Income Taxes

Income from continuing operations before income taxes consisted of the following:



	Years ended December 31
In millions	2016			2015			2014
Federal ⁽¹⁾	$	(25.6	)	$	(21.8	)	$	(15.8	)
International ⁽²⁾	586.6			534.3			486.7
Income from continuing operations before income taxes	$	561.0		$	512.5		$	470.9


(1)	"Federal" reflects U.K. income from continuing operations before income taxes.


(2)	"International" reflects non-U.K. income from continuing operations before income taxes.

The provision for income taxes consisted of the following:



	Years ended December 31
In millions	2016			2015			2014
Currently payable
Federal ⁽¹⁾	$	(0.1	)	$	—		$	0.5
International ⁽²⁾	125.6			117.7			136.8
Total current taxes	125.5			117.7			137.3
Deferred
Federal ⁽¹⁾	(0.4		)	1.2			(0.7		)
International ⁽²⁾	(15.7		)	(3.5		)	(22.3		)
Total deferred taxes	(16.1		)	(2.3		)	(23.0		)
Total provision for income taxes	$	109.4		$	115.4		$	114.3


(1)	"Federal" represents U.K. taxes.


(2)	"International" represents non-U.K. taxes.

Reconciliations of the federal statutory income tax rate to our effective tax rate were as follows:



	Years ended December 31
Percentages	2016		2015		2014
Federal statutory income tax rate ⁽¹⁾	20.0		20.3		21.0
Tax effect of international operations ⁽²⁾	(11.8	)	(6.5	)	(4.9	)
Change in valuation allowances	9.7		6.9		4.4
Withholding taxes	0.9		0.6		2.8
Interest limitations	0.6		0.7		1.0
Non-deductible transaction costs	0.1		0.5		—
Effective tax rate	19.5		22.5		24.3


(1)	The statutory rate for 2016, 2015 and 2014 reflects the U.K. statutory rate of 20.0 percent, 20.3 percent and 21.0 percent, respectively.


(2)	The tax effect of international operations consists of non-U.K. jurisdictions.

Reconciliations of the beginning and ending gross unrecognized tax benefits were as follows:



	Years ended December 31
In millions	2016			2015			2014
Beginning balance	$	45.6		$	40.3		$	39.5
Gross increases for tax positions in prior periods	27.4			4.7			0.8
Gross decreases for tax positions in prior periods	(4.8		)	(1.5		)	(0.2		)
Gross increases based on tax positions related to the current year	2.0			1.3			1.1
Gross decreases related to settlements with taxing authorities	(3.4		)	(1.9		)	(0.1		)
Reductions due to statute expiration	(0.8		)	(1.4		)	(1.1		)
Gross (decreases) increases due to currency fluctuations	(0.2		)	(2.5		)	0.3
Gross increases due to acquisitions	5.3			6.6			—
Ending balance	$	71.1		$	45.6		$	40.3

Included in the $71.1 million of total gross unrecognized tax benefits as of December 31, 2016 was $68.3 million of tax benefits that, if recognized, would impact the effective tax rate. It is reasonably possible that the gross unrecognized tax benefits as of December 31, 2016 may decrease by a range of zero to $42.2 million during 2017, primarily as a result of the resolution of non-U.K. examinations, including U.S. federal and state examinations, and the expiration of various statutes of limitations. The $27.4 million gross increase for tax positions in prior periods consists primarily of a tentative settlement with the Internal Revenue Service ("IRS") related to the value of certain intellectual property sold from the U.S. to a non-U.S. affiliate. The increase for tax positions in prior periods had no impact on our effective tax rate.

Based on the outcome of these examinations, or as a result of the expiration of statute of limitations for specific jurisdictions, it is reasonably possible that certain unrecognized tax benefits for tax positions taken on previously filed tax returns will materially change from those recorded as liabilities in our financial statements. The IRS is currently examining the Panthro Acquisition Co. U.S. federal income tax returns for tax years ending December 31, 2012 and December 31, 2013. A number of tax periods from 2002 to present are under audit by tax authorities in various jurisdictions, including Canada, France, Germany, India, Italy, New Zealand and Singapore. We anticipate that several of these audits may be concluded in the foreseeable future. We are also subject to the 2012 Tax Sharing Agreement, discussed below, which generally applies to pre-Distribution Tyco tax periods which remain subject to audit by the IRS.

We record penalties and interest related to unrecognized tax benefits in Provision for income taxes and Interest expense, respectively, in the Consolidated Statements of Operations and Comprehensive Income (Loss). As of December 31, 2016 and 2015, we have liabilities of $2.4 million and $2.3 million, respectively, for the possible payment of penalties and $11.0 million and $7.9 million, respectively, for the possible payment of interest expense, which are recorded in Other current liabilities in the Consolidated Balance Sheets.

Taxes have not been provided on undistributed earnings of subsidiaries where it is our intention to reinvest these earnings permanently or to repatriate the earnings only when it is tax effective to do so. It is not practicable to estimate the amount of tax that might be payable if such earnings were to be remitted.

