INCOME TAXES

Current and deferred provision for income taxes

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



In millions	2015		2014		2013
United States	$	451.6	$	276.5	$	(147.4	)
Non-U.S.	796.3		932.9		977.0
Total	$	1,247.9	$	1,209.4	$	829.6

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



In millions	2015		2014			2013
Current tax expense (benefit):
United States	$	300.1	$	168.4		$	2.1
Non-U.S.	132.9		148.7			157.5
Total:	433.0		317.1			159.6
Deferred tax expense (benefit):
United States	69.0		(21.4		)	19.2
Non-U.S.	38.8		(2.0		)	10.2
Total:	107.8		(23.4		)	29.4
Total tax expense (benefit):
United States	369.1		147.0			21.3
Non-U.S.	171.7		146.7			167.7
Total	$	540.8	$	293.7		$	189.0

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
	2015		2014		2013
Statutory U.S. rate	35.0	%	35.0	%	35.0	%
Increase (decrease) in rates resulting from:
Non-U.S. tax rate differential	(17.2	)	(14.8	)	(26.8	)
Tax on U.S. subsidiaries on non-U.S. earnings	1.3		1.7		2.0
State and local income taxes ⁽¹⁾	1.5		1.6		6.3
Valuation allowances	1.7		(1.0	)	2.5
Change in permanent reinvestment assertion ⁽²⁾	3.9		0.9		6.2
Reserves for uncertain tax positions	14.1		0.3		(2.9	)
Provision to return and other true-up adjustments	0.7		0.1		(0.7	)
Other adjustments	2.3		0.5		1.2
Effective tax rate	43.3	%	24.3	%	22.8	%


(1)	Net of changes in state valuation allowances


(2)	Primarily federal and non-U.S., excludes state valuation allowances


(3)	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, 2015, 2014 and 2013 was $22.6 million, $24.7 million and $25.3 million, respectively.

IRS Exam Results

As previously discussed in the Company’s third quarter Form 10-Q for the quarterly period ended September 30, 2015, the Company entered into an agreement with the IRS in July 2015 to resolve disputes related to withholding and income taxes for years 2002 through 2011. The IRS had previously disagreed with the Company’s tax treatment of intercompany debt and distributions and asserted the Company owed income and withholding tax relating to the 2002-2006 period totaling $774 million, not including interest and penalties. The Company also provided a substantial amount of information to the IRS in connection with its audit of the 2007-2011 tax periods. The Company expected the IRS to propose similar adjustments to these periods, although it was not known how the IRS would apply its position to the different facts presented in these years or whether the IRS would take a similar position to intercompany debt instruments not outstanding in prior years.

The resolution reached in July 2015 covered intercompany debt and related issues for the entire period from 2002 through 2011 and includes all aspects of the dispute with the U.S. Tax Court, the Appeals Division and the Examination Division of the IRS. The resolution was subsequently reported to the Congressional Joint Committee on Taxation (JCT), as required, for its review. The JCT concluded its review without objection in December 2015 and the settlement was finalized with the IRS in December 2015.

Pursuant to the agreement with the IRS, the Company agreed to pay withholding tax and interest of $412 million respect to the 2002-2006 years. The Company owed no additional tax with respect to intercompany debt and related matters for the years 2007-2011. No penalties were applied to any of the tax years 2002 through 2011. The resolution resulted in a net cash outflow of$364 million, consisting of $230 million in tax and $134 million of interest, net of a tax benefit of $48 million.

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



In millions	2015			2014
Deferred tax assets:
Inventory and accounts receivable	$	17.4		$	19.2
Fixed assets and intangibles	17.5			8.6
Postemployment and other benefit liabilities	672.6			702.5
Product liability	169.5			191.0
Other reserves and accruals	190.9			190.5
Net operating losses and credit carryforwards	562.7			505.9
Other	65.0			77.3
Gross deferred tax assets	1,695.6			1,695.0
Less: deferred tax valuation allowances	(213.1		)	(210.7		)
Deferred tax assets net of valuation allowances	$	1,482.5		$	1,484.3
Deferred tax liabilities:
Inventory and accounts receivable	$	(43.3	)	$	(42.8	)
Fixed assets and intangibles	(1,993.7		)	(1,999.6		)
Postemployment and other benefit liabilities	(6.8		)	(3.3		)
Other reserves and accruals	(2.5		)	(14.1		)
Other	(53.5		)	(20.3		)
Gross deferred tax liabilities	(2,099.8		)	(2,080.1		)
Net deferred tax assets (liabilities)	$	(617.3	)	$	(595.8	)

At December 31, 2015, no deferred taxes have been provided for any portion of the approximately $10.6 billion 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, 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.

