INCOME TAXES

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (“the Act”). Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, changes to U.S. international taxation, and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017. Pursuant to Staff Accounting Bulletin No. 118 (“SAB 118”) issued by the SEC in December 2017, issuers were permitted up to one year from the enactment of the Act to complete the accounting for the income tax effects of the Act (“the measurement period”). The Company completed its accounting for the tax effects of the Act within the measurement period and has included those effects as a component of Income taxes in the Consolidated Statements of Operations.

Deferred tax assets and liabilities: U.S. deferred tax assets and liabilities were remeasured based on the rates at which they are expected to reverse in the future, resulting in an income tax benefit of approximately $230.6 million. The Company recorded an income tax provision of $21.9 million in 2018 as an adjustment to its provisional income tax benefit recorded in 2017 of $252.5 million.

Transition Tax: The one-time transition tax, which totals $450.1 million, is based on the Company’s post-1986 earnings and profits that were previously deferred from U.S. income taxes. In 2018, the Company recorded a $10.6 million adjustment to its provisional income tax payable of approximately $460.7 million recorded in December 2017. The Company has elected to pay its transition tax over the eight-year period provided in the Act. As of December 29, 2018, the remaining balance of the transition tax obligation is $365.7 million, which will be paid over the next seven years.

Indefinite reinvestment: Following enactment of the Act and the associated one-time transition tax, in general, repatriation of foreign earnings to the United States can be completed with no incremental U.S. tax. However, repatriation of foreign earnings could subject the Company to U.S. state and non-U.S. jurisdictional taxes (including withholding taxes) on distributions. While repatriation of some foreign earnings held outside the United States may be restricted by local laws, most of the Company’s foreign earnings as of December 2017 could be repatriated to the United States. As a result of the Act, the Company analyzed all unrepatriated foreign earnings as of December 2017, and concluded that it no longer asserts indefinite reinvestment on approximately $4.8 billion. The deferred tax liability associated with these unrepatriated foreign earnings is approximately $217.7 million. The Company recorded a $188.3 million income tax provision in 2018, mainly comprised of U.S. state and non-U.S. jurisdictional withholding taxes. The Company otherwise continues to consider the remaining undistributed earnings of its foreign subsidiaries to be permanently reinvested based on its current plans for use outside of the U.S. and accordingly no taxes have been provided on such earnings.

Significant components of the Company’s deferred tax assets and liabilities at the end of each fiscal year were as follows:



(Millions of Dollars)	2018			2017 ¹
Deferred tax liabilities:
Depreciation	$	128.5		$	98.4
Amortization of intangibles	672.8			668.0
Liability on undistributed foreign earnings	202.5			4.9
Deferred revenue	19.1			26.5
Other	54.8			62.2
Total deferred tax liabilities	$	1,077.7		$	860.0
Deferred tax assets:
Employee benefit plans	$	222.1		$	256.4
Doubtful accounts and other customer allowances	14.7			16.3
Basis differences in liabilities	93.3			84.5
Operating loss, capital loss and tax credit carryforwards	710.6			632.2
Currency and derivatives	11.6			48.5
Other	121.0			88.6
Total deferred tax assets	$	1,173.3		$	1,126.5
Net Deferred Tax Asset (Liability) before Valuation Allowance	$	95.6		$	266.5
Valuation Allowance	$	(626.7	)	$	(516.7	)
Net Deferred Tax Liability after Valuation Allowance	$	(531.1	)	$	(250.2	)

¹Certain prior year amounts have been recast as a result of the adoption of the new revenue standard. Refer to Note A, Significant Accounting Policies, for further discussion.

A valuation allowance is recorded on certain deferred tax assets if it has been determined it is more likely than not that all or a portion of these assets will not be realized. The Company recorded a valuation allowance of $626.7 million and $516.7 million on deferred tax assets existing as of December 29, 2018 and December 30, 2017, respectively. The valuation allowance in 2018 and 2017 was primarily attributable to foreign and state net operating loss carryforwards and foreign capital loss carryforwards.

As of December 29, 2018, the Company has approximately $5.5 billion of unremitted foreign earnings and profits. Of the total amount, the Company has provided for deferred taxes of $202.5 million on approximately $3.6 billion, which is not indefinitely reinvested primarily due to the changes brought about by the Act. The Company otherwise continues to consider the remaining undistributed earnings of its foreign subsidiaries to be permanently reinvested based on its current plans for use outside of the U.S. and accordingly no taxes have been provided on such earnings. The cash that the Company’s non-U.S. subsidiaries hold for indefinite reinvestment is generally used to finance foreign operations and investments, including acquisitions. The income taxes applicable to such earnings are not readily determinable or practicable to calculate.

Net operating loss carryforwards of $2.6 billion as of December 29, 2018 are available to reduce future tax obligations of certain U.S. and foreign companies. The net operating loss carryforwards have various expiration dates beginning in 2019 with certain jurisdictions having indefinite carryforward periods. The foreign capital loss carryforwards of $21.3 million as of December 29, 2018 have indefinite carryforward periods.

