Income Taxes

12 Months Ended

Dec. 31, 2019

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



	Years ended December 31
In millions	2019			2018			2017
Federal ⁽¹⁾	$	(1.6	)	$	(24.6	)	$	(34.1	)
International ⁽²⁾	409.1			404.4			206.9
Income from continuing operations before income taxes	$	407.5		$	379.8		$	172.8


⁽¹⁾	“Federal” reflects United Kingdom (“U.K.”) loss 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	2019			2018			2017
Currently payable (receivable)
Federal ⁽¹⁾	$	—		$	(0.1	)	$	—
International ⁽²⁾	64.2			62.3			76.7
Total current taxes	64.2			62.2			76.7
Deferred
International ⁽²⁾	(18.4		)	(4.1		)	(18.0		)
Total deferred taxes	(18.4		)	(4.1		)	(18.0		)
Total provision for income taxes	$	45.8		$	58.1		$	58.7


⁽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	2019		2018		2017
U.K. federal statutory income tax rate	19.0	%	19.0	%	19.3	%
Tax effect of international operations⁽¹⁾	(8.2	)	(9.9	)	(18.7	)
Change in valuation allowances	1.1		7.9		27.6
Excess tax benefits on stock-based compensation	(0.7	)	(1.7	)	(4.5	)
Tax effect of U.S. tax reform	—		(0.9	)	1.3
Tax effect of early extinguishment of debt	—		0.9		9.0
Effective tax rate	11.2	%	15.3	%	34.0	%


⁽¹⁾	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	2019			2018			2017
Beginning balance	$	51.4		$	13.8		$	46.3
Gross increases for tax positions in prior periods	0.4			44.0			4.7
Gross decreases for tax positions in prior periods	(0.8		)	(4.4		)	(3.4		)
Gross increases based on tax positions related to the current year	0.4			0.9			0.7
Gross decreases related to settlements with taxing authorities	(2.9		)	(1.8		)	(33.6		)
Reductions due to statute expiration	(1.1		)	(1.1		)	(0.9		)
Ending balance	$	47.4		$	51.4		$	13.8

We record gross unrecognized tax benefits in Other current liabilities and Other non-current liabilities in the Consolidated Balance Sheets. Included in the $47.4 million of total gross unrecognized tax benefits as of December 31, 2019 was $47.0 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, 2019 may decrease by a range of zero to $4.3 million during 2020, primarily as a result of the resolution of non-U.K. examinations, including U.S. state examinations, and the expiration of various statutes of limitations.

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. A number of tax periods from 2008 to present are under audit by tax authorities in various jurisdictions, including China, Germany, India, Italy and New Zealand. We anticipate that several of these audits may be concluded in the foreseeable future.

We record penalties and interest related to unrecognized tax benefits in Provision for income taxes and Net interest expense, respectively, in the Consolidated Statements of Operations and Comprehensive Income. As of December 31, 2019 and 2018, we have liabilities of $0.4 million and $0.5 million, respectively, for the possible payment of penalties and $3.7 million and $3.6 million, respectively, for the possible payment of interest expense, which are recorded in Other current liabilities in the Consolidated Balance Sheets.

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).

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



	December 31
In millions	2019		2018
Other non-current assets	$	29.6	$	26.2
Deferred tax liabilities	104.4		105.9
Net deferred tax liabilities	$	74.8	$	79.7

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



	December 31
In millions	2019		2018
Deferred tax assets
Accrued liabilities and reserves	$	41.9	$	42.9
Pension and other post-retirement compensation and benefits	25.2		25.2
Employee compensation and benefits	19.6		21.8
Tax loss and credit carryforwards	712.0		724.7
Interest limitations	45.0		20.6
Total deferred tax assets	843.7		835.2
Valuation allowance	693.8		711.9
Deferred tax assets, net of valuation allowance	149.9		123.3
Deferred tax liabilities
Property, plant and equipment	8.5		7.1
Goodwill and other intangibles	200.4		179.7
Other liabilities	15.8		16.2
Total deferred tax liabilities	224.7		203.0
Net deferred tax liabilities	$	74.8	$	79.7

Included in tax loss and credit carryforwards in the table above is a deferred tax asset of $29.6 million as of December 31, 2019 related to foreign tax credit carryover from the tax period ended December 31, 2017 and related to transition taxes. The entire amount is subject to a valuation allowance. The foreign tax credit is eligible for carryforward until the tax period ending December 31, 2027.

As of December 31, 2019, tax loss carryforwards of $2,957.4 million were available to offset future income. A valuation allowance of $663.1 million exists for deferred income tax benefits related to the tax loss carryforwards which may not be realized. 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 primarily relate to non-U.S. carryforwards of $2,843.1 million which are subject to varying expiration periods. Non-U.S. carryforwards of $1,763.9 million are located in jurisdictions with unlimited tax loss carryforward periods, while the remainder will begin to expire in 2020. In addition, there were $14.6 million U.S. federal loss carryforwards with unlimited tax loss carryforward periods and $99.7 million of state tax loss carryforwards as of December 31, 2019. State tax losses of $64.0 million are in jurisdictions with unlimited tax loss carryforward periods, while the remainder will expire in future years through 2039.

U.S. tax reform

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Act”) was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, the transition of U.S international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017. For 2018, the Company considered in its annual effective tax rate additional provisions of the Act including changes to the deduction for executive compensation and interest expense, a tax on global intangible low-taxed income provisions (“GILTI”), the base erosion anti-abuse tax, and a deduction for foreign-derived intangible income. The Company has elected to treat tax on GILTI income as a period cost and has therefore included it in its annual effective tax rate.

The Company calculated its best estimate of the impact of the Act in its December 31, 2017 income tax provision in accordance with its understanding of the Act and guidance available as of the date of the filing of the 2017 Annual Report on Form 10-K and as a result recorded a provisional income tax expense of $2.2 million in the fourth quarter of 2017, the period in which the legislation was enacted. We subsequently recorded a $3.6 million decrease to the provisional income tax expense in the third quarter of 2018, resulting in a $1.4 million net decrease to income tax expense as a result of the Act.

The amount related to the remeasurement of certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future was a decrease to income tax expense of $28.0 million. The amount related to the one-time transition tax on the mandatory deemed repatriation of foreign earnings was an increase to income tax expense of $26.6 million. No additional income taxes have been provided for any remaining undistributed foreign earnings not subject to the transition tax, or any additional outside basis difference inherent in these entities, as these amounts continue to be indefinitely reinvested in foreign operations.