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 2013, 2013 and 2009, respectively.

On December 22, 2017, the Tax Act was enacted into law. The Tax Act reduced the U.S. federal statutory income tax rate to 21% from 35% for tax years beginning after December 31, 2017 and made several changes to existing tax law that affect our tax assets and liabilities related to previously reported taxable income. The significant changes require that we record tax expense on the accumulated earnings of our foreign subsidiaries and adjust our previously reported deferred tax positions to reflect the impact of the revised statutory federal rate as of the enactment date. In December 2017, the SEC issued Staff Accounting Bulletin 118, or SAB 118, which provides guidance on accounting for the impact of the Tax Act. SAB 118 provides that provisional amounts should be recognized in our financial statements where accounting for certain effects of the Tax Act are not complete and a reasonable estimate of the effects of the Tax Act can be made. Accordingly, at December 31, 2017, we have estimated the effect of the Tax Act and recorded a net increase to income tax expense of $106.3 million. Our estimate is based on our understanding of the Tax Act and currently available guidance. However, we are still analyzing the impact of the Tax Act and we expect the estimate to change. Any adjustment to the provisional amounts through December 22, 2018 will be recorded in results of operations in the period when the analysis is complete.

We are required to account for effect of U.S. federal tax rate changes on our deferred tax balances by measuring deferred tax assets and liabilities at the rate at which they are expected to reverse in the future, which as a result of the Tax Act is 21%. The provisional amount for the remeasurement of our deferred tax assets and liabilities reduced income tax expense by $173.3 million.

The territorial tax system will allow us to repatriate future earnings of our foreign subsidiaries without incurring additional U.S. tax by providing a 100% dividend exemption. However, while the change to a territorial system limits U.S. federal income tax to domestic earnings, foreign source income is subject to tax by the appropriate foreign jurisdiction at the local rate, which, in certain jurisdictions, may be higher than the U.S. federal statutory income tax rate of 21%. As a result, the foreign tax rate differential will cause our effective tax rate to be higher than the U.S. federal statutory income tax rate.

The Tax Act imposes a one-time transition tax on our accumulated foreign earnings at December 31, 2017. We recorded a provisional amount of $192.1 million in income tax expense for the transition tax. The portion of the foreign earnings comprising cash and other specified assets is taxed at a 15.5% rate and any remaining amount is taxed at an 8% rate. The provisional amount can change as we obtain additional information related to our foreign subsidiaries. After taking into consideration available foreign tax credits and other items, we recorded a net cash liability of $102.9 million, which we will elect to pay over an eight year period. Although the adoption of a territorial tax system allows for the repatriation of foreign earnings after December 31, 2017 without incurring U.S. income tax, withholding taxes by the foreign jurisdictions will be applied to any dividends remitted to the U.S. As a result, we recorded a charge of $87.5 million related to these withholding taxes.

In January 2018, the FASB released guidance on the accounting for tax on the global intangible low-taxed income, or GILTI, provisions of the Tax Act. We have elected to account for any GILTI tax in the period in which it is incurred, and therefore have not provided any deferred tax impacts of GILTI in our consolidated financial statements for the year ended December 31, 2017.

Income before income taxes for the three years ended December 31, 2017 was (in millions):



	2017		2016		2015
Domestic	$	832.4	$	805.2	$	803.3
International	1,052.5		1,036.6		975.3
	$	1,884.9	$	1,841.8	$	1,778.6

Income tax expense (benefit) for the three years ended December 31, 2017 was (in millions):



	2017			2016			2015
Current:
Federal	$	458.8		$	381.8		$	342.3
State and local	36.5			12.6			29.9
International	280.2			332.1			324.5
	775.5			726.5			696.7
Deferred:
Federal	(205.5		)	(88.2		)	(86.7		)
State and local	11.1			12.0			12.1
International	115.1			(49.8		)	(38.5		)
	(79.3		)	(126.0		)	(113.1		)
	$	696.2		$	600.5		$	583.6

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



	2017		2016		2015
Statutory U.S. federal income tax rate	35.0	%	35.0	%	35.0	%
State and local income taxes, net of federal income tax benefit	1.3		0.9		1.5
Effect of Tax Act	5.6		—		—
International tax rate differentials	(3.8	)	(4.0	)	(3.7	)
Other	(1.2	)	0.7		—
Effective tax rate	36.9	%	32.6	%	32.8	%

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

Income tax expense in 2017, 2016 and 2015 includes $2.5 million, $2.3 million and $1.1 million, respectively, of interest, net of tax benefit, and penalties related to tax positions taken on our tax returns. At December 31, 2017 and 2016, accrued interest and penalties were $16.1 million and $11.9 million, respectively.

The components of deferred tax assets and liabilities at December 31, 2017 and 2016 were (in millions):



	2017			2016
Deferred tax assets:
Compensation	$	173.7		$	307.5
Tax loss and credit carryforwards	40.3			88.5
Basis differences from acquisitions	18.0			24.3
Basis differences from short-term assets and liabilities	39.5			36.2
Other	17.8			18.7
Deferred tax assets	289.3			475.2
Valuation allowance	(3.3		)	(3.0		)
Net deferred tax assets	$	286.0		$	472.2
Deferred tax liabilities:
Goodwill and intangible assets	$	562.2		$	802.7
Unremitted foreign earnings	94.9			15.9
Financial instruments	41.4			132.3
Basis differences from investments	9.8			1.8
Deferred tax liabilities	$	708.3		$	952.7

Long-term deferred tax assets	$	61.3		$	—

Long-term deferred tax liabilities	$	483.6		$	480.5

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, 2017, we paid $263 million of the liability. As a result of the Tax Act, the remaining liability was revalued to $41.4 million and will be paid in 2018.

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 $3.3 million and $3.0 million at December 31, 2017 and 2016, respectively, relates to tax losses in international jurisdictions. Tax loss and credit carryforwards for which there is no valuation allowance are available for periods ranging from 2018 to 2037, which is longer than the forecasted utilization of such carryforwards.

A reconciliation of our unrecognized tax benefits at December 31, 2017 and 2016 is (in millions):



	2017			2016
January 1	$	116.9		$	113.0
Additions:
Current year tax positions	67.1			20.0
Prior year tax positions	5.5			6.5
Reduction of prior year tax positions	(16.5		)	(21.9		)
Settlements	—			(0.7		)
Foreign currency translation	0.7			—
December 31	$	173.7		$	116.9

The majority of the liability for uncertain tax positions is recorded in long-term liabilities. At December 31, 2017 and 2016, approximately $142.8 million and $71.0 million, respectively, of the liability for uncertain tax positions would affect our effective tax rate upon resolution of the uncertain tax positions.