124,758			—
Divestitures(a)	(55,881		)	—			—
Additions for tax positions related to prior years	548			4,329			—
Reductions for tax positions related to prior years	(1,253		)	(46,211		)	(214		)
Additions for tax positions related to current year	1,271			202			2,232
Lapses in statutes of limitations/settlements	(12,591		)	(6,736		)	(5,057		)
Foreign currency translation adjustment	(2,425		)	(5,596		)	(1,135		)
Balance at December 31	$	25,384		$	95,715		$	24,969

(a) Reclassified to Other noncurrent liabilities as a result of the indemnification of certain income tax liabilities associated with the Chemetall Surface Treatment entities sold. See Note 16, “Other Noncurrent Liabilities.”

We are subject to income taxes in the U.S. and numerous foreign jurisdictions. Due to the statute of limitations, we are no longer subject to U.S. federal income tax audits by the Internal Revenue Service (“IRS”) for years prior to 2013. In 2016, the IRS finalized its audit of legacy Albemarle’s U.S. consolidated group for 2011 and 2012. Due to the statute of limitations, we also are no longer subject to U.S. state income tax audits prior to 2010.

With respect to jurisdictions outside the U.S., several audits are in process. During 2016, the German tax authorities continued and announced audits on multiple German subsidiaries that have since divested, for various years from 2006 through 2015. Also during 2016, audits of our Japanese, Taiwan, Singapore, and Netherlands subsidiaries were closed with no issue. In addition, we have various audits ongoing for the years 2007 through 2014 related to Canada, Russia, India, and Italy, all of which are entities that have since been divested.

While we believe we have adequately provided for all tax positions, amounts asserted by taxing authorities could be greater than our accrued position. Accordingly, additional provisions on federal and foreign tax-related matters could be recorded in the future as revised estimates are made or the underlying matters are settled or otherwise resolved.

Since the timing of resolutions and/or closure of tax audits is uncertain, it is difficult to predict with certainty the range of reasonably possible significant increases or decreases in the liability related to uncertain tax positions that may occur within the next twelve months. Our current view is that it is reasonably possible that we could record a decrease in the liability related to uncertain tax positions, relating to a number of issues, up to approximately $3.2 million as a result of closure of tax statutes.