INCOME TAXES

Earnings before income taxes for the years ended December 31 were taxed within the following jurisdictions:



In millions	2014		2013			2012
United States	$	276.5	$	(147.4	)	$	(49.3	)
Non-U.S.	932.9		977.0			897.3
Total	$	1,209.4	$	829.6		$	848.0

The components of the Provision for income taxes for the years ended December 31 were as follows:



In millions	2014			2013		2012
Current tax expense (benefit):
United States	$	168.4		$	2.1	$	(70.1	)
Non-U.S.	148.7			157.5		174.0
Total:	317.1			159.6		103.9
Deferred tax expense (benefit):
United States	(21.4		)	19.2		116.9
Non-U.S.	(2.0		)	10.2		(164.8		)
Total:	(23.4		)	29.4		(47.9		)
Total tax expense (benefit):
United States	147.0			21.3		46.8
Non-U.S.	146.7			167.7		9.2
Total	$	293.7		$	189.0	$	56.0

The Provision for income taxes differs from the amount of income taxes determined by applying the applicable U.S. statutory income tax rate to pretax income, as a result of the following differences:



	Percent of pretax income
	2014		2013		2012
Statutory U.S. rate	35.0	%	35.0	%	35.0	%
Increase (decrease) in rates resulting from:
Non-U.S. tax rate differential	(14.8	)	(26.8	)	(22.5	)
Tax on U.S. subsidiaries on non-U.S. earnings	1.7		2.0		4.1
State and local income taxes (1)	1.6		6.3		0.3
Valuation allowances	(1.0	)	2.5		(16.6	)
Change in permanent reinvestment assertion (2)	0.9		6.2		—
Reserves for uncertain tax positions	0.3		(2.9	)	2.4
Impact of change in taxation of retiree drugs subsidy	—		—		1.9
Provision to return and other true-up adjustments	0.1		(0.7	)	(0.1	)
Other adjustments	0.5		1.2		2.1
Effective tax rate	24.3	%	22.8	%	6.6	%


(1)	Net of changes in valuation allowances


(2)	Net of foreign tax credits

Tax incentives, in the form of tax holidays, have been granted to the Company in certain jurisdictions to encourage industrial development. The expiration of these tax holidays varies by country. The tax holidays are conditional on the Company meeting certain employment and investment thresholds. The most significant tax holidays relate to the Company’s qualifying locations in China, Puerto Rico, and Belgium. The benefit for the tax holidays for the years ended December 31, 2014, 2013 and 2012 was $24.7 million, $25.3 million and $13.7 million, respectively.

A summary of the deferred tax accounts at December 31 are as follows:



In millions	2014			2013
Deferred tax assets:
Inventory and accounts receivable	$	19.2		$	19.7
Fixed assets and intangibles	8.6			3.3
Postemployment and other benefit liabilities	702.5			643.1
Product liability	191.0			221.7
Other reserves and accruals	190.5			198.5
Net operating losses and credit carryforwards	505.9			707.1
Other	77.3			59.2
Gross deferred tax assets	1,695.0			1,852.6
Less: deferred tax valuation allowances	(210.7		)	(218.5		)
Deferred tax assets net of valuation allowances	$	1,484.3		$	1,634.1
Deferred tax liabilities:
Inventory and accounts receivable	$	(42.8	)	$	(46.8	)
Fixed assets and intangibles	(1,999.6		)	(2,046.8		)
Postemployment and other benefit liabilities	(3.3		)	(3.3		)
Other reserves and accruals	(14.1		)	(6.0		)
Other	(20.3		)	(49.1		)
Gross deferred tax liabilities	(2,080.1		)	(2,152.0		)
Net deferred tax assets (liabilities)	$	(595.8	)	$	(517.9	)

At December 31, 2014, no deferred taxes have been provided for any portion of the approximately $11.1 billion of undistributed earnings of the Company’s subsidiaries, since these earnings have been, and under current plans will continue to be, permanently reinvested in these subsidiaries. Due to the number of legal entities and jurisdictions involved and the complexity of the legal entity structure of the Company, the complexity of the tax laws in the relevant jurisdictions, including, but not limited to the rules pertaining to the utilization of foreign tax credits in the United States and the impact of projections of income for future years to any calculations, the Company believes it is not practicable to estimate, within any reasonable range, the amount of additional taxes which may be payable upon distribution of these earnings.

As a result of the Allegion spin-off and certain internal restructurings, the Company believed it to be advantageous to fully repay an intercompany debt obligation between two of its subsidiaries. In order to facilitate the repayment of this intercompany debt, in the fourth quarter of 2013, the Company decided to change its permanent reinvestment assertion as it relates to approximately $740 million of earnings primarily related to subsidiaries in Hong Kong, Australia and Canada. The Company recorded the tax effects of this change in the fourth quarter of 2013, which resulted in a charge of approximately $51 million.

