12. INCOME TAXES

Income before income taxes consisted of:


(millions)	2017		2016		2015
United States		$848.4		$656.1		$733.0
International		916.4		994.3		584.7
Total		$1,764.8		$1,650.4		$1,317.7

The provision (benefit) for income taxes consisted of:


(millions)	2017		2016		2015
Federal and state		$241.8		$224.2		$241.4
International		355.1		269.7		303.6
Total current		596.9		493.9		545.0
Federal and state		(332.8)		(49.2)		(185.4)
International		(21.7)		(41.4)		(59.1)
Total deferred		(354.5)		(90.6)		(244.5)
Provision for income taxes		$242.4		$403.3		$300.5

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


December 31 (millions)	2017		2016
Deferred tax assets
Other accrued liabilities		$144.4		$187.4
Loss carryforwards		67.3		54.8
Share-based compensation		58.9		83.1
Pension and other comprehensive income		195.2		264.7
Foreign tax credits		-		21.8
Other, net		122.2		111.1
Valuation allowance		(21.3)		(19.9)
Total		566.7		703.0
Deferred tax liabilities
Property, plant and equipment basis differences		(178.4)		(275.4)
Intangible assets		(865.6)		(1,151.4)
Other, net		(63.2)		(154.1)
Total		(1,107.2)		(1,580.9)
Net deferred tax liabilities balance		$(540.5)		$(877.9)

Deferred tax assets and liabilities are recorded based on the rates at which they are expected to reverse in the future. At December 31, 2017, U.S. deferred tax assets and liabilities were recorded at the U.S. federal tax rate of 21%, reduced from 35% by the Tax Act. The Company recorded a provisional income tax benefit of $321.0 million to record U.S. deferred tax assets and liabilities at the enacted tax rate, which is a discrete tax item within income tax expense. The Company’s provisional amount is based on an estimate of the impact of the reduction in the U.S. tax rate on deferred tax assets and liabilities, and is subject to final calculations related to the filing of the Company’s 2017 U.S. federal income tax return. The Company’s estimates are subject to continued technical guidance which may change the provisional amounts recorded in the financial statements, and will be evaluated throughout the measurement period, as permitted by SAB 118.

Deferred assets and liabilities were recorded at a U.S. federal tax rate of 35% as of December 31, 2016.

As of December 31, 2017 the Company has tax effected federal, state and international net operating loss carryforwards of $0.5 million, $23.2 million and $43.6 million, respectively, which will be available to offset future taxable income. The state loss carryforwards expire from 2018 to 2038. For the international loss carryforwards, $17.0 million expire from 2018 to 2038 and $26.6 million have no expiration.

The Company has valuation allowances on certain deferred tax assets of $21.3 million and $19.9 million at December 31, 2017 and 2016, respectively. The increase in valuation allowance from year end 2016 to year end 2017 was driven by current year losses and foreign currency translation.

In 2017, the Company obtained tax benefits from tax holidays in two foreign jurisdictions, the Dominican Republic and Singapore. 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 Company has two tax incentives awarded by the Singapore Economic Development Board. These incentives provide for a preferential 10% tax rate on certain headquarter income and a 0% tax rate on manufacturing profits generated at the Company’s facility located on Jurong Island. In 2016 and 2015 one of the Company’s legal entities in China was entitled to the benefit of incentives provided by the Chinese government to technology companies in order to encourage development of the high-tech industry, including reduced tax rates and other measures. As a result, the Company was entitled to a preferential enterprise income tax rate of 15%. The Company did not recognize a benefit related to this China tax incentive in 2017. The tax reduction as the result of the tax holidays for 2017 was $16.9 million and 2016 was $6.4 million. The impact of the tax holiday in 2015 was similar to 2016.

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


	2017		2016		2015
Statutory U.S. rate	35.0	%	35.0	%	35.0	%
One time transition tax	9.1		-		-
State income taxes, net of federal benefit	0.4		0.9		0.4
Foreign operations	(7.4)		(8.0)		(8.1)
Domestic manufacturing deduction	(2.2)		(2.0)		(2.7)
R&D credit	(1.0)		(1.1)		(1.0)
Change in valuation allowance	0.2		(0.7)		(1.7)
Audit settlements and refunds	(0.1)		(0.2)		(0.7)
Excess stock benefits	(2.3)		-		-
Change in federal tax rate (deferred taxes)	(18.2)		-		-
Venezuela charges	-		-		4.5
Worthless stock deduction	-		0.4		(3.0)
Other, net	0.2		0.1		0.1
Effective income tax rate	13.7	%	24.4	%	22.8	%

