12. INCOME TAXES

Income before income taxes consisted of:


(millions)	2015		2014		2013
United States		$ 733.0		$ 937.7		$ 725.8
International		584.7		760.7		572.5
Total		$ 1,317.7		$ 1,698.4		$ 1,298.3

The provision for income taxes consisted of:


(millions)	2015		2014		2013
Federal and state		$ 241.4		$ 344.3		$ 301.3
International		303.6		253.4		153.9
Total current		545.0		597.7		455.2
Federal and state		(185.4)		(67.7)		(124.0)
International		(59.1)		(53.8)		(6.5)
Total deferred		(244.5)		(121.5)		(130.5)
Provision for income taxes		$ 300.5		$ 476.2		$ 324.7

The company’s overall net deferred tax assets and deferred tax liabilities were comprised of the following:


December 31 (millions)	2015		2014
Deferred tax assets
Other accrued liabilities		$ 172.7		$ 122.9
Loss carryforwards		62.4		86.0
Share-based compensation		75.2		70.9
Pension and other comprehensive income		309.0		357.3
Foreign tax credits		31.3		15.6
Other, net		78.5		78.2
Valuation allowance		(31.8)		(74.2)
Total		697.3		656.7
Deferred tax liabilities
Property, plant and equipment basis differences		267.5		269.2
Intangible assets		1,227.7		1,392.2
Unremitted foreign earnings		25.8		37.4
Other, net		158.4		126.1
Total		1,679.4		1,824.9
Net deferred tax liabilities balance		$ (982.1)		$ (1,168.2)

As of December 31, 2015 the company has tax effected federal, state and international net operating loss carryforwards of $0.8 million, $6.0 million and $55.6 million, respectively, which will be available to offset future taxable income. The state loss carryforwards expire from 2016 to 2035. For the international loss carryforwards, $24.8 million expire from 2016 to 2035 and $30.8 million have no expiration.

The company had valuation allowances on certain deferred tax assets of $31.8 million and $74.2 million at December 31, 2015 and 2014, respectively. During 2015, the company determined sufficient positive income trends existed to conclude it was more likely than not it would be able to realize the benefits of the net operating losses and other deferred tax assets within certain underlying foreign entities for which valuation allowances had been recorded, thus resulting in a $20.6 million valuation allowance release. The reduction in the valuation allowance from year end 2014 to year end 2015 was also driven by current year utilization and foreign currency translation.

The company’s U.S. foreign tax credit carryforward of $31.3 million has a ten-year carryforward period and will expire between 2018 and 2025 if not utilized.

The company has a tax holiday in one foreign jurisdiction that resulted in tax reductions during 2015, 2014 and 2013. The company received a permit of operation, which expires in July 2021, from the National Council of Free Zones of Exportation for the Dominican Republic. Companies operating under the Free Zones are not subject to income tax in the Dominican Republic on export income. The tax reduction as the result of the permit for 2015 was $4.8 million, or approximately $0.02 per diluted share. The impact of the tax holiday was similar during 2014 and 2013.

A reconciliation of the statutory U.S. federal income tax rate to the company’s effective income tax rate is as follows:


	2015		2014		2013
Statutory U.S. rate	35.0	%	35.0	%	35.0	%
State income taxes, net of federal benefit	0.4		1.6		1.1
Foreign operations	(8.1)		(6.1)		(4.5)
Domestic manufacturing deduction	(2.7)		(2.0)		(2.6)
R&D credit	(1.0)		(0.7)		(1.4)
Change in valuation allowance	(1.7)		(0.1)		(1.0)
Nondeductible deal costs	(0.1)		-		0.2
Audit settlements and refunds	(0.7)		0.2		(0.8)
Venezuela charges	4.5		-		-
Worthless stock deduction	(3.0)		-		-
Other, net	0.2		0.1		(1.0)
Effective income tax rate	22.8	%	28.0	%	25.0	%

As of December 31, 2015 and 2014, the company has recorded deferred tax liabilities of $25.8 million and $37.4 million, respectively, on foreign earnings of the legacy Nalco entities and legacy Champion entities that the company intends to repatriate. The deferred tax liabilities originated based on purchase accounting decisions made in connection with the Nalco merger and Champion acquisition and were the result of extensive studies required to calculate the impact at the purchase date.