At December 31, 2014, the Company had the following operating loss and tax credit carryforwards available to offset taxable income in prior and future years:



In millions	Amount		Expiration Period
U.S. Federal net operating loss carryforwards	$	696.3	2022-2034
U.S. Federal credit carryforwards	45.2		2024-Unlimited
U.S. State net operating loss carryforwards	2,966.8		2015-2034
U.S. State credit carryforwards	36.6		2015-Unlimited
Non-U.S. net operating loss carryforwards	867.8		2015-Unlimited
Non-U.S. credit carryforwards	2.2		Unlimited

The amount of net operating loss carryforwards for which a benefit would be recorded in additional paid in capital when realized is $38.2 million.

The U.S. state net operating loss carryforwards were incurred in various jurisdictions. The non-U.S. net operating loss carryforwards were incurred in various jurisdictions, predominantly in Belgium, Brazil, Ireland, India, Luxembourg, Spain, and the United Kingdom.

Activity associated with the Company’s valuation allowance is as follows:



In millions	2014			2013			2012
Beginning balance	$	218.5		$	156.2		$	308.4
Increase to valuation allowance	35.2			89.3			44.5
Decrease to valuation allowance	(38.8		)	(26.3		)	(192.4		)
Accumulated other comprehensive income (loss)	(4.2		)	(0.7		)	(4.3		)
Ending balance	$	210.7		$	218.5		$	156.2

The Company has total unrecognized tax benefits of $343.8 million and $363.3 million as of December 31, 2014, and December 31, 2013, respectively. The amount of unrecognized tax benefits that, if recognized, would affect the continuing operations effective tax rate are $266.5 million as of December 31, 2014. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:



In millions	2014			2013			2012
Beginning balance	$	363.3		$	497.5		$	503.4
Additions based on tax positions related to the current year	6.7			19.9			8.5
Additions based on tax positions related to prior years	49.8			152.9			88.2
Reductions based on tax positions related to prior years	(52.4		)	(215.3		)	(24.1		)
Reductions related to settlements with tax authorities	(8.0		)	(84.7		)	(50.6		)
Reductions related to lapses of statute of limitations	(7.1		)	(8.4		)	(29.5		)
Translation (gain) loss	(8.5		)	1.4			1.6
Ending balance	$	343.8		$	363.3		$	497.5

In connection with the Company’s spin-off of Allegion, the Company and Allegion entered into a tax sharing agreement for the allocation of taxes. Of the total unrecognized tax benefit of $343.8 million at December 31, 2014, Allegion has agreed to indemnify Ingersoll Rand for $1.9 million, which is reflected in an other long-term receivable account. Additionally, included in this other long-term receivable account is an indemnity receivable from Allegion in the amount of $58.2 million related to a filing for competent authority relief in connection with an unrecognized tax benefit included in the table above. The $58.2 million is exclusive of interest and penalties in the amount of $9.7 million. The Company also has an indemnity payable to Allegion in the amount of $7.0 million of tax and interest primarily related to competent authority relief filings.

The Company records interest and penalties associated with the uncertain tax positions within its Provision for income taxes. The Company had reserves associated with interest and penalties, net of tax, of $69.7 million and $71.9 million at December 31, 2014 and December 31, 2013, respectively. For the year ended December 31, 2014 and December 31, 2013, the Company recognized $2.5 million and $(5.9) million, respectively, in interest and penalties net of tax in continuing operations related to these uncertain tax positions.

The total amount of unrecognized tax benefits relating to the Company's tax positions is subject to change based on future events including, but not limited to, the settlements of ongoing audits and/or the expiration of applicable statutes of limitations. Although the outcomes and timing of such events are highly uncertain, it is reasonably possible that the balance of gross unrecognized tax benefits, excluding interest and penalties, could potentially be reduced by up to approximately $5.9 million during the next 12 months.

The provision for income taxes involves a significant amount of management judgment regarding interpretation of relevant facts and laws in the jurisdictions in which the Company operates. Future changes in applicable laws, projected levels of taxable income and tax planning could change the effective tax rate and tax balances recorded by the Company. In addition, tax authorities periodically review income tax returns filed by the Company and can raise issues regarding its filing positions, timing and amount of income or deductions, and the allocation of income among the jurisdictions in which the Company operates. A significant period of time may elapse between the filing of an income tax return and the ultimate resolution of an issue raised by a revenue authority with respect to that return. In the normal course of business the Company is subject to examination by taxing authorities throughout the world, including such major jurisdictions as Brazil, Canada, China, France, Germany, Ireland, Italy, Mexico, Switzerland, the Netherlands and the United States. In general, the examination of the Company’s material tax returns is complete for the years prior to 2001, with certain matters being resolved through appeals and litigation.

