Income Taxes

Following is a summary of earnings before income taxes for United States and foreign operations:



	2017		2016	2015
United States	$	754,562	627,567	324,210
Foreign	563,295		613,558	424,651
Earnings before income taxes	$	1,317,857	1,241,125	748,861

Income tax expense (benefit) for the years ended December 31, 2017, 2016 and 2015 consists of the following:



	2017			2016		2015
Current income taxes:
U.S. federal	$	327,697		247,917		117,602
State and local	17,811			31,939		11,175
Foreign	73,248			61,712		31,981
Total current	418,756			341,568		160,758
Deferred income taxes:
U.S. federal	(17,419		)	(16,167	)	4,165
State and local	(3,046		)	(22,115	)	(3,983	)
Foreign	(55,126		)	4,273		(29,065	)
Total deferred	(75,591		)	(34,009	)	(28,883	)
Total	$	343,165		307,559		131,875

The geographic dispersion of earnings and losses contributes to the annual changes in the Company’s effective tax rates. Approximately 57% of the Company’s current year earnings before income taxes was generated in the United States at a combined federal and state effective tax rate that is higher than the Company’s overall effective tax rate. The Company is also subject to taxation in other jurisdictions where it has operations, including Australia, Belgium, Bulgaria, France, Ireland, Italy, Luxembourg, Malaysia, Mexico, the Netherlands, Russia and Spain. The effective tax rates that the Company accrues in these jurisdictions vary widely, but they are generally lower than the Company’s overall effective tax rate. The Company’s domestic effective tax rates for the years ended December 31, 2017, 2016 and 2015 were 43.1%, 38.5%, and 39.8%, respectively, and its non-U.S. effective tax rates for the years ended December 31, 2017, 2016 and 2015 were 3.2%, 10.8%, and 0.7%, respectively. The difference in rates applicable in foreign jurisdictions results from a number of factors, including lower statutory rates, historical loss carry-forwards, financing arrangements, and other factors. The Company’s effective tax rate has been and will continue to be impacted by the geographical dispersion of the Company’s earnings and losses. To the extent that domestic earnings increase while the foreign earnings remain flat or decrease, or increase at a lower rate, the Company’s effective tax rate will increase.

Income tax expense (benefit) attributable to earnings before income taxes differs from the amounts computed by applying the U.S. statutory federal income tax rate to earnings before income taxes as follows:



	2017			2016		2015
Income taxes at statutory rate	$	461,250		434,394		262,102
State and local income taxes, net of federal income tax benefit	10,133			6,298		4,951
Foreign income taxes^(a)	(113,520		)	(111,217	)	(95,198	)
Change in valuation allowance	10,008			(21,106	)	(14,237	)
2017 revaluation of deferred tax assets and liabilities ^(b)	(150,546		)	—		—
Deemed Repatriation Transition Tax	105,165			—		—
Tax contingencies and audit settlements, net	23,097			2,496		(23,032	)
Other, net	(2,422		)	(3,306	)	(2,711	)
	$	343,165		307,559		131,875

(a) Foreign income taxes includes statutory rate differences, financing arrangements, withholding taxes, local income taxes, notional deductions, and other miscellaneous items.

(b) 2017 revaluation of deferred tax assets and liabilities includes $106,107 related to TCJA and $44,439 related to Belgium tax reform.

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities as of December 31, 2017 and 2016 are presented below:



	2017			2016
Deferred tax assets:
Accounts receivable	$	18,481		23,521
Inventories	41,169			48,673
Employee benefits	42,191			76,143
Accrued expenses and other	52,635			72,258
Deductible state tax and interest benefit	2,087			5,186
Intangibles	22,119			12,874
Federal, foreign and state net operating losses and credits	530,978			456,130
Gross deferred tax assets	709,660			694,785
Valuation allowance	(362,963		)	(289,078	)
Net deferred tax assets	346,697			405,707
Deferred tax liabilities:
Inventories	(14,423		)	(13,099	)
Plant and equipment	(397,668		)	(426,087	)
Intangibles	(170,817		)	(243,339	)
Other liabilities	(31,702		)	(50,041	)
Gross deferred tax liabilities	(614,610		)	(732,566	)
Net deferred tax liability	$	(267,913	)	(326,859	)

