INCOME TAXES

12 Months Ended

Dec. 31, 2020

INCOME TAXES

INCOME TAXES

13. INCOME TAXES

Income before income taxes consisted of:

(millions)	2020		2019		2018
United States (U.S.)		$100.5		$787.1		$690.1
International		1,060.9		944.4		897.0
Total		$1,161.4		$1,731.5		$1,587.1

The provision (benefit) for income taxes consisted of:

(millions)	2020		2019		2018
U.S. federal and state		($43.9)		$134.4		$105.1
International		259.8		176.3		93.5
Total current		215.9		310.7		198.6
U.S. federal and state		12.0		37.9		52.7
International		(51.3)		(60.0)		69.9
Total deferred		(39.3)		(22.1)		122.6
Provision for income taxes		$176.6		$288.6		$321.2

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

December 31 (millions)	2020		2019
Deferred tax assets
Pension and post-retirement benefits		$234.3		$207.4
Other accrued liabilities		154.7		127.5
Lease liability		95.5		104.8
Credit carryforwards		76.6		18.7
Loss carryforwards		63.4		48.0
Share-based compensation		44.8		55.0
Other, net		77.0		57.5
Valuation allowance		(45.3)		(24.5)
Total deferred tax assets		701.0		594.4
Deferred tax liabilities
Intangible assets		(598.9)		(569.9)
Property, plant and equipment		(317.8)		(258.1)
Lease asset		(95.4)		(105.2)
Other, net		(9.6)		(62.3)
Total deferred tax liabilities		(1,021.7)		(995.5)
Net deferred tax liabilities balance		($320.7)		($401.1)

As of December 31, 2020, the Company has tax effected federal, state and international net operating loss carryforwards of $0.1 million, $20.2 million and $43.1 million, respectively, which will be available to offset future taxable income. The federal and state loss carryforwards of $20.3 million expire from 2021 to 2041. The international loss carryforwards of $13.9 million expire from 2021 to 2041 and $29.2 million have no expiration. The tax loss carryforwards expiring in 2021 are not material.

Additionally, the Company has $76.6 million of credit carryforwards that are primarily related to foreign tax credits and various state credits. The foreign tax credit carryforwards of $57.7 million expire from 2028 to 2030 and the state credit carryforwards of $19.1 million expire from 2021 to 2028.

The Company has valuation allowances on certain deferred tax assets of $45.3 million and $24.5 million at December 31, 2020 and 2019, respectively. The increase in valuation allowance from year end 2019 to year end 2020 was primarily due to U.S. capital loss carryforwards and state tax attributes.

In 2020, 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 a tax incentive awarded by the Singapore Economic Development Board. This incentive provides for a preferential 10% tax rate on certain headquarter income which expires in January 2021. The tax reduction as the result of the tax holidays for 2020 was $26.9 million ($0.09 per diluted share), 2019 was $29.2 million ($0.10 per diluted share) and 2018 was $25.6 million ($0.09 per diluted share). The Company is in the process of extending or mitigating the impact of the expiring tax holidays.

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

	2020		2019		2018
Statutory U.S. rate	21.0	%	21.0	%	21.0	%
State income taxes, net of federal benefit	0.4		1.8		1.2
Foreign operations	(1.3)		5.5		(15.5)
R&D credit	(1.1)		(1.0)		(1.0)
Change in valuation allowance	0.6		(8.2)		10.3
Excess stock benefits	(4.9)		(2.4)		(1.7)
One-time transition tax	-		(0.2)		4.2
Prior year adjustments	-		-		2.9
Other, net	0.5		0.2		(1.2)
Effective income tax rate	15.2	%	16.7	%	20.2	%

The change in the Company’s effective income tax rate includes the tax impact of special (gains) and charges and discrete tax items, which have impacted the comparability of the Company’s historical effective income tax rates, as amounts included in special (gains) and charges are derived from tax jurisdictions with rates that vary from the statutory U.S. rate, and discrete tax items are not necessarily consistent across periods. The tax impact of special (gains) and charges and discrete tax items will likely continue to impact comparability of the Company’s effective income tax rate in the future.