In 2007, the Company received a notice from the IRS containing proposed adjustments to the Company's tax filings in connection with an audit of the 2001 and 2002 tax years. The IRS did not contest the validity of the Company's reincorporation in Bermuda. The IRS proposed to ignore the entities that hold the intercompany debt incurred in connection with the Company's reincorporation in Bermuda (2001 Debt) and to which the interest was paid and impose 30% withholding tax on a portion of the interest payments as if they were made directly to a company that was not eligible for reduced U.S. withholding tax under a U.S. income tax treaty. The IRS asserted that the Company owed additional taxes with respect to 2002 of approximately $84 million plus interest. In 2010, the Company received an amended notice from the IRS assessing penalties of 30% on the asserted underpayment of tax described above.

The Company has so far been unsuccessful in resolving this dispute, and in 2013, received a Notice of Deficiency from the IRS for 2002. The Company filed a petition in the United States Tax Court in November 2013 contesting this deficiency. In its January 2014 answer to the Company’s petition, the IRS asserted that the Company also owes 30% withholding tax on the portion of 2002 interest payments made on the 2001 Debt upon which it did not previously assert withholding tax. This increases the total tax liability proposed for 2002 to $109.0 million ($84 million referred to in the paragraph above plus an additional $25.0 million) plus 30% penalties and interest.

In 2013, the Company received notices from the IRS containing proposed adjustments to the Company's tax filings in connection with an audit of the 2003-2006 tax years. In these notices, the IRS asserts that the Company owes a total of approximately $665.0 million of additional taxes, as described more fully in the two paragraphs below, in connection with the Company's interest payments on the 2001 Debt for the 2003-2006 period, plus penalties and interest on these unpaid taxes.

The IRS continues to take the position on the 2001 Debt, which was retired at the end of 2011, that it previously took for the Company's 2002 tax year and which is described above. As a result of this recharacterization, the IRS asserts that the Company owes approximately $455.0 million of withholding tax for 2003-2006 plus 30% penalties.

The IRS also proposes to extend its position further and to treat all of the interest income from the 2001 Debt as creating earnings and profits at IR-Limited and, as a result, recharacterize the distributions made by IR-Limited during the 2002-2006 tax years as taxable dividends instead of as a return of capital. Consequently the IRS asserts that the Company owes approximately $210.0 million of income tax on these dividends plus penalties of 20%. The Company strongly disagrees with the view of the IRS and filed a protest in January 2014 for the 2003-2006 tax years.

Furthermore, a substantial amount of information has been provided to the IRS in connection with its audit of our 2007-2011 tax years. We expect the IRS to propose similar adjustments with respect to the 2001 Debt, although the Company does not know how the IRS will apply its position to the different facts presented in these years or whether the IRS will take a similar position with respect to intercompany debt instruments not outstanding in prior years.

The Company has vigorously contested all of these proposed adjustments and intends to continue to do so. Although the outcome of these matters cannot be predicted with certainty, based upon an analysis of the merits of the Company's position, the Company believes that it is adequately reserved under the applicable accounting standards for these matters and does not expect that the ultimate resolution will have a material adverse impact on its future results of operations, financial condition, or cash flows. As the Company moves forward to resolve these matters with the IRS, the reserves established may be adjusted. Although the Company continues to contest the IRS's position, there can be no assurance that it will be successful. If the IRS's position with respect to the 2002-2006 tax years is ultimately sustained, the Company would be required to record additional charges and the resulting liability would have a material adverse impact on its future results of operations, financial condition and cash flows.

The Company believes that it has adequately provided for any reasonably foreseeable resolution of any tax disputes, but will adjust its reserves if events so dictate in accordance with GAAP. To the extent that the ultimate results differ from the original or adjusted estimates of the Company, the effect will be recorded in the Provision for income taxes.

During 2013, the Company recorded to continuing operations a tax charge of approximately $74.3 million as result of increases to its deferred tax asset valuation allowance for non-U.S. and U.S. state and local net operating losses and other net deferred tax assets. During 2013, the Company also recorded to continuing operations a net tax benefit of $36.0 million related to its liability for unrecognized tax benefits primarily driven by a tax benefit of $75.0 million as a result of the settlement of an audit in a major tax jurisdiction, partially offset by an increase in our liability for unrecognized tax benefits in non-U.S. tax jurisdictions.

During 2012 the Company recorded to continuing operations a tax benefit of approximately $140.0 million as a result of reducing its deferred tax asset valuation allowance for state net operating losses.