The components of earnings before income taxes consisted of the following:



(Millions of Dollars)	2018		2017 ¹		2016 ¹
United States	$	444.1	$	715.2	$	307.1
Foreign	578.0		812.6		922.2
Earnings before income taxes	$	1,022.1	$	1,527.8	$	1,229.3

¹Certain prior year amounts have been recast as a result of the adoption of the new revenue standard. Refer to Note A, Significant Accounting Policies, for further discussion.

Income tax expense (benefit) consisted of the following:



(Millions of Dollars)	2018		2017 ¹			2016 ¹
Current:
Federal	$	25.4	$	590.6		$	84.8
Foreign	175.0		224.6			191.5
State	24.8		25.4			10.6
Total current	$	225.2	$	840.6		$	286.9
Deferred:
Federal	$	29.7	$	(513.0	)	$	18.7
Foreign	132.7		(33.0		)	(26.1		)
State	28.7		6.3			(17.8		)
Total deferred	191.1		(539.7		)	(25.2		)
Income taxes	$	416.3	$	300.9		$	261.7

¹Certain prior year amounts have been recast as a result of the adoption of the new revenue standard. Refer to Note A, Significant Accounting Policies, for further discussion.

Net income taxes paid during 2018, 2017 and 2016 were $339.4 million, $273.6 million and $233.3 million, respectively. The 2018, 2017 and 2016 amounts include refunds of $43.7 million, $28.5 million and $30.5 million, respectively, primarily related to prior year overpayments and settlement of tax audits.

The reconciliation of the U.S. federal statutory income tax provision to Income taxes in the Consolidated Statements of Operations is as follows:



(Millions of Dollars)	2018			2017 ¹			2016 ¹
Tax at statutory rate	$	214.6		$	534.1		$	429.1
State income taxes, net of federal benefits	24.7			13.3			12.5
Foreign tax rate differential	(33.2		)	(149.0		)	(166.3		)
Uncertain tax benefits	4.5			64.4			32.0
Tax audit settlements	(5.2		)	(16.5		)	(10.5		)
Change in valuation allowance	5.1			(5.4		)	38.9
Change in deferred tax liabilities on undistributed foreign earnings	—			(94.1		)	(38.7		)
Basis difference for businesses Held for Sale	—			27.9			(27.9		)
Stock-based compensation	(4.1		)	(23.2		)	—
Sale of businesses	—			(47.3		)	—
U.S. Federal tax reform	199.6			23.6			—
Other-net	10.3			(26.9		)	(7.4		)
Income taxes	$	416.3		$	300.9		$	261.7

¹Certain prior year amounts have been recast as a result of the adoption of the new revenue standard. Refer to Note A, Significant Accounting Policies, for further discussion.

The Company conducts business globally and, as a result, files income tax returns in the U.S. federal jurisdiction and various state, and foreign jurisdictions. In the normal course, the Company is subject to examinations by taxing authorities throughout the world. The Internal Revenue Service is currently examining its consolidated U.S. income tax returns for the 2010-2013 tax years. With few exceptions, as of December 29, 2018, the Company is no longer subject to U.S. federal, state, local, or foreign examinations by tax authorities for years before 2010.

The Company’s liabilities for unrecognized tax benefits relate to U.S. and various foreign jurisdictions. The following table summarizes the activity related to the unrecognized tax benefits:



(Millions of Dollars)	2018			2017			2016
Balance at beginning of year	$	387.8		$	309.8		$	283.1
Additions based on tax positions related to current year	28.3			34.6			14.9
Additions based on tax positions related to prior years	103.0			82.5			53.9
Reductions based on tax positions related to prior years	(91.5		)	(4.2		)	(34.2		)
Settlements	(2.5		)	(0.3		)	5.4
Statute of limitations expirations	(18.8		)	(34.6		)	(13.3		)
Balance at end of year	$	406.3		$	387.8		$	309.8

The gross unrecognized tax benefits at December 29, 2018 and December 30, 2017 include $397.0 million and $368.7 million, respectively, of tax benefits that, if recognized, would impact the effective tax rate. The liability for potential penalties and interest related to unrecognized tax benefits was decreased by $15.8 million in 2018, increased by $3.8 million in 2017 and increased by $4.6 million in 2016. The liability for potential penalties and interest totaled $52.1 million as of December 29, 2018, $67.9 million as of December 30, 2017, and $64.1 million as of December 31, 2016. The Company classifies all tax-related interest and penalties as income tax expense.

The Company considers many factors when evaluating and estimating its tax positions and the impact on income tax expense, which may require periodic adjustments, and which may not accurately anticipate actual outcomes. It is reasonably possible that the amount of the unrecognized benefit with respect to certain of the Company's unrecognized tax positions will significantly increase or decrease within the next 12 months. These changes may be the result of settlement of ongoing audits or final decisions in transfer pricing matters. The Company cannot reasonably estimate the range of the potential change.