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, 2014 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 required 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 provided 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 estimated the effect of the Tax Act and recorded a net increase to income tax expense of $106.3 million. Our estimate was based on our understanding of the Tax Act and currently available guidance. In 2018, we finalized the provisional amounts based on additional information regarding the tax on our accumulated foreign earnings. As a result, we recorded additional income tax expense of $28.9 million.

We were 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%. At December 31, 2017, 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 in 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 imposed a one-time transition tax on our accumulated foreign earnings at December 31, 2017. 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. In 2017, we recorded a provisional amount of $192.1 million in income tax expense for the transition tax. After taking into consideration available foreign tax credits and other items, at December 31, 2017, we recorded a net cash liability of $102.9 million, which we elected to pay over an eight year period. In 2018, we finalized the provisional amount. At December 31, 2018 the cash liability, which reflects the finalization of the provisional amount and payments, was $139.1 million. 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, at December 31, 2018 and 2017, we recorded a charge of $3.0 million and $87.5 million, respectively, related to these withholding taxes.

We elected to account for any tax on the global intangible low-taxed income, or GILTI, in the period in which it is incurred. At December 31, 2018, we provided $12.9 million for tax impacts of GILTI.

Income before income taxes for the three years ended December 31, 2018 was (in millions):



	2018		2017		2016
Domestic	$	643.7	$	832.4	$	805.2
International	1,280.6		1,052.5		1,036.6
	$	1,924.3	$	1,884.9	$	1,841.8

Income tax expense (benefit) for the three years ended December 31, 2018 was (in millions):



	2018			2017			2016
Current:
Federal	$	273.8		$	458.8		$	381.8
State and local	35.5			36.5			12.6
International	305.2			280.2			332.1
	614.5			775.5			726.5
Deferred:
Federal	(104.2		)	(205.5		)	(88.2		)
State and local	2.8			11.1			12.0
International	(20.4		)	115.1			(49.8		)
	(121.8		)	(79.3		)	(126.0		)
	$	492.7		$	696.2		$	600.5

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



	2018		2017		2016
Statutory U.S. federal income tax rate	21.0	%	35.0	%	35.0	%
State and local income taxes, net of federal income tax benefit	1.5		1.3		0.9
Effect of Tax Act	1.6		5.6		—
International tax rate differentials	1.1		(3.8	)	(4.0	)
Other	0.4		(1.2	)	0.7
Effective tax rate	25.6	%	36.9	%	32.6	%

The international tax rate differentials in 2018 are primarily attributed to our earnings in Canada, Australia, Japan, Colombia and Hong Kong being taxed at higher rates than the U.S. statutory tax rate, reduced by approximately $19 million resulting from the successful resolution of foreign tax claims.

Income tax expense in 2018, 2017 and 2016 includes $3.6 million, $2.5 million and $2.3 million, respectively, of interest, net of tax benefit, and penalties related to tax positions taken on our tax returns. At December 31, 2018 and 2017, accrued interest and penalties were $21.1 million and $16.1 million, respectively.

The components of deferred tax assets and liabilities at December 31, 2018 and 2017 were (in millions):



	2018			2017
Deferred tax assets:
Compensation	$	209.7		$	173.7
Tax loss and credit carryforwards	38.1			40.3
Basis differences from acquisitions	13.9			18.0
Basis differences from short-term assets and liabilities	35.7			39.5
Other	10.8			17.8
Deferred tax assets	308.2			289.3
Valuation allowance	(3.0		)	(3.3		)
Net deferred tax assets	$	305.2		$	286.0
Deferred tax liabilities:
Goodwill and intangible assets	$	577.5		$	562.2
Unremitted foreign earnings	69.2			94.9
Basis differences from investments	9.6			9.8
Financial instruments	0.8			41.4
Deferred tax liabilities	$	657.1		$	708.3

Long-term deferred tax assets	$	61.8		$	61.3

Long-term deferred tax liabilities	$	413.7		$	483.6

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 $3.3 million at December 31, 2018 and 2017, 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 2019 to 2038, which is longer than the forecasted utilization of such carryforwards.

A reconciliation of our unrecognized tax benefits at December 31, 2018 and 2017 is (in millions):



	2018			2017
January 1	$	173.7		$	116.9
Additions:
Current year tax positions	30.1			67.1
Prior year tax positions	5.2			5.5
Reduction of prior year tax positions	(25.4		)	(16.5		)
Foreign currency translation	(0.8		)	0.7
December 31	$	182.8		$	173.7

The majority of the liability for uncertain tax positions is recorded in long-term liabilities. At December 31, 2018 and 2017, approximately $174.0 million and $142.8 million, respectively, of the liability for uncertain tax positions would affect our effective tax rate upon resolution of the uncertain tax positions.