Income Taxes

12 Months Ended

Dec. 31, 2020

The components of income before income taxes were (in millions):


	Year Ended December 31,
	2020		2019		2018
Domestic	$	711.1	$	913.1	$	643.7
International	698.2		1,025.2		1,280.6
	$	1,409.3	$	1,938.3	$	1,924.3

Income tax expense (benefit) was (in millions):


	Year Ended December 31,
	2020		2019		2018
Current:
U.S. federal	$	172.2	$	180.2	$	273.8
U.S. state and local	39.5		33.9		35.5
International	189.1		306.9		305.2
	400.8		521.0		614.5
Deferred:
U.S. federal	(17.4)		19.1		(104.2)
U.S. state and local	(6.1)		(22.5)		2.8
International	4.4		(13.2)		(20.4)
	(19.1)		(16.6)		(121.8)
	$	381.7	$	504.4	$	492.7

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


	2020		2019		2018
Statutory U.S. federal income tax rate	21.0	%	21.0	%	21.0	%
U.S. state and local income taxes, net of U.S. federal income tax benefit	2.2		0.5		1.6
Effect of Tax Act	—		—		1.5
Impact of foreign operations	3.4		4.5		3.8
Other	0.5		—		(2.3)
Effective tax rate	27.1	%	26.0	%	25.6	%

Our effective tax rate for 2020 increased year-over-year to 27.1% from 26.0%. The non-deductibility in certain jurisdictions of a portion of the COVID-19 repositioning costs recorded in the second quarter of 2020 had the effect of increasing our effective tax rate for 2020. This increase was substantially offset by a lower effective tax rate on our foreign earnings resulting from a change in legislation. The effective tax rate for 2019 includes a reduction of $10.8 million primarily from the net favorable settlement of uncertain tax positions in various jurisdictions in the second quarter of 2019. The international tax rate differentials in 2020 and 2019 are primarily attributed to our earnings in Germany, Australia, France, Japan and Brazil being taxed at higher rates than the U.S. statutory tax rate.

The Tax Cuts and Jobs Act of 2017, or Tax Act, among other things, implemented a territorial tax system and imposed a one-time transition tax on the deemed repatriation of accumulated earnings of foreign subsidiaries. At December 31, 2020 and 2019, the transition tax liability was $112.0 million and $123.6 million, respectively. The territorial tax system allows us to repatriate earnings of our foreign subsidiaries without incurring additional U.S. tax by providing a 100% dividend exemption. While a territorial tax system limits U.S. federal income tax to domestic source income, 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.

We have elected to account for any tax on the global intangible low-taxed income, or GILTI, in the period in which it is incurred. In 2020 and 2019, we provided $3.0 million and $14.7 million, respectively, for tax impacts of GILTI.

Income tax expense in 2020, 2019 and 2018 includes $3.8 million, $2.2 million and $3.6 million, respectively, of interest, net of tax benefit, and penalties related to tax positions taken on our tax returns. At December 31, 2020 and 2019, accrued interest and penalties were $23.5 million and $20.0 million, respectively.

The components of deferred tax assets and liabilities and balance sheet classification were (in millions):


	December 31,
	2020		2019
Deferred tax assets:
Compensation	$	236.5	$	210.9
Tax loss and credit carryforwards	67.0		60.6
Basis differences from acquisitions	20.8		22.9
Basis differences from short-term assets and liabilities	34.4		42.2
Other	(5.8)		4.6
Deferred tax assets	352.9		341.2
Valuation allowance	(15.9)		(7.6)
Net deferred tax assets	$	337.0	$	333.6
Deferred tax liabilities:
Goodwill and intangible assets	$	611.1	$	598.0
Unremitted foreign earnings	91.9		69.0
Basis differences from investments	(1.1)		9.0
Financial instruments	0.8		0.9
Deferred tax liabilities	$	702.7	$	676.9

Long-term deferred tax assets	$	77.8	$	64.8
Long-term deferred tax liabilities	$	443.5	$	408.1

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 $15.9 million and $7.6 million at December 31, 2020 and 2019, respectively, relates to tax losses and tax credit carryforwards in the U.S. and in international jurisdictions. Tax loss and credit carryforwards for which there is no valuation allowance are available for periods ranging from 2021 to 2040, which is longer than the forecasted utilization of such carryforwards.

A reconciliation of our unrecognized tax benefits is (in millions):


	December 31,
	2020		2019
January 1	$	206.8	$	182.8
Additions:
Current year tax positions	3.9		12.3
Prior year tax positions	2.8		29.4
Reduction of prior year tax positions	(26.1)		(13.1)
Settlements	(2.5)		(5.0)

Foreign currency translation	(2.0)		0.4
December 31	$	182.9	$	206.8

The majority of the liability for uncertain tax positions is recorded in long-term liabilities. At December 31, 2020 and 2019, approximately $174.0 million and $179.0 million, respectively, of the liability for uncertain tax positions would affect our effective tax rate upon resolution of the uncertain tax positions.

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 U.S. federal tax returns through 2015. Tax returns in the United Kingdom, France and Germany have been examined through 2017, 2016 and 2009, respectively.

In response to the economic impact of the COVID-19 pandemic, the CARES Act, was signed into law on March 27, 2020. We have determined that the CARES Act did not have a material impact on our income tax expense or effective tax rate for 2020.

- Definition

The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.

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