U.S. deferred income taxes are not provided on certain other unremitted foreign earnings that are considered permanently reinvested which as of December 31, 2015 and 2014 were approximately $1.8 billion for both periods. These earnings are considered to be reinvested indefinitely or available for distribution with foreign tax credits to offset the amount of applicable income tax and foreign withholding taxes that may be payable on remittance. It is impractical due to the complexities associated with its hypothetical calculation to determine the amount of incremental taxes that might arise if all undistributed earnings were distributed.

The company files income tax returns in the U.S. federal jurisdiction and various U.S. state and international jurisdictions. With few exceptions, the company is no longer subject to state and foreign income tax examinations by tax authorities for years before 2011. The IRS has completed examinations of the company’s U.S. federal income tax returns (Ecolab and Nalco) through 2012. To date, the 2012 U.S. income tax return of Champion has not been audited. The company’s Ecolab U.S. federal (including Nalco and Champion) income tax returns for the years 2013 and 2014 are currently under audit. In addition to the U.S. federal examination, there is ongoing audit activity in several U.S. state and foreign jurisdictions. The company anticipates changes to its uncertain tax positions due to closing of various audit years mentioned above. The company does not believe these changes will result in a material impact during the next twelve months. Decreases in the company’s gross liability could result in offsets to other balance sheet accounts, cash payments, and/or adjustments to tax expense. The occurrence of these events and/or other events not included above within the next twelve months could change depending on a variety of factors and result in amounts different from above.

During 2015, the company recognized net benefits related to discrete tax items of $63.3 million. The net benefits were driven primarily by the release of $20.6 million of valuation allowances, as previously discussed, and the ability to recognize a worthless stock deduction of $39.0 million for the tax basis in a wholly-owned domestic subsidiary.

During 2014, the company recognized net expense related to discrete tax items of $13.2 million. The net expense in 2014 was driven primarily by an update to non-current tax liabilities for certain global tax audits, an adjustment related to the re-characterization of intercompany payments between its U.S. and foreign affiliates, the remeasurement of certain deferred tax assets and liabilities resulting from changes in its deferred state tax rate, recognizing adjustments from filing its 2013 U.S. federal and state tax returns, net changes of valuation allowances based on the realizability of foreign deferred tax assets and the impact from other foreign country audit settlements.

During 2013, the company recognized net benefits related to discrete taxes of $41.7 million. The net benefit in 2013 was driven primarily by the net release of valuation allowances related to the realizability of foreign deferred tax assets of $11.5 million, the remeasurement of certain deferred tax assets and liabilities of $11.3 million and recognizing adjustments from filing its 2012 U.S. federal and state tax returns of $11.0 million. The remaining discrete tax items relate primarily to recognizing settlements related to prior year income tax audits, law changes within a foreign jurisdiction, the retroactive extension during first quarter 2013 of the U.S. R&D credit for 2012, foreign audit adjustments and other adjustments to deferred tax assets and liabilities.

A reconciliation of the beginning and ending amount of gross liability for unrecognized tax benefits is as follows:


(millions)	2015		2014		2013
Balance at beginning of year		$ 78.7		$ 98.7		$ 93.1
Additions based on tax positions related to the current year		5.8		5.3		9.1
Additions for tax positions of prior years		0.9		5.2		6.1
Reductions for tax positions of prior years		(8.8)		(17.8)		(15.6)
Reductions for tax positions due to statute of limitations		(1.6)		(0.2)		(3.6)
Settlements		(4.2)		(9.0)		(0.7)
Assumed in connection with acquisitions		8.0		-		9.8
Foreign currency translation		(4.2)		(3.5)		0.5
Balance at end of year		$ 74.6		$ 78.7		$ 98.7

The total amount of unrecognized tax benefits, if recognized would have affected the effective tax rate by $59.2 million as of December 31, 2015, $64.0 million as of December 31, 2014 and $90.9 million as of December 31, 2013.

The company recognizes interest and penalties related to unrecognized tax benefits in its provision for income taxes. During 2015 the company released $1.4 million related to interest and penalties and during 2014 and 2013, it accrued $6.6 million and $1.8 million in interest and penalties, respectively. The company had $13.1 million and $14.5 million of accrued interest, including minor amounts for penalties, at December 31, 2015 and 2014, respectively.