INCOME TAXES

The Company's income before provision for income taxes was generated from United States and international operations as follows (in millions):



	Years Ended December 31,
	2017		2016		2015
United States	$	491.5	$	378.2	$	182.8
International, including Puerto Rico	543.4		359.7		439.6
	$	1,034.9	$	737.9	$	622.4

The provision for income taxes consists of the following (in millions):



	Years Ended December 31,
	2017			2016			2015
Current
United States:
Federal	$	330.8		$	153.4		$	102.4
State and local	32.8			12.1			7.4
International, including Puerto Rico	60.6			27.4			33.5
Current income tax expense	$	424.2		$	192.9		$	143.3
Deferred
United States:
Federal	$	39.3		$	(19.6	)	$	(12.5	)
State and local	(3.8		)	(4.3		)	(2.6		)
International, including Puerto Rico	(8.4		)	(0.6		)	(0.7		)
Deferred income tax expense (benefit)	27.1			(24.5		)	(15.8		)
Total income tax provision	$	451.3		$	168.4		$	127.5

The components of deferred tax assets and liabilities are as follows (in millions):



	December 31,
	2017			2016
Deferred tax assets
Compensation and benefits	$	53.9		$	100.8
Benefits from uncertain tax positions	66.1			56.7
Net tax credit carryforwards	78.8			45.6
Net operating loss carryforwards	47.3			30.2
Accrued liabilities	29.2			29.4
Inventories	6.8			11.5
Cash flow and net investment hedges	13.3			—
State income taxes	5.8			2.4
Investments	1.6			2.6
Other intangible assets	—			4.2
Other	1.7			3.1
Total deferred tax assets	304.5			286.5
Deferred tax liabilities
Property, plant, and equipment	(20.0		)	(28.2		)
Cash flow hedges	—			(1.2		)
Deferred tax on foreign earnings	(3.1		)	(6.0		)
Inventories	(4.2		)	(4.1		)
Other intangible assets	(49.5		)	(4.2		)
Other	(0.1		)	(0.2		)
Total deferred tax liabilities	(76.9		)	(43.9		)
Valuation allowance	(41.6		)	(47.7		)
Net deferred tax assets	$	186.0		$	194.9

During 2017, net deferred tax assets decreased $8.9 million, including items that were recorded to stockholders' equity and which did not impact the Company's income tax provision.

The valuation allowance of $41.6 million as of December 31, 2017 reduces certain deferred tax assets to amounts that are more likely than not to be realized. This allowance primarily relates to the net operating loss carryforwards of certain United States and non-United States subsidiaries and certain non-United States credit carryforwards.

Net operating loss and capital loss carryforwards and the related carryforward periods at December 31, 2017 are summarized as follows (in millions):



	Carryforward Amount		Tax Benefit Amount		Valuation Allowance			Net Tax Benefit		Carryforward Period Ends
United States federal net operating losses	$	19.6	$	4.1	$	—		$	4.1	2033-2036
United States state net operating losses	24.7		1.6		(1.5		)	0.1		2018-2035
Non-United States net operating losses	69.3		15.5		(15.3		)	0.2		2018-2026
Non-United States net operating losses	134.2		26.1		(9.0		)	17.1		Indefinite
United States capital losses	33.7		12.7		—			12.7		2022
Total	$	281.5	$	60.0	$	(25.8	)	$	34.2

Certain tax attributes are subject to an annual limitation as a result of the acquisition of Harpoon Medical, Inc. (see Note 7), which constitutes a change of ownership as defined under Internal Revenue Code Section 382.

The gross tax credit carryforwards and the related carryforward periods at December 31, 2017 are summarized as follows (in millions):



	Carryforward Amount		Valuation Allowance			Net Tax Benefit		Carryforward Period Ends
California research expenditure tax credits	$	90.2	$	—		$	90.2	Indefinite
Federal research expenditure tax credits	0.2		—			0.2		Indefinite
Puerto Rico purchases credit	16.1		(16.1		)	—		Indefinite
Total	$	106.5	$	(16.1	)	$	90.4

The Company has $90.2 million of California research expenditure tax credits it expects to use in future periods. The credits may be carried forward indefinitely. Based upon anticipated future taxable income, the Company expects that it is more likely than not that all California research expenditure tax credits will be utilized, although the utilization of the full benefit is expected to occur over a number of years and into the distant future. Accordingly, no valuation allowance has been provided.

The Company adopted the new accounting standard for employee share-based compensation effective January 1, 2017 (see Note 2). The new standard eliminates the requirement that excess tax benefits be realized through a reduction in income taxes payable before a company can recognize them. Upon adoption, the Company recorded a cumulative-effect benefit of $9.3 million in retained earnings for excess tax benefits not previously recognized.