The Company’s 2020 effective tax rate of 15.2% includes $57.9 million of net tax benefits on special (gains) and charges, and net tax benefits of $55.8 million associated with discrete items. During 2020, the Company recorded a discrete tax benefit of $57.3 million related to share-based compensation excess tax benefits. The extent of excess tax benefits is subject to variation in stock price and award exercises. The Company recorded changes in reserves in non-U.S. and U.S. jurisdictions due to audit settlements and the expiration of statutes of limitations which resulted in a $9.8 million tax benefit. Additionally, the Company recognized a net tax expense of $11.3 million primarily related to the filing of prior year federal, state and foreign tax returns and other income tax adjustments.

The Company’s 2019 effective tax rate of 16.7% includes $40.1 million of net tax benefits on special (gains) and charges, net tax benefits of $54.6 million associated with discrete tax items and $3.1 million of net benefit associated with updates to the one-time transition tax primarily due to the issuance of further technical guidance with respect to the Tax Act. During 2019, the Company recorded a discrete tax benefit of $42.3 million related to share-based compensation excess tax benefits. The Company recognized $15.6 million tax benefit related to changes in local tax law, which primarily includes $30.4 million benefit due to the passage of the Swiss Tax Reform and AHV Financing Act, a Swiss federal tax law, offset by a tax expense of $10.2 million due to the release of the final Treasury Regulation governing taxation of foreign dividends. The Company recorded changes in reserves in non-U.S. and U.S. jurisdictions due to audit settlements and statutes of limitations which resulted in a $13.8 million tax benefit. The Company finalized the 2015 and 2016 IRS audit in 2019, which resulted in a discrete tax expense of $11.0 million. The remaining discrete tax expense was primarily related to changes in estimates in non-U.S. jurisdictions.

The Company’s 2018 effective tax rate of 20.2% includes $66.0 million of net tax expense associated updates to the one-time transition tax primarily due to the issuance of further technical guidance with respect to the Tax Act, $29.0 million of net tax benefits on special (gains) and charges, and net tax benefits of $64.0 million associated with discrete tax items. During 2018, the Company recorded a discrete tax benefit of $27.7 million related to share-based compensation excess tax benefits. In addition, the Company recorded net discrete benefit of $39.5 million related to adjustments from filing the 2017 U.S. federal income tax return and IRS approved method change. Included within the 2018 provision for income taxes is $38.0 million of discrete charges recorded in the fourth quarter to correct immaterial errors in prior years. The remaining discrete expense was primarily related to changes in reserves, audit settlements, international and U.S. changes in estimates, and accounting for internal entity reorganization.

The Company continues to assert permanent reinvestment of the undistributed earnings of international affiliates unless the earnings can be remitted in a net income tax benefit or tax-neutral manner. If there are policy changes, the Company would record the applicable taxes in the period of change. Due to the complexity of the legal entity structure, the number of legal entities and jurisdictions involved, and the complexity of the laws and regulations, the Company believes it is not practicable to estimate the amount of additional taxes which may be payable upon distribution of these undistributed earnings. Accordingly, no deferred taxes have been provided for withholding taxes or other taxes on permanently reinvested earnings.

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

(millions)	2020		2019		2018
Balance at beginning of year		$27.0		$49.0		$60.6
Additions based on tax positions related to the current year		3.3		2.1		3.0
Additions for tax positions of prior years		-		1.0		2.0
Reductions for tax positions of prior years		(1.1)		(18.4)		(8.7)
Reductions for tax positions due to statute of limitations		(9.1)		(5.7)		(5.8)
Settlements		-		(0.6)		(0.8)
Foreign currency translation		0.6		(0.4)		(1.3)
Balance at end of year		$20.7		$27.0		$49.0

The total amount of unrecognized tax benefits, if recognized would affect the effective tax rate by $18.3 million as of December 31, 2020, $23.7 million as of December 31, 2019 and $35.6 million as of December 31, 2018.

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 2017. The IRS has completed examinations of the Company’s U.S. federal income tax returns through 2016, and the years 2017 and 2018 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 uncertain tax positions due to closing of various audits and statutes closing on 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 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.

The Company recognizes interest and penalties related to unrecognized tax benefits in its provision for income taxes. During 2020, 2019 and 2018 the Company released $2.0 million, $1.9 million and $1.2 million related to interest and penalties, respectively. The Company had $4.1 million, $6.1 million and $8.0 million of accrued interest, including minor amounts for penalties, at December 31, 2020, 2019, and 2018, respectively.