Income Taxes

On December 22, 2017, the Tax Cuts and Jobs Act (“the Act”) was enacted in the United States. The Act significantly revised the U.S. corporate income tax structure resulting in changes to the Company’s expected U.S. corporate taxes due for 2017 and in future periods. Effective January 1, 2018, the Act, among other things, reduces the U.S. federal corporate tax rate from 35% to 21%, creates new provisions related to foreign sourced earnings, and eliminates the deduction for domestic production activities. The Act also requires companies to pay a one-time transition tax on the cumulative earnings and profits of certain foreign subsidiaries that were previously not repatriated and therefore not taxed for U.S. income tax purposes. Taxes due on the one-time transition tax are payable as of December 31, 2017 and may be paid to the tax authority over eight years.

In December 2017, the SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”), which addresses situations where the accounting is incomplete for the income tax effects of the Act. SAB 118 directs taxpayers to consider the impact of the Act as “provisional” when the Company does not have the necessary information available, prepared or analyzed (including computations) to finalize the accounting for the change in tax law. Companies are provided a measurement period of up to one year to obtain, prepare, and analyze information necessary to finalize the accounting for provisional amounts or amounts that cannot be estimated as of December 31, 2017. We will continue to refine our calculations as additional analysis is completed related to the Act. Additional information that may affect our provisional amounts would include further clarification and guidance on how the IRS will implement tax reform, including guidance with respect to executive compensation and transition tax, further clarification and guidance on how state taxing authorities will implement tax reform and the related effect on our state income tax returns, completion of our 2017 tax return filings, and the potential for additional guidance from the SEC or the FASB related to tax reform. The accounting is expected to be complete when the 2017 U.S. corporate income tax return is filed in 2018.

Reduction of U.S. Federal Corporate Tax Rate

We re-measured certain U.S. deferred tax assets and liabilities as of December 31, 2017 based on the rates at which they are expected to reverse in the future, which is generally 21%. However, we are still analyzing certain aspects of the Act and refining our calculations, which could potentially affect the measurement of these balances or potentially give rise to changes in deferred tax amounts. As we continue to analyze the Act and refine our calculations, it could give rise to additional changes in our valuation allowance and the realizability of certain U.S. deferred tax assets. The provisional income tax expense recorded related to the re-measurement of our deferred tax balance for the period ending December 31, 2017 was $113.2 million.

Deemed Repatriation Transition Tax

The one-time transition tax associated with the Act is based on our total post-1986 earnings and profits ("E&P") that was previously deferred from U.S. federal taxation. During the period ending December 31, 2017, we recorded a provisional amount for our one-time transition tax liability for our foreign subsidiaries of $202.7 million, resulting in an increase in income tax expense. We have not yet completed our calculation of the total post-1986 E&P for our foreign subsidiaries or the tax pools of our foreign subsidiaries. Further, the transition tax is based in part on the amount of those earnings held in cash and other specified assets. This amount may change when we finalize the calculation of post-1986 foreign E&P previously deferred from U.S. federal taxation and finalize the amounts held in cash or other specified assets. We have not provided additional income taxes for any additional outside basis differences inherent in our investments in subsidiaries because the investments are essentially permanent in duration or we have concluded that no additional tax liability will arise upon disposal. Determining the amount of unrecognized deferred tax liability related to any remaining undistributed foreign earnings not subject to the transition tax and additional outside basis difference in these entities (i.e., basis difference in excess of that subject to the one-time transition tax) is not practicable. We are still in the process of analyzing the impact of the Act on our indefinite reinvestment assertion.

Provisions Related to Foreign Sourced Earnings

Beginning in 2018, the Act subjects a U.S. shareholder of a controlled foreign corporation to current tax on “global intangible low-taxed income” (GILTI) and establishes a tax on certain payments from corporations subject to US tax to related foreign persons, also referred to as base erosion and anti-abuse tax (BEAT). Additionally, we recorded an impairment charge to write down certain indefinite-lived intangible assets of the acquired DuPont Crop Protection Business as a result of the triggering event associated with the Act. The triggering event represented the expected tax rate increase from the GILTI minimum tax to be imposed on certain of our foreign subsidiaries where these intangible assets are recorded.

Because of the complexity of the new international tax provisions included in the Act that are not applicable to the Company until 2018, the Company is continuing to evaluate these provisions of the Act and the application of ASC 740. To date, the Company has not made an accounting policy election with respect to the period in which to recognize tax pertaining to GILTI and has therefore not provided any deferred tax impacts of GILTI in its consolidated financial statements for the year ended December 31, 2017.

The impacts of the Act are presented herein as part of our results from continuing operations.

