10. Income Taxes

The provision for income taxes for continuing operations was as follows:

(In thousands)	2018			2017			2016
Currently (receivable) payable:
Federal ⁽¹⁾	$	(9,071	)	$	15,513		$	12,145
State		205			642			2,631
Foreign		23,187			25,254			19,168
		14,321			41,409			33,944
Deferred expense (benefit):
Federal		3,977			18,458			7,630
State		3,164			215			1,656
Foreign		2,703			(1,259	)		1,142
		9,844			17,414			10,428
Income taxes	$	24,165		$	58,823		$	44,372

(1)

In 2018 and 2017, this amount includes $(3.9) million and $7.4 million, respectively, of income tax (benefit) expense related to the one-time transition tax on earnings of foreign subsidiaries enacted by the 2017 Tax Legislation (See discussion below). There was no liability for this amount recorded as of December 31, 2018. As of December 31, 2017, $5.1 million of this amount was reported in Other liabilities on the Consolidated Balance Sheet.

The tax effects of temporary differences that give rise to significant portions of deferred tax assets and liabilities consisted of the following:

(in thousands)	2018			2017
Deferred tax assets:
Benefit plans	$	6,788		$	8,440
Liabilities and reserves		12,563			11,141
Operating loss and credit carryovers		65,392			40,164
Other		1,404			1,007
Gross deferred tax assets		86,147			60,752
Valuation allowance		(50,702	)		(38,366	)
Deferred tax assets		35,445			22,386
Deferred tax liabilities:
Property, plant and equipment		(29,372	)		(12,458	)
Goodwill		(21,372	)		(20,345	)
Other		(4,488	)		(422	)
Deferred tax liabilities		(55,232	)		(33,225	)
Net deferred tax liabilities	$	(19,787	)	$	(10,839	)

The Company is subject to current tax on Global Intangible Low-Taxed Income (GILTI) earned by foreign subsidiaries. The FASB Staff Q&A Topic No. 5, Accounting for Global Intangible Low-Taxed Income, states that an entity can make an accounting policy election either to recognize deferred taxes for temporary differences that are expected to reverse as GILTI in future years or provide for the tax expense related to GILTI resulting from those items in the year the tax is incurred. Sensient is electing to recognize GILTI as a period expense in the period the tax is incurred.

At December 31, 2018, foreign operating loss carryovers were $122.9 million. Included in the foreign operating loss carryovers are losses of $25.2 million that expire through 2033, and $97.7 million that expire after 2033 or do not have an expiration date. At December 31, 2018, state operating loss carryovers were $138.4 million, of which $137.3 million expires through 2033.

The effective tax rate for continuing operations differed from the statutory federal income tax rate as described below:

	2018			2017			2016
Taxes at statutory rate		21.0	%		35.0	%		35.0	%
State income taxes, net of federal income tax benefit		1.1			0.3			1.4
Tax credits		(1.5	)		(1.1	)		(1.8	)
Taxes on foreign earnings		(0.4	)		0.2			(4.4	)
Global Intangible Low-Taxed Income		0.6			-			-
Resolution of prior years’ tax matters		(0.3	)		0.1			-
U.S. manufacturing deduction		-			(1.4	)		(2.0	)
Valuation allowance adjustments		0.4			-			(0.3	)
2017 Tax Legislation		(3.7	)		12.4			-
Loss on foreign branch remittances		-			(5.2	)		-
U.S. tax accounting method changes		(2.9	)		-			-
Other, net		(1.0	)		(0.7	)		(1.4	)
Effective tax rate		13.3	%		39.6	%		26.5	%

On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (Act or 2017 Tax Legislation). The Act significantly changed the U.S. corporate income tax laws by reducing the U.S. corporate income tax rate to 21% beginning in 2018 and imposing a one-time mandatory tax on previously deferred foreign earnings of U.S. subsidiaries in 2017. Staff Accounting Bulletin No. 118 (SAB 118) was issued to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Act. In accordance with SAB 118, the Company recorded a net charge of $18.4 million during the fourth quarter of 2017. The amount consists of reassessing the U.S. deferred tax assets and liabilities, adjustments to the Company’s foreign tax credit carryover, and the one-time mandatory tax on previously deferred foreign earnings of U.S. subsidiaries. Based on additional guidance, changes in interpretation, additional analysis, and assumptions, the Company reduced this net charge by $6.6 million in 2018. Sensient considers $11.8 million to be the final net charge related to the Act.