In 2015 the company changed its permanent reinvestment assertion on prior and current year’s earnings on certain of its subsidiaries. The Company recorded the tax effects of this change in the fourth quarter of 2015, which resulted in a tax charge of $52 million.

In 2013, in order to facilitate the repayment of an intercompany obligation between two of its subsidiaries, the Company changed 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, 2015, 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	$	678.1	2022-2034
U.S. Federal credit carryforwards	28.6		2024-Unlimited
U.S. State net operating loss carryforwards	3,051.6		2016-2035
U.S. State credit carryforwards	36.2		2016-Unlimited
Non-U.S. net operating loss carryforwards	748.2		2016-Unlimited
Non-U.S. credit carryforwards	3.4		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, India, Luxembourg, Spain, and the United Kingdom.

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



In millions	2015			2014			2013
Beginning balance	$	210.7		$	218.5		$	156.2
Increase to valuation allowance	40.7			35.2			89.3
Decrease to valuation allowance	(34.0		)	(38.8		)	(26.3		)
Accumulated other comprehensive income (loss)	(4.3		)	(4.2		)	(0.7		)
Ending balance	$	213.1		$	210.7		$	218.5

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.

Unrecognized tax benefits

The Company has total unrecognized tax benefits of $174.9 million and $343.8 million as of December 31, 2015, and December 31, 2014, respectively. The amount of unrecognized tax benefits that, if recognized, would affect the continuing operations effective tax rate are $87.1 million as of December 31, 2015. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:



In millions	2015			2014			2013
Beginning balance	$	343.8		$	363.3		$	497.5
Additions based on tax positions related to the current year	8.7			6.7			19.9
Additions based on tax positions related to prior years	186.5			49.8			152.9
Reductions based on tax positions related to prior years	(102.2		)	(52.4		)	(215.3		)
Reductions related to settlements with tax authorities	(251.0		)	(8.0		)	(84.7		)
Reductions related to lapses of statute of limitations	(3.7		)	(7.1		)	(8.4		)
Translation (gain) loss	(7.2		)	(8.5		)	1.4
Ending balance	$	174.9		$	343.8		$	363.3

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 $55.5 million and $69.7 million at December 31, 2015 and December 31, 2014, respectively. For the year ended December 31, 2015 and December 31, 2014, the Company recognized $77.8 million and $2.5 million, respectively, in interest and penalties net of tax in continuing operations related to these uncertain tax positions.

During 2015, the Company recorded a tax charge of approximately $227 million to continuing operations related to the increase in the liability for unrecognized tax benefits as a result of the proposed IRS settlement. Pursuant to the agreement with the IRS, the Company reduced its liability for unrecognized tax benefits for all related amounts at December 31, 2015. In addition, the Company recorded a tax benefit of approximately $65 million within continuing operations as a result of the settlement of the settlement of an audit in a major tax jurisdiction.

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 $174.9 million at December 31, 2015, Allegion has agreed to indemnify Ingersoll Rand for $9.0 million, which is reflected in an other long-term receivable account. Additionally, included in an other current asset account is an indemnity receivable from Allegion in the amount of $42.6 million related to a filing for competent authority relief in connection with an unrecognized tax benefit included in the table above. The $42.6 million is exclusive of interest and penalties in the amount of $6.5 million. The Company also has an indemnity payable to Allegion in the amount of $5.8 million of tax and interest primarily related to competent authority relief filings.

During 2013, the Company 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.

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 $64.3 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 2003, with certain matters being resolved through appeals and litigation.