Domestic and foreign components of income (loss) from continuing operations before income taxes are shown below:



	Year Ended December 31,
(in Millions)	2017			2016			2015
Domestic	$	(155.9	)	$	(48.5	)	$	(280.4	)
Foreign	336.7			229.3			73.0
Total	$	180.8		$	180.8		$	(207.4	)

The provision (benefit) for income taxes attributable to income (loss) from continuing operations consisted of:



	Year Ended December 31,
(in Millions)	2017			2016			2015
Current:
Federal ^{(1) (3)}	$	97.5		$	(24.6	)	$	(80.9	)
Foreign	58.4			21.6			68.9
State	4.0			(0.2		)	(1.0		)
Total current	$	159.9		$	(3.2	)	$	(13.0	)
Deferred:
Federal ⁽²⁾	$	119.4		$	27.6		$	21.1
Foreign	(14.8		)	9.5			(0.8		)
State	(0.4		)	16.2			(2.1		)
Total deferred	$	104.2		$	53.3		$	18.2
Total	$	264.1		$	50.1		$	5.2

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(1)	The transition tax on deemed repatriated foreign earnings incurred as a result of the Act is $202.7 million and reflected as component of tax expense in the U.S for the current year.


(2)	The remeasurement of the Company’s U.S. net deferred tax asset as a result of the Act resulted in tax expense of $113.2 million in the current year which is presented as a component of deferred tax expense in the U.S.


(3)	In 2015, the gain from the sale of our discontinued Alkali business created overall domestic taxable income. Exclusive of this gain, we incurred a loss from domestic continuing operations that reduced current taxes payable in 2015 and as such is presented as a reduction to 2015 current tax expense.

Significant components of our deferred tax assets and liabilities were attributable to:



	December 31,
(in Millions)	2017			2016
Reserves for discontinued operations, environmental and restructuring	$	101.6		$	148.5
Accrued pension and other postretirement benefits	19.3			39.6
Capital loss, foreign tax and other credit carryforwards	4.0			22.5
Net operating loss carryforwards	207.0			165.8
Deferred expenditures capitalized for tax	4.0			15.3
Other	153.3			191.4
Deferred tax assets	$	489.2		$	583.1
Valuation allowance, net	(272.0		)	(289.6		)
Deferred tax assets, net of valuation allowance	$	217.2		$	293.5
Property, plant and equipment, net	137.9			181.8
Deferred tax liabilities	$	137.9		$	181.8
Net deferred tax assets	$	79.3		$	111.7

We evaluate our deferred income taxes quarterly to determine if valuation allowances are required or should be adjusted. GAAP accounting guidance requires companies to assess whether valuation allowances should be established against deferred tax assets based on all available evidence, both positive and negative, using a “more likely than not” standard. In assessing the need for a valuation allowance, appropriate consideration is given to all positive and negative evidence related to the realization of deferred tax assets. This assessment considers, among other matters, the nature and severity of current and cumulative losses, forecasts of future profitability, the duration of statutory carryforward periods, and tax planning alternatives. We operate and derive income from multiple lines of business across multiple jurisdictions. As each of the respective lines of business experiences changes in operating results across its geographic footprint, we may encounter losses in jurisdictions that have been historically profitable, and as a result might require additional valuation allowances to be recorded. We are committed to implementing tax planning actions, when deemed appropriate, in jurisdictions that experience losses in order to realize deferred tax assets prior to their expiration.

During 2016, due to forecasts of domestic state taxable earnings, we concluded that there is insufficient positive evidence to realize certain portions of the U.S. state net deferred tax assets and established an additional valuation allowance in the amount of $17.7 million. As of December 31, 2017, we continue to maintain a valuation allowance against certain U.S. state deferred tax assets that the Company has concluded are not more likely than not realizable.

During 2015, our Agricultural Solutions business in Brazil experienced significant current and cumulative losses driven by unfavorable market conditions. As of December 31, 2017, sufficient positive evidence to realize the net deferred tax assets in Brazil was not available and a full valuation allowance against those assets remains established.

At December 31, 2017, we had net operating loss and tax credit carryforwards as follows: U.S. state net operating loss carryforwards of $29.9 million (tax-effected) expiring in future years through 2037, foreign net operating loss carryforwards of $177.1 million (tax-effected) expiring in various future years, $0.7 million of capital loss carryforwards expiring in 2020 and other tax credit carryforwards of $3.3 million expiring in various future years.