The Company evaluates its ability to realize the tax benefits associated with deferred tax assets by analyzing its forecasted taxable income using both historic and projected future operating results, the reversal of existing temporary differences, taxable income in prior carry-back years (if permitted) and the availability of tax planning strategies. The valuation allowance as of December 31, 2017, and 2016 is $362,963 and $289,078, respectively. The valuation allowance as of December 31, 2017 relates to the net deferred tax assets of certain of the Company’s foreign subsidiaries as well as certain state net operating losses and tax credits. The total change in the 2017 valuation allowance was an increase of $73,885 which includes $36,792 related to foreign currency translation. The total change in the 2016 valuation allowance was an increase of $1,498, which includes $(9,364) related to foreign currency translation.

Management believes it is more likely than not that the Company will realize the benefits of its deferred tax assets, net of valuation allowances, based upon the expected reversal of deferred tax liabilities and the level of historic and forecasted taxable income over periods in which the deferred tax assets are deductible.

As of December 31, 2017, the Company has state net operating loss carry forwards and state tax credits with potential tax benefits of $74,985, net of federal income tax benefit; these carry forwards expire over various periods based on taxing jurisdiction. A valuation allowance totaling $33,503 has been recorded against these state deferred tax assets as of December 31, 2017. In addition, as of December 31, 2017, the Company has net operating loss carry forwards in various foreign jurisdictions with potential tax benefits of $455,161. A valuation allowance totaling $329,301 has been recorded against these deferred tax assets as of December 31, 2017.

Historically, the Company has not provided for U.S. federal and state income taxes on the undistributed accumulated earnings of its foreign subsidiaries because such earnings and profits ("E&P") were deemed to be permanently reinvested. Due to the passage of the Tax Cuts and Jobs Act (“TCJA”) on December 22, 2017, the Company was required to recognize U.S. federal and state taxes on the higher of its accumulated earnings as of November 2, 2017, or December 31, 2017. Accordingly, as of December 31, 2017, the Company recognized $105,165 of income tax expense on its November 2, 2017 E&P from its foreign subsidiaries, as discussed further below. As of December 31, 2017, the Company has approximately $860,000 of E&P previously subject to U.S. federal and state taxes and should this E&P be distributed in the form of dividends in the future, the Company might be subject to withholding taxes (possibly offset by U.S. foreign tax credits) in various foreign jurisdictions, but the Company would not expect incremental U.S. federal or state taxes to be accrued on the now previously taxed E&P. Despite the new territorial tax regime created by the TCJA, the Company continues to assert that earnings of its foreign subsidiaries are permanently reinvested.

The SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance on accounting for the income tax effects of the TCJA. SAB 118 provides a measurement period that should not extend beyond one year from the enactment date of the TCJA for companies to complete the accounting under ASC 740, Income Taxes ("ASC 740"). In accordance with SAB 118, a company must (1) reflect the income tax effects of those aspects of TCJA for which the accounting under ASC 740 is complete, (2) record a provisional estimate for those aspects of TCJA for which the accounting is incomplete but a reasonable estimate can be made, and/or (3) continue to apply ASC 740 on the basis of the provisions of tax laws in effect immediately before the enactment of the TCJA if no reasonable estimate can be made.

The Company has recorded a net provisional tax expense of $45,249 based on the initial impact of the TCJA and related transactions for the year ended December 31, 2017. This net tax expense primarily consists of a tax expense of $105,165 for the Deemed Repatriation Transition Tax and $46,191 for related transactions, offset by a tax benefit of $106,107 for the corporate tax rate reduction, and the associated revaluation of the Company’s net deferred tax liability. For various reasons that are discussed more fully below, the Company has not completed its accounting for the income tax effects of certain elements of the TCJA. The Company was able to make reasonable estimates of the effects of certain elements for which the analysis is not yet complete, and as such, it recorded provisional estimates. The Company was not able to make reasonable estimates of the impact of certain other elements, and therefore has not recorded any estimates related to those elements and have continued accounting for them in accordance with ASC 740 on the basis of the tax laws in effect before the TCJA.