On December 22, 2017, Public Law 115-97, commonly referred to as the Tax Cuts and Jobs Act ("the 2017 Act"), was signed into law. The 2017 Act reduces the U.S. federal corporate tax rate from 35 percent to 21 percent for tax years beginning after December 31, 2017, requires companies to pay a one-time mandatory deemed repatriation tax on the cumulative earnings of certain foreign subsidiaries that were previously tax deferred, accelerates federal tax depreciation and creates new taxes on certain foreign earnings in future years.

On December 22, 2017, Staff Accounting Bulletin No. 118 ("SAB 118") was issued to address the application of generally accepted accounting principles in the United States of America in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the 2017 Act. In accordance with SAB 118, the Company has estimated provisional amounts for $3.3 million of tax benefits in connection with the remeasurement of certain tax assets and liabilities, and $327.4 million of current tax expense (discussed below) recorded in connection with the one-time mandatory deemed repatriation tax on cumulative earnings of certain foreign subsidiaries. Additionally, as a result of a revenue procedure issued by the Internal Revenue Service ("IRS") on February 13, 2018, approximately $32.3 million of tax benefits associated with a tax reform related restructuring may need to be adjusted.

The changes included in the 2017 Act are broad and complex. The final transition impacts of the 2017 Act may differ from the above estimate, possibly materially, due to, among other things, changes in interpretations of the 2017 Act, any further legislative or regulatory actions that arise because of the 2017 Act, any changes in accounting standards for income taxes or related interpretations in response to the 2017 Act, or any updates or changes to the estimates the Company has utilized to calculate the transition impacts. Any subsequent adjustment to these amounts will be recorded to current tax expense in the quarter of 2018 when the analysis is complete. The Company did not identify items for which a reasonable estimate of the income tax effects of the 2017 Act could not be determined as of December 31, 2017.

As mentioned above, the 2017 Act requires a mandatory deemed repatriation of post-1986 cumulative undistributed foreign earnings and profits. The rate applied varies depending on whether the earnings and profits are held in liquid or non-liquid assets. A proportional deduction on the deemed repatriation results in a repatriation toll charge of effectively 15.5% for liquid assets and 8% for non-liquid assets. At the election of the taxpayer, the repatriation tax can be paid in installments over eight years. The Company provisionally intends to elect to pay the repatriation tax in installments over eight years. The deemed repatriation results in a provisional $327.4 million tax obligation which, when offset by the correlative effects of uncertain tax positions of $30.0 million, results in a provisional net increase in tax expense of $297.4 million.

Prior to the 2017 Act, the Company asserted that accumulated earnings of most of its foreign subsidiaries would be indefinitely reinvested. However, as a result of the 2017 Act, all of the accumulated earnings of its foreign subsidiaries were subjected to United States federal income tax. In light of the 2017 Act, the Company's analysis is incomplete at this time with respect to its investment intentions for its accumulated foreign earnings. During the period prescribed by SAB 118, the Company will evaluate, among other factors, the profitability of its United States and foreign operations and the need for cash within and outside the United States, legal entity capitalization requirements, cash controls imposed in foreign jurisdictions, withholding taxes and the availability to offset with foreign tax credits, cash requirements for capital improvements, acquisitions, market expansion, and stock repurchase programs in determining its investment assertion on its accumulated foreign earnings.

The Company has received tax incentives in certain non-U.S. tax jurisdictions, the primary benefit of which will expire in 2024. The tax reductions as compared to the local statutory rates were $81.0 million ($0.39 per diluted share), $78.7 million ($0.32 per diluted share), and $60.4 million ($0.25 per diluted share) for the years ended December 31, 2017, 2016, and 2015, respectively.

A reconciliation of the United States federal statutory income tax rate to the Company's effective income tax rate is as follows (in millions):



	Years Ended December 31,
	2017			2016			2015
Income tax expense at U.S. federal statutory rate	$	362.2		$	258.3		$	217.8
Foreign income taxed at different rates	(106.9		)	(88.6		)	(105.8		)
State and local taxes, net of federal tax benefit	11.5			9.7			3.1
Tax credits, federal and state	(25.8		)	(21.3		)	(15.7		)
(Release) build of reserve for prior years' uncertain tax positions	(7.7		)	4.6			3.3
U.S. tax on foreign earnings, net of credits	(30.3		)	5.1			20.5
Deductible employee share-based compensation	(48.2		)	—			—
Nondeductible employee share-based compensation	3.9			3.6			2.3
Effects of mandatory deemed repatriation	297.4			—			—
Effects of U.S. tax rate changes	(3.3		)	—			—
Other	(1.5		)	(3.0		)	2.0
Income tax provision	$	451.3		$	168.4		$	127.5

Factors impacting the Company's effective tax rate in 2017 included the one-time impact of the mandatory taxation of previously unrepatriated earnings, partially offset by the revaluation of tax-related balance sheet items due to U.S. tax rate changes required by the 2017 Act. In addition, the effective tax rate for 2017 was favorably impacted by the adoption of the new accounting standard for the tax benefit of employee shared-based compensation (see Note 2).

