Tredegar recorded tax expense of $8.5 million on pretax net income of $42.7 million in the first six months of 2019. Therefore, the effective tax rate in the first six months of 2019 was 19.8%, compared to 23.0% in the first six months of 2018. The quarterly effective tax rate is an estimate based on a proration of the components of the Company’s estimated annual effective tax rate and discrete items recorded during the first six months of the year. The significant differences between the U.S. federal statutory rate and the effective income tax rate for the six months ended June 30, 2019 and 2018 are as follows:



(In thousands, except percentages)	2019					2018
Six Months Ended June 30,	Amount			%		Amount			%
Income tax expense at federal statutory rate	$	8,972		21.0		$	8,971		21.0
U.S. Tax on Foreign Branch Income	1,808			5.0		736			1.7
Foreign rate differences	1,191			3.3		669			1.6
State taxes, net of federal income tax benefit	468			1.1		537			1.2
Non-deductible expenses	217			0.6		123			0.3
Changes in estimates related to prior year tax provision	152			0.4		(34		)	(0.1	)
Valuation allowance for capital loss carry-forwards	—			—		91			0.2
Stock-based compensation	(141		)	(0.4	)	176			0.4
Tax contingency accruals and tax settlements	(154		)	(0.4	)	100			0.2
Research and development tax credit	(255		)	(0.7	)	(188		)	(0.4	)
Foreign Derived Intangible Income (FDII)	(445		)	(1.2	)	(309		)	(0.7	)
Tax impact of dividend received	(919		)	(2.2	)	—			—
Foreign tax incentives	(1,074		)	(3.0	)	(655		)	(1.5	)
Valuation allowance due to foreign losses and impairments	(1,353		)	(3.7	)	(383		)	(0.9	)
Effective income tax rate	$	8,467		19.8		$	9,834		23.0

Tredegar accrues U.S. federal income taxes on unremitted earnings of all foreign subsidiaries where required. However, due to changes in the taxation of dividends under the U.S. Tax Cuts and Jobs Act of 2017, Tredegar will only record U.S. federal income taxes on unremitted earnings of its foreign subsidiaries where Tredegar cannot take steps to eliminate any potential tax on future distributions from its foreign subsidiaries.

The Brazilian federal statutory income tax rate is a composite of 34.0% (25.0% of income tax and 9.0% of social contribution on income). Terphane Ltda.’s manufacturing facility in Brazil is the beneficiary of certain income tax incentives that allow for a reduction in the statutory Brazilian federal income tax rate to 15.25% levied on the operating profit on certain of its products. The incentives have been granted for a 10-year period, from the commencement date of January 1, 2015. The benefit from the tax incentives was $1.1 million and $0.7 million in the first six months of 2019 and 2018, respectively.

Tredegar and its subsidiaries file income tax returns in the U.S., various states, and jurisdictions outside the U.S. With exceptions for some U.S. states and non-U.S. jurisdictions, Tredegar and its subsidiaries are no longer subject to U.S. federal, state or non-U.S. income tax examinations by tax authorities for years before 2014.

The Company includes tax-related interest and penalties in income tax expense. As of June 30, 2019, $0.2 million of interest and penalties are accrued as a tax liability. During the first half of 2019, a minimal amount of net interest income was recorded.