The TCJA reduced the US corporate tax rate from 35% to 21% effective January 1, 2018. For certain of the Company's deferred tax assets and liabilities, it recorded a provisional decrease of $106,107, with a corresponding net estimated deferred tax benefit. While the Company is able to make a reasonable estimate of the impact of the rate reduction, it may be affected by other analysis to the TCJA, including, but not limited to, our calculations of deemed repatriation of deferred foreign income and the state tax effect, 2017 expenditures that qualify for immediate expensing, and amounts limited for payments to covered employees.

The Deemed Repatriation Transition Tax (“Transition Tax”) is a tax on previously untaxed E&P of certain foreign subsidiaries. To determine the amount of the Transition Tax, the Company must determine, in addition to other factors, the amount of post-1986 E&P of the relevant foreign subsidiaries, as well as the amount of non-U.S. income tax paid on such earnings. The Company was able to make a provisional estimate of the Transition Tax obligation; however, the Company is continuing to gather additional information to compute a more precise amount. The Company will elect to pay the transition tax liability over the 8-year deferral period, with 8% due in each of the first five years, 15% in the sixth year, 20% in the seventh year, and 25% in the eighth year. This total liability of $105,165 is recorded in other long-term liabilities within the December 31, 2017 consolidated balance sheet.

Because of the complexity of the new Global Intangible Low-Taxed Income (“GILTI”) rules, the Company is continuing to evaluate this provision of the TCJA and the application of ASC 740. Accordingly, the accounting is incomplete, and the Company is not yet able to make reasonable estimates of the effects; therefore, no provisional estimates were recorded. Under U.S. GAAP, the Company is allowed to make an accounting policy choice of either (1) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred (the “period cost method”) or (2) factoring such amounts into a company’s measurement of its deferred taxes (the “deferred method”). The Company’s selection of an accounting policy with respect to the new GILTI tax rules will depend on complex calculations that the Company is unable to reasonably determine at this time.

The Company will continue to evaluate the interpretations of the TCJA, the assumptions made within the calculations, and future guidance that may be issued to determine the impact, if any, on these provisional calculations, which may materially change the Company’s tax determinations.

The Company has also recorded a net tax benefit of $44,439 related to the December 25, 2017 Belgium enacted tax reform legislation. This tax benefit relates to the reduction of the Belgium corporate income tax rate from 33.99% to 29.58% for January 1, 2018 and January 1, 2019, respectively, with a further reduction to 25% effective January 1, 2020, and the associated revaluation of the Company's net deferred tax liability. The Belgium tax reform legislation also sets an annual limitation on the utilization of net operating losses and provides for the creation of a consolidated corporate income tax regime.

Tax Uncertainties

In the normal course of business, the Company’s tax returns are subject to examination by various taxing authorities. Such examinations may result in future tax and interest assessments by these taxing jurisdictions. Accordingly, the Company accrues liabilities when it believes that it is not more likely than not that it will realize the benefits of tax positions that it has taken in its tax returns or for the amount of any tax benefit that exceeds the cumulative probability threshold in accordance with ASC 740-10. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company records interest and penalties related to unrecognized tax benefits in income tax expense (benefit). Differences between the estimated and actual amounts determined upon ultimate resolution, individually or in the aggregate, are not expected to have a material adverse effect on the Company’s consolidated financial position but could possibly be material to the Company’s consolidated results of operations or cash flow in any given quarter or annual period.

