Income Taxes

We file a consolidated U.S. federal income tax return and income tax returns in various state and local jurisdictions. Our subsidiaries file tax returns in various foreign jurisdictions. Our principal foreign jurisdictions include the United Kingdom, France and Germany. The Internal Revenue Service has completed its examination of our federal tax returns through 2010. Tax returns in the United Kingdom, France and Germany have been examined through 2012, 2010 and 2009, respectively.

Income before income taxes for the three years ended December 31, 2015 was (in millions):



	2015		2014		2013
Domestic	$	803.3	$	739.9	$	629.4
International	975.3		1,070.1		1,031.5
	$	1,778.6	$	1,810.0	$	1,660.9

Income tax expense (benefit) for the three years ended December 31, 2015 was (in millions):



	2015			2014			2013
Current:
Federal	$	342.3		$	356.1		$	246.3
State and local	29.9			38.1			30.6
International	324.5			344.8			336.5
	696.7			739.0			613.4
Deferred:
Federal	(86.7		)	(106.4		)	0.3
State and local	12.1			(2.3		)	(3.6		)
International	(38.5		)	(37.2		)	(44.9		)
	(113.1		)	(145.9		)	(48.2		)
	$	583.6		$	593.1		$	565.2

The reconciliation from the statutory U.S. federal income tax rate to our effective tax rate is:



	2015		2014		2013
Statutory U.S. federal income tax rate	35.0	%	35.0	%	35.0	%
State and local income taxes, net of federal income tax benefit	1.5		1.3		1.0
International tax rate differentials	(3.7	)	(3.3	)	(3.0	)
Other	—		(0.2	)	1.0
Effective tax rate	32.8	%	32.8	%	34.0	%

The international tax rate differentials are primarily attributed to our earnings in the U.K., Germany, France, the United Arab Emirates and Singapore being taxed at different rates than the U.S. statutory tax rate. Income tax expense for 2014 reflects the recognition of an income tax benefit of approximately $11 million related to previously incurred expenses for the proposed merger with Publicis Groupe S.A. (“Publicis”). On May 8, 2014, the proposed merger was terminated. Prior to the termination of the merger, the majority of the merger costs, which were incurred in 2013, were capitalized for income tax purposes and the related tax benefits were not recorded. Because the merger was terminated, the merger costs were no longer required to be capitalized for income tax purposes. Excluding the income tax benefit of $11 million related to the proposed merger, income tax expense for 2014 would have been $604.5 million. The decrease in the effective tax rate for 2015 from the effective tax rate for 2014, excluding the income tax benefit related to the proposed merger, is primarily due to a legal entity restructuring of our European operations. As a result of the reorganization, a certain portion of the foreign earnings in the affected countries is subject to lower effective tax rates.

Income tax expense for 2015, 2014 and 2013 includes $1.1 million, $1.7 million and $1.6 million, respectively, of interest, net of tax benefit, and penalties related to tax positions taken on our tax returns. At December 31, 2015 and 2014, the accrued interest and penalties were $8.4 million and $14.2 million, respectively.

The components of deferred tax assets and liabilities at December 31, 2015 and 2014 were (in millions):



	2015			2014
Deferred tax assets:
Compensation and severance	$	293.8		$	311.9
Tax loss and credit carryforwards	113.3			95.6
Basis differences from acquisitions	37.1			38.0
Basis differences from short-term assets and liabilities	27.2			27.8
Other	26.9			33.0
Deferred tax assets	498.3			506.3
Valuation allowance	(35.3		)	(34.1		)
Net deferred tax assets	$	463.0		$	472.2
Deferred tax liabilities:
Goodwill and intangible assets	$	729.5		$	706.1
Financial instruments	197.3			263.1
Unremitted foreign earnings	9.9			51.1
Basis differences from investments	(4.6		)	(4.2		)
Deferred tax liabilities	$	932.1		$	1,016.1

Long-term deferred tax liabilities	$	469.1		$	543.9

Long-term deferred tax liabilities at December 31, 2014 were adjusted to reflect the retrospective adoption of ASU 2015-17 (See Note 2).

The American Recovery and Reinvestment Act of 2009 provided an election where qualifying cancellation of indebtedness income for debt reacquired in 2009 and 2010 was deferred and included in taxable income from 2014 to 2018. In 2009 and 2010, we redeemed $1.4 billion of our debt resulting in a tax liability of approximately $329 million. Through December 31, 2015, we paid $132 million of the liability and the remainder will be paid from 2016 through 2018. Substantially all the deferred tax liability for financial instruments at December 31, 2015 and 2014, relates to the reacquired debt.

In 2014, as a result of the conversion of the 2032 Notes (See Note 6), we paid $66.2 million, representing the excess of the accreted value of the notes for income tax purposes over the conversion value and reclassified $32.2 million, representing the difference between the issue price of the notes and the conversion value from long-term deferred tax liabilities to additional paid-in capital. As a result of the conversion of the 2033 Notes and 2038 Notes in 2013 (See Note 6), in 2014 we paid $52.7 million, representing the excess of the accreted value of the notes for income tax purposes over the conversion value and in 2013 reclassified $34.5 million, representing the tax effect of the difference between the issue price of the notes and the conversion value from long-term deferred tax liabilities to additional paid-in capital.

We have concluded that it is more likely than not that we will be able to realize our net deferred tax assets in future periods because results of future operations are expected to generate sufficient taxable income. The valuation allowance of $35.3 million and $34.1 million at December 31, 2015 and 2014, respectively, relates to tax loss and credit carryforwards in the United States and international jurisdictions. Tax loss and credit carryforwards for which there is no valuation allowance are available for periods ranging from 2016 to 2035, which is longer than the forecasted utilization of such carryforwards.

We have not provided U.S. federal income and foreign withholding taxes on approximately $2.1 billion of cumulative undistributed earnings of certain foreign subsidiaries. We intend to indefinitely reinvest these earnings in our international operations for working capital requirements and expansion in the region and we currently have no plans to repatriate these funds. We cannot determine the amount of taxes and foreign tax credits associated with the future repatriation of such earnings and therefore cannot quantify the tax liability.

In 2015, the weakening of substantially all foreign currencies against the U.S. Dollar impacted the translation of approximately $1.1 billion of the cumulative undistributed earnings of certain foreign operations that are not indefinitely reinvested. The foreign tax credits on those earnings substantially offset the U.S. federal tax liability on any repatriation. We have provided $9.9 million of residual U.S. taxes on those earnings. Changes in international tax rules or changes in U.S. tax rules and regulations covering international operations and foreign tax credits may affect our future reported financial results or the way we conduct our business.

A reconciliation of our unrecognized tax benefits at December 31, 2015 and 2014 is (in millions):



	2015			2014
January 1	$	139.8		$	137.8
Additions:
Current year tax positions	5.8			6.0
Prior year tax positions	0.2			1.0
Reduction of prior year tax positions	(25.1		)	0.5
Settlements	(6.0		)	(0.8		)
Lapse of statute of limitations	—			(2.9		)
Foreign currency translation	(1.7		)	(1.8		)
December 31	$	113.0		$	139.8

The majority of the liability for uncertain tax positions is recorded in long-term liabilities. At December 31, 2015 and 2014, approximately $52.2 million and $58.6 million, respectively, of the liability for uncertain tax positions would affect our effective tax rate upon resolution of the uncertain tax positions.