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 2012. 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, 2016 was (in millions):



	2016		2015		2014
Domestic	$	805.2	$	803.3	$	739.9
International	1,036.6		975.3		1,070.1
	$	1,841.8	$	1,778.6	$	1,810.0

Income tax expense (benefit) for the three years ended December 31, 2016 was (in millions):



	2016			2015			2014
Current:
Federal	$	381.8		$	342.3		$	356.1
State and local	12.6			29.9			38.1
International	332.1			324.5			344.8
	726.5			696.7			739.0
Deferred:
Federal	(88.2		)	(86.7		)	(106.4		)
State and local	12.0			12.1			(2.3		)
International	(49.8		)	(38.5		)	(37.2		)
	(126.0		)	(113.1		)	(145.9		)
	$	600.5		$	583.6		$	593.1

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



	2016		2015		2014
Statutory U.S. federal income tax rate	35.0	%	35.0	%	35.0	%
State and local income taxes, net of federal income tax benefit	0.9		1.5		1.3
International tax rate differentials	(4.0	)	(3.7	)	(3.3	)
Other	0.7		—		(0.2	)
Effective tax rate	32.6	%	32.8	%	32.8	%

The international tax rate differentials are primarily attributed to our earnings in the U.K., China, Canada, the United Arab Emirates and Brazil being taxed at different rates than the U.S. statutory tax rate.

Income tax expense in 2016, 2015 and 2014 includes $2.3 million, $1.1 million and $1.7 million, respectively, of interest, net of tax benefit, and penalties related to tax positions taken on our tax returns. At December 31, 2016 and 2015, the accrued interest and penalties were $11.9 million and $8.4 million, respectively.

The components of deferred tax assets and liabilities at December 31, 2016 and 2015 were (in millions):



	2016			2015
Deferred tax assets:
Compensation	$	307.5		$	293.8
Tax loss and credit carryforwards	88.5			113.3
Basis differences from acquisitions	24.3			37.1
Basis differences from short-term assets and liabilities	36.2			27.2
Other	18.7			26.9
Deferred tax assets	475.2			498.3
Valuation allowance	(3.0		)	(35.3		)
Net deferred tax assets	$	472.2		$	463.0
Deferred tax liabilities:
Goodwill and intangible assets	$	802.7		$	729.5
Financial instruments	132.3			197.3
Unremitted foreign earnings	15.9			9.9
Basis differences from investments	1.8			(4.6		)
Deferred tax liabilities	$	952.7		$	932.1

Net deferred tax liabilities	$	480.5		$	469.1

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, 2016, we paid $197 million of the liability and the remainder will be paid ratably in 2017 and 2018. Substantially all the deferred tax liability for financial instruments at December 31, 2016 and 2015, relates to the reacquired debt.

As a result of the conversion of the 2032 Notes (see Note 6), in 2014 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.

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 $3.0 million and $35.3 million at December 31, 2016 and 2015, respectively, relates to tax loss and credit carryforwards in the United States and international jurisdictions. The reduction in the valuation allowance year-over-year is primarily related to a change in tax law as it relates to certain domestic earnings. Tax loss and credit carryforwards for which there is no valuation allowance are available for periods ranging from 2017 to 2036, which is longer than the forecasted utilization of such carryforwards.

We have not provided U.S. federal income and foreign withholding taxes on approximately $2.4 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 2016, the sustained strength of the U.S. Dollar against substantially all foreign currencies impacted the translation of approximately $1.3 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 $15.9 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, 2016 and 2015 is (in millions):



	2016			2015
January 1	$	113.0		$	139.8
Additions:
Current year tax positions	20.0			5.8
Prior year tax positions	6.5			0.2
Reduction of prior year tax positions	(21.9		)	(25.1		)
Settlements	(0.7		)	(6.0		)
Foreign currency translation	—			(1.7		)
December 31	$	116.9		$	113.0

The majority of the liability for uncertain tax positions is recorded in long-term liabilities. At December 31, 2016 and 2015, approximately $71.0 million and $52.2 million, respectively, of the liability for uncertain tax positions would affect our effective tax rate upon resolution of the uncertain tax positions.