As of December 31, 2017, the Company’s gross amount of unrecognized tax benefits is $65,631, excluding interest and penalties. If the Company were to prevail on all uncertain tax positions, $52,433 of the unrecognized tax benefits would affect the Company’s effective tax rate, exclusive of any benefits related to interest and penalties.

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



	2017			2016
Balance as of January 1	$	46,434		51,037
Additions based on tax positions related to the current year	28,663			2,221
Additions for tax positions of acquired companies	1,776			—
Additions for tax positions of prior years	876			6,412
Reductions resulting from the lapse of the statute of limitations	(14,502		)	(6,294	)
Settlements with taxing authorities	(655		)	(6,555	)
Effects of foreign currency translation	3,039			(387	)
Balance as of December 31	$	65,631		46,434

The Company will continue to recognize interest and penalties related to unrecognized tax benefits as a component of its income tax provision. As of December 31, 2017 and 2016, the Company has $8,252 and $8,020, respectively, accrued for the payment of interest and penalties, excluding the federal tax benefit of interest deductions where applicable. During the years ended December 31, 2017, 2016 and 2015, the Company accrued interest and penalties through the consolidated statements of operations of $165, $2,170 and $(5,635), respectively.

The Company believes that its unrecognized tax benefits could decrease by $13,248 within the next twelve months. The Company has effectively settled all Federal income tax matters related to years prior to 2010. Various other state and foreign income tax returns are open to examination for various years.

Belgian Tax Matter

In January 2012, the Company received a €23,789 assessment from the Belgian tax authority related to its year ended December 31, 2008, asserting that the Company had understated its Belgian taxable income for that year. The Company filed a formal protest in the first quarter of 2012 refuting the Belgian tax authority's position. The Belgian tax authority set aside the assessment in the third quarter of 2012 and refunded all related deposits, including interest income of €1,583 earned on such deposits. However, on October 23, 2012, the Belgian tax authority notified the Company of its intent to increase the Company's taxable income for the year ended December 31, 2008 under a revised theory. On December 28, 2012, the Belgian tax authority issued assessments for the years ended December 31, 2005 and December 31, 2009, in the amounts of €46,135 and €35,567, respectively, including penalties, but excluding interest. The Company filed a formal protest during the first quarter of 2013 relating to the new assessments. In September 2013, the Belgian tax authority denied the Company's protests, and the Company has brought these two years before the Court of First Appeal in Bruges. In December 2013, the Belgian tax authority issued additional assessments related to the years ended December 31, 2006, 2007, and 2010, in the amounts of €38,817, €39,635, and €43,117, respectively, including penalties, but excluding interest. The Company filed formal protests during the first quarter of 2014, refuting the Belgian tax authority's position for each of the years assessed. In the quarter ended June 28, 2014, the Company received a formal assessment for the year ended December 31, 2008, totaling €30,131, against which the Company also submitted its formal protest. All 4 additional years have been brought before the Court of First Appeal in November 2014. In January of 2015, the Company met with the Court of First Appeal in Bruges, Belgium and agreed with the Belgium tax authorities to consolidate and argue the issues regarding the years 2005 and 2009, and apply the ruling to all of the open years (to the extent there are no additional facts/procedural arguments in the other years). In May 2017, the statute of limitation was extended to include the calendar year 2011.

On January 27, 2016, the Court of First Appeal in Bruges, Belgium ruled in favor of the Company with respect to the calendar years ending December 31, 2005 and December 31, 2009. On March 9, 2016, the Belgian tax authority lodged its Notification of Appeal with the Ghent Court of Appeal.

The Company disagrees with the views of the Belgian tax authority on this matter and will persist in its vigorous defense. Nevertheless, on May 24, 2016, the tax collector representing the Belgian tax authorities imposed a lien on the Company's properties in Wielsbeke (Ooigemstraat and Breestraat), Oostrozebeke (Ingelmunstersteenweg) and Desselgem (Waregemstraat) included in the Flooring ROW segment. The purpose of the lien is to provide security for payment should the Belgian tax authority prevail on its appeal. The lien does not interfere with the Company's operations at these properties.