The effective income tax rate applicable to income from continuing operations before income taxes was different from the statutory U.S. federal income tax rate due to the factors listed in the following table:



	Year Ended December 31,
	2017			2016			2015
U.S. Federal statutory rate	$	63.3		$	63.3		$	(72.6	)
Impacts of Tax Cuts and Jobs Act ⁽¹⁾	315.9			—			—
Foreign earnings subject to different tax rates	(79.0		)	(49.3		)	(75.8		)
Capital loss on internal restructuring	(45.3		)	—			—
State and local income taxes, less federal income tax benefit	(1.5		)	16.0			(2.4		)
Manufacturer's production deduction and miscellaneous tax credits	(10.1		)	0.8			(4.0		)
Tax on intercompany dividends and deemed dividends for tax purposes	10.6			2.1			10.2
Changes to unrecognized tax benefits	7.2			4.9			8.5
Nondeductible expenses	12.2			5.7			6.4
Change in valuation allowance	(32.0		)	7.9			160.7
Exchange gains and losses ⁽²⁾	29.4			(12.1		)	(20.4		)
Other	(6.6		)	10.8			(5.4		)
Total Tax Provision	$	264.1		$	50.1		$	5.2

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(1)	As a result of the Act, the Company has recognized provisional income tax expense of $202.7 million and $113.2 million related to the transition tax on deemed repatriation of foreign earnings and the remeasurement of the Company’s U.S. net deferred tax asset, respectively.


(2)	Includes impact of transaction gains or losses on net monetary assets for which no corresponding tax expense or benefit is realized and the tax provision for statutory taxable gains or losses in foreign jurisdictions for which there is no corresponding amount in income before taxes.

The material factors contributing to the increase in income tax expense from continuing operations in 2017 as compared to 2016 are the provisional income tax expense recorded upon the enactment of the Act, partially offset by the tax effect of internal restructuring and an increase to the foreign earnings in low tax jurisdictions.

The material factors contributing to the increase in income from continuing operations in 2016 compared to 2015 were prior year Cheminova acquisition related charges incurred by our domestic operations, improved results in our Agricultural Solutions business, primarily in Brazil, and significant prior year restructuring charges. These increases did not significantly impact the tax benefit attributable to foreign earnings subject to different tax rates as the statutory tax rates in the jurisdictions to which these items relate are similar to the U.S. Federal statutory rate. Reduced earnings from operations located in jurisdictions with lower tax rates than the U.S. Federal statutory rate resulted in a decreased tax benefit for foreign earnings subject to different tax rates in 2016 as compared to 2015.

Uncertain Income Tax Positions

U.S. GAAP accounting guidance for uncertainty in income taxes prescribes a model for the recognition and measurement of a tax position taken or expected to be taken in a tax return, and provides guidance on derecognition, classification, interest and penalties, disclosure and transition.

We file income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. The income tax returns for FMC entities taxable in the U.S. and significant foreign jurisdictions are open for examination and adjustment. As of December 31, 2017, the U. S. federal and state income tax returns are open for examination and adjustment for the years 2014 - 2017 and 1998 - 2017, respectively. Our significant foreign jurisdictions, which total 17, are open for examination and adjustment during varying periods from 2007 - 2017.

As of December 31, 2017, we had total unrecognized tax benefits of $84.0 million, of which $22.5 million would favorably impact the effective tax rate from continuing operations if recognized. As of December 31, 2016, we had total unrecognized tax benefits of $111.6 million, of which $34.9 million would favorably impact the effective tax rate if recognized. Interest and penalties related to unrecognized tax benefits are reported as a component of income tax expense. For the years ended December 31, 2017, 2016 and 2015, we recognized interest and penalties of $5.2 million, $4.4 million, and $2.0 million, respectively, in the consolidated statements of income (loss). As of December 31, 2017 and 2016, we have accrued interest and penalties in the consolidated balance sheets of $13.1 million and $9.6 million, respectively.

Due to the potential for resolution of federal, state, or foreign examinations, and the expiration of various jurisdictional statutes of limitation, it is reasonably possible that our liability for unrecognized tax benefits will decrease within the next 12 months by a range of $13.5 million to $14.7 million.

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



(in Millions)	2017			2016			2015
Balance at beginning of year	$	111.6		$	97.1		$	45.9
Increases related to positions taken in the current year	9.4			22.3			21.4
Increases for tax positions on acquisitions	—			—			25.1
Increases and decreases related to positions taken in prior years	(4.6		)	2.6			7.4
Decreases related to lapse of statutes of limitations	(14.2		)	(10.2		)	(2.7		)
Settlements during the current year	(0.3		)	(0.2		)	—
Decreases for tax positions on dispositions	(17.9		)	—			—
Balance at end of year ⁽¹⁾	$	84.0		$	111.6		$	97.1

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(1)	At December 31, 2017, 2016, and 2015 we recognized an offsetting non-current deferred asset of $59.8 million, $74.4 million, and $65.5 million respectively, relating to specific uncertain tax positions presented above.