Uncertain Tax Positions

As of December 31, 2017 and 2016, the gross uncertain tax positions were $225.6 million and $245.5 million, respectively. The Company estimates that these liabilities would be reduced by $94.0 million and $44.9 million, respectively, from offsetting tax benefits associated with the correlative effects of potential transfer pricing adjustments, state income taxes, and timing adjustments. The net amounts of $131.6 million and $200.6 million, respectively, if not required, would favorably affect the Company's effective tax rate.

A reconciliation of the beginning and ending amount of uncertain tax positions, excluding interest, penalties, and foreign exchange, is as follows (in millions):



	December 31,
	2017			2016			2015
Uncertain gross tax positions, January 1	$	245.5		$	216.1		$	192.3
Current year tax positions	77.7			29.0			29.6
Increase prior year tax positions	63.7			2.7			2.2
Decrease prior year tax positions	(65.0		)	(0.9		)	(7.4		)
Settlements	(95.3		)	(0.3		)	(0.4		)
Lapse of statutes of limitations	(1.0		)	(1.1		)	(0.2		)
Uncertain gross tax positions, December 31	$	225.6		$	245.5		$	216.1

The Company recognizes interest and penalties, if any, related to uncertain tax positions in the provision for income taxes. As of December 31, 2017, the Company had accrued $7.4 million (net of $2.9 million tax benefit) of interest related to uncertain tax positions, and as of December 31, 2016, the Company had accrued $14.7 million (net of $10.8 million tax benefit) of interest related to uncertain tax positions. During 2017, 2016, and 2015, the Company recognized interest expense (benefit), net of tax benefit, of $(7.3) million, $4.0 million, and $3.9 million, respectively, in "Provision for Income Taxes" on the consolidated statements of operations.

The Company strives to resolve open matters with each tax authority at the examination level and could reach agreement with a tax authority at any time. While the Company has accrued for matters it believes are more likely than not to require settlement, the final outcome with a tax authority may result in a tax liability that is more or less than that reflected in the consolidated financial statements. Furthermore, the Company may later decide to challenge any assessments, if made, and may exercise its right to appeal. The uncertain tax positions are reviewed quarterly and adjusted as events occur that affect potential liabilities for additional taxes, such as lapsing of applicable statutes of limitations, proposed assessments by tax authorities, negotiations between tax authorities, identification of new issues, and issuance of new legislation, regulations, or case law. Management believes that adequate amounts of tax and related penalty and interest have been provided in income tax expense for any adjustments that may result from these uncertain tax positions.

At December 31, 2017, all material state, local, and foreign income tax matters have been concluded for years through 2008. The IRS has substantially completed its fieldwork for the 2009 through 2012 tax years. However, the audits have been in suspense pending a final determination with respect to the application for an Advance Pricing Agreement ("APA") discussed below. As a result of the partial agreement discussed below, the IRS will now be able to finalize their audits of the 2009 through 2011 tax years. The IRS began its examination of the 2014 tax year during the fourth quarter of 2016.

The Company had been pursuing an APA between the Switzerland and United States governments for the years 2009 through 2013 covering transfer pricing matters with the possibility of a roll-forward of the results to subsequent years. During December 2017, the U.S. and Swiss Competent Authorities agreed on the terms of several of the transactions covered by the APA, including a rollforward of some of the results through 2020. The remaining terms of transactions not covered by the final bilateral agreement will be reviewed by the IRS as part of the traditional exam process for the tax years beyond 2011. These transfer pricing matters are significant to the Company's consolidated financial statements as the disputed amounts are material, and the final outcome is uncertain. The Company continues to believe its positions are supportable. As a result of the bilateral agreement, a reclassification of $73.7 million was made from the long-term liability for uncertain tax positions to current taxes payable, and a $15.2 million tax benefit was recorded during the quarter.

During 2014, the Company filed with the IRS a request for a pre-filing agreement associated with a tax return filing position on a portion of the litigation settlement payment received in May 2014. During the first quarter of 2015, the IRS accepted the Company's request into the pre-filing agreement program. The closing agreement for this matter was finalized during the fourth quarter of 2016. There remained a disputed issue and the Company was accepted into the Fast-Track Appeals process in July 2017. The Company met with the Fast-Track Appeals team in October 2017 and was unable to reach an agreement. The Company intends to revert to the regular Appeals process on this issue. The Company made an advance payment of tax in December 2015 to prevent the further accrual of interest on any potential deficiency.

The Company believes that adequate amounts of tax and related penalty and interest have been provided in income tax expense for any adjustments that may result from its uncertain tax positions. Based upon the information currently available and numerous possible outcomes, the Company cannot reasonably estimate what, if any, changes in its existing uncertain tax positions may occur in the next 12 months and thus have recorded the gross uncertain tax positions as a long-term liability. However, if the appeals process related to the pre-filing agreement or transfer pricing matters is finalized in the next 12 months, it is reasonably possible that these events could result in a significant change in the Company's uncertain tax positions within the next 12 months.