During the third and fourth quarters of 2018, the US Treasury released numerous proposed regulations related to the 2017 Tax Legislation. The Company has reviewed and evaluated these proposed regulations. These regulations, when finalized, could result in adjustments to the Company’s provision for income taxes and its realizability of certain deferred tax assets.

The effective tax rate in 2018 was also favorably impacted by U.S. tax accounting method changes that were filed with the IRS in the second quarter of 2018 and generation of foreign tax credits during 2018.

The 2017 loss on remittances is the result of the cumulative foreign currency effect related to certain repatriation transactions.

Taxes on foreign earnings include the difference between the tax rates applied to foreign earnings relative to the U.S. statutory tax rate, accruals for foreign unrecognized tax benefits, and the impact of the U.S. foreign tax credit, not including the impact from GILTI. The impact on the Company’s effective tax rate varies from year to year based on the mix of earnings, increases in foreign unrecognized tax benefits, and the expected realization of U.S. foreign tax credits generated each year. The increase of the 2017 effective tax rate from taxes on foreign earnings compared to 2016 is primarily the result of the non-deductible losses from the sale of the European Natural Ingredients business (See Note 13, Restructuring Charges), and the sale of the business lines in Strasbourg, France (See Note 15, Divestiture).

Earnings from continuing operations before income taxes were as follows:

(In thousands)	2018		2017		2016

United States	$	80,641	$	88,479	$	96,963
Foreign		100,884		59,944		70,322
Total	$	181,525	$	148,423	$	167,285

Federal and state income taxes are provided on international subsidiary income distributed to or taxable in the U.S. during the year. At December 31, 2018, no additional income or withholding taxes have been provided for the $553 million of undistributed earnings or any additional outside basis differences inherent in these entities, as these amounts are considered to be invested indefinitely. If the undistributed earnings were repatriated, Sensient estimates it would have a withholding tax liability of $24.9 million. The determination of the tax liability for any outside basis differences is not practicable.

A reconciliation of the change in the liability for unrecognized tax benefits for 2018 and 2017 is as follows:

(in thousands)	2018			2017
Balance at beginning of year	$	6,276		$	4,947
Increases for tax positions taken in the current year		834			871
Increases for tax positions taken in prior years		271			553
Decreases related to settlements with tax authorities		(177	)		(76	)
Decreases as a result of lapse of the applicable statutes of limitations		(920	)		(607	)
Foreign currency exchange rate changes		(258	)		588
Balance at the end of year	$	6,026		$	6,276

The amount of the unrecognized tax benefits that would affect the effective tax rate, if recognized, was approximately $4.8 million. The Company recognizes interest and penalties related to the unrecognized tax benefits in income tax expense. As of December 31, 2018 and 2017, $0.5 million and $0.5 million, respectively, of accrued interest and penalties were reported as an income tax liability in each period. The liability for unrecognized tax benefits relates to multiple jurisdictions and is reported in Other liabilities on the Company’s Consolidated Balance Sheet at December 31, 2018.

The Company believes that it is reasonably possible that the total amount of liability for unrecognized tax benefits as of December 31, 2018, will decrease by approximately $0.9 million during 2019, of which $0.9 million is estimated to impact the effective tax rate. The potential decrease relates to various tax matters for which the statute of limitations may expire or will be otherwise settled in 2019. The amount that is ultimately recognized in the financial statements will be dependent upon various factors including potential increases or decreases in unrecognized tax benefits as a result of examinations, settlements, and other unanticipated items that may occur during the year. With limited exceptions, the Company is no longer subject to federal, state, and local, or non-U.S. income tax examinations by tax authorities for years before 2014.