Deferred taxes arise because of different treatment between financial statement accounting and tax accounting, known as "temporary differences." We record the tax effect of these temporary differences as "deferred tax assets" (generally items that can be used as a tax deduction or credit in future periods) and "deferred tax liabilities" (generally items for which we received a tax deduction but the tax impact has not yet been recorded in the Consolidated Statements of Operations and Comprehensive Income (Loss)).

Deferred taxes were recorded in the Consolidated Balance Sheets as follows:



	December 31
In millions	2016		2015
Other current assets	$	—	$	34.4
Other non-current assets	39.0		2.2
Deferred tax liabilities	609.5		670.2
Net deferred tax liabilities	$	570.5	$	633.6

The tax effects of the major items recorded as deferred tax assets and liabilities were as follows:



	December 31
In millions	2016		2015
Deferred tax assets
Accrued liabilities and reserves	$	83.2	$	70.2
Pension and other post-retirement benefits	48.9		44.5
Employee compensation and benefits	76.6		78.3
Tax loss and credit carryforwards	391.0		293.8
Total deferred tax assets	599.7		486.8
Valuation allowance	380.8		286.5
Deferred tax assets, net of valuation allowance	218.9		200.3
Deferred tax liabilities
Property, plant and equipment	23.6		23.9
Goodwill and other intangibles	733.7		774.2
Other liabilities	32.1		35.8
Total deferred tax liabilities	789.4		833.9
Net deferred tax liabilities	$	570.5	$	633.6

As of December 31, 2016, tax loss carryforwards of $1,462.4 million were available to offset future income. A valuation allowance of $378.9 million exists for deferred income tax benefits related to the tax loss carryforwards which may not be realized. The increase in tax loss carryforwards and valuation allowance from 2015 to 2016 were primarily related to restructuring and interest expense. We believe sufficient taxable income will be generated in the respective jurisdictions to allow us to fully recover the remainder of the tax losses. The tax losses relate to Non-U.S. carryforwards of $1,388.0 million which are subject to varying expiration periods. Non-U.S. carryforwards of $1,130.6 million are located in jurisdictions with unlimited tax loss carryforward periods, while the remainder will begin to expire in 2017. In addition, there were no U.S. federal tax loss carryforwards and $74.4 million of state tax loss carryforwards as of December 31, 2016, which will expire in future years through 2036.

Tax sharing agreement

In connection with the Distribution, we entered into a tax sharing agreement (the "2012 Tax Sharing Agreement") with Tyco (now known as Johnson Controls International plc, "Johnson Controls") and The ADT Corporation ("ADT"), which governs the rights and obligations of ADT, Johnson Controls and us for certain pre-Distribution tax liabilities, including Johnson Controls' obligations under a separate tax sharing agreement (the "2007 Tax Sharing Agreement") entered into by Johnson Controls, Covidien Ltd. (now known as Medtronic plc, "Medtronic") and TE Connectivity Ltd. ("TE Connectivity") in connection with the 2007 distributions of Medtronic and TE Connectivity by Johnson Controls.

The 2012 Tax Sharing Agreement provides that we, Johnson Controls and ADT will share (i) certain pre-Distribution income tax liabilities that arise from adjustments made by tax authorities to our, Johnson Controls' and ADT's U.S. income tax returns, including withholding tax, income tax or other tax liabilities that could arise if the Merger, Distribution or certain internal transactions undertaken in anticipation of the Distribution are determined to be taxable for U.S. federal or Swiss tax purposes, and (ii) payments required to be made by Johnson Controls with respect to the 2007 Tax Sharing Agreement (the liabilities in clauses (i) and (ii) collectively, "Shared Tax Liabilities"). Johnson Controls is responsible for the first $500 million of Shared Tax Liabilities. As of December 31, 2016, Johnson Controls has paid $210.0 million of Shared Tax Liabilities. We and ADT will share 42% and 58%, respectively, of the next $225 million of Shared Tax Liabilities. We, ADT and Johnson Controls will share 20%, 27.5% and 52.5%, respectively, of Shared Tax Liabilities above $725 million. Costs and expenses associated with the management of Shared Tax Liabilities will generally be shared 20% by us, 27.5% by ADT and 52.5% by Johnson Controls. As of December 31, 2016, we have a liability of $13.3 million recorded for this matter in Other non-current liabilities in the Consolidated Balance Sheets.

In addition, under the terms of the 2012 Tax Sharing Agreement, in the event the Distribution, the ADT distribution, the internal transactions or the Merger were determined to be taxable as a result of actions taken after the Distribution by us, ADT or Johnson Controls, the party responsible for such failure would be responsible for all taxes imposed as a result thereof. If such failure is not the result of actions taken after the Distribution by us, ADT or Johnson Controls, then we, ADT and Johnson Controls would be responsible for any taxes imposed as a result of such determination in the same manner and in the same proportions as we, ADT and Johnson Controls are responsible for Shared Tax Liabilities.