Prior to enactment of the Tax Act, the Company did not recognize a deferred tax liability related to unremitted foreign earnings because it overcame the presumption of the repatriation of foreign earnings. Upon enactment, the Tax Act imposes a tax on certain foreign earnings and profits at various tax rates. The Company recorded a provisional amount for the income tax effects related to the one-time transition tax of $160.1 million which is subject to payment over eight years. The one-time transition tax is based on certain foreign earnings and profits for which earnings had been previously indefinitely reinvested, as well as estimates of assets and liabilities at future dates. The transition tax is based in part on the amount of those earnings held in cash and other specified assets, and is subject to change when the calculation of foreign earnings and profits is finalized, and the amount of specific assets and liabilities held at a future date is known. No additional income taxes have been provided for any remaining undistributed foreign earnings not subject to the transition tax and any additional outside basis differences inherent in these entities as these amounts continue to be indefinitely reinvested in foreign operations. The Company’s provisional amount is based on an estimate of the one-time transition tax, and subject to finalization of estimates of assets and liabilities at future dates, the calculation of deemed repatriation of foreign income and the state tax effect of adjustments made to federal temporary differences. In addition, federal and state tax authorities continue to issue technical guidance which may differ from our initial interpretations. The provisional amount is subject to adjustment during the measurement period of up to one year following the December 2017 enactment of the Tax Act. The Company continues to assert permanent reinvestment of the undistributed earnings of international affiliates, and, if there are policy changes, the Company would record the applicable taxes. The Company’s estimates are subject to continued technical guidance which may change the provisional amounts recorded in the financial statements, and will be evaluated throughout the measurement period, as permitted by SAB 118.

As of December 31, 2015, the Company had deferred tax liabilities of $25.8 million on foreign earnings of the legacy Nalco entities and legacy Champion entities that the Company intended 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. The remaining foreign earnings were repatriated in 2016, thus reducing the deferred tax liabilities to zero as of December 31, 2016.

The Company files U.S. federal income tax returns and income tax returns in various U.S. state and non- U.S. jurisdictions. With few exceptions, the Company is no longer subject to state and foreign income tax examinations by tax authorities for years before 2014. The IRS has completed examinations of the Company’s U.S. federal income tax returns (Ecolab and Nalco) through 2014. The Company’s U.S. federal income tax return for the years 2015 and 2016 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.

The Company’s 2017 reported tax rate includes $160.9 million of net tax benefits associated with the Tax Act, $6.2 million of net tax benefits on special gains and charges, and net tax benefits of $25.3 million associated with discrete tax items. In connection with the Company’s initial analysis of the impact of the Tax Act, as noted above, a provisional net discrete tax benefit of $160.9 million was recorded in the period ended December 31, 2017, which includes $321.0 million tax benefit for recording deferred tax assets and liabilities at the U.S. enacted tax rate, and a net expense for the one-time transition tax of $160.1 million. While the Company was able to make an estimate of the impact of the reduction in the U.S. rate on deferred tax assets and liabilities and the one-time transition tax, it may be affected by other analyses related to the Tax Act, as indicated above.

Special (gains) and charges represent the tax impact of special (gains) and charges, as well as additional tax benefits utilized in anticipation of U.S. tax reform of $7.8 million. During 2017, the Company recorded a discrete tax benefit of $39.7 million related to excess tax benefits, resulting from the adoption of accounting changes regarding the treatment of tax benefits on share-based compensation. The extent of excess tax benefits is subject to variation in stock price and stock option exercises. In addition, the Company recorded net discrete expenses of $14.4 million related to recognizing adjustments from filing the 2016 U.S. federal income tax return and international adjustments due to changes in estimates, partially offset by the release of reserves for uncertain tax positions due to the expiration of statute of limitations in state tax matters.

During 2016, the Company recognized net expense related to discrete tax items of $3.9 million. The net expenses were driven primarily by recognizing adjustments from filing the Company’s 2015 U.S. federal income tax return, partially offset by settlement of international tax matters and remeasurement of certain deferred tax assets and liabilities resulting from the application of updated tax rates in international jurisdictions. Net expense was also impacted by adjustments to deferred tax asset and liability positions and the release of reserves for uncertain tax positions due to the expiration of statute of limitations in non-U.S. jurisdictions.

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, based on the realizability of foreign deferred tax assets and the ability to recognize a worthless stock deduction of $39.0 million for the tax basis in a wholly-owned domestic subsidiary.

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


(millions)	2017		2016		2015
Balance at beginning of year		$75.9		$74.6		$78.7
Additions based on tax positions related to the current year		3.2		8.8		5.8
Additions for tax positions of prior years		-		2.1		0.9
Reductions for tax positions of prior years		(4.9)		(1.0)		(8.8)
Reductions for tax positions due to statute of limitations		(14.0)		(5.5)		(1.6)
Settlements		(10.8)		(2.0)		(4.2)
Assumed in connection with acquisitions		10.0		-		8.0
Foreign currency translation		2.1		(1.1)		(4.2)
Balance at end of year		$61.5		$75.9		$74.6

The total amount of unrecognized tax benefits, if recognized would have affected the effective tax rate by $47.1 million as of December 31, 2017, $57.5 million as of December 31, 2016 and $59.2 million as of December 31, 2015.

The Company recognizes interest and penalties related to unrecognized tax benefits in its provision for income taxes. During 2017, 2016 and 2015 the Company released $0.9 million, $2.9 million and $1.4 million related to interest and penalties, respectively. The Company had $9.3 million, $10.2 million and $13.1 million of accrued interest, including minor amounts for penalties, at December 31, 2017, 2016, and 2015, respectively.