NOTE 6 INCOME TAXES

On December 22, 2017, the Tax Cuts and Jobs Act (“TCJA”) was enacted by the U.S. federal government. The legislation lowered the U.S. federal corporate tax rate from 35.0% to 21.0%, effective January 1, 2018 and imposed a one-time transition tax on previously unremitted earnings of non-U.S. subsidiaries as of December 31, 2017.

The SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provided us with up to one year to finalize our accounting for the impacts of U.S. tax reform. We made reasonable estimates of the tax impacts related to the transition tax and the revaluation of deferred tax assets and liabilities. In 2017, we recognized a net tax charge of approximately $24.7 million, including a provisional charge of $31.6 million for the transition tax and a provisional benefit of $6.8 million related to the corporate rate change. We finalized our accounting for these items in 2018, recognizing a $2.6 million benefit related to the transition tax and a $2.8 million benefit related to the change in tax rate. We have elected to account for the tax on the U.S. Global Intangible Low Taxed Income (“GILTI”) as a period cost and not as a measure of deferred taxes.

Income before income taxes consists of:


Years Ended December 31,	2018		2017		2016
United States	$	34,404	$	36,139	$	55,278
International		231,616		258,686		225,219
Total	$	266,020	$	294,825	$	280,497

The provision (benefit) for income taxes is composed of:


Years Ended December 31,	2018		2017		2016
Current:
U.S. Federal	$	10,273	$	(342)	$	24,045
State/Local		877		230		449
International		83,456		72,670		61,511
	$	94,606	$	72,558	$	86,005
Deferred:
U.S. Federal/State	$	(17,019)	$	2,570	$	(4,002)
International		(6,333)		(332)		(7,110)
	$	(23,352)	$	2,238	$	(11,112)
Total	$	71,254	$	74,796	$	74,893

The difference between the actual income tax provision and the tax provision computed by applying the statutory federal income tax rate of 21.0% in 2018, and 35.0% in 2017 and 2016 to income before income taxes is as follows:


Years Ended December 31,	2018			2017			2016
Income tax at statutory rate	$	55,864		$	103,189		$	98,174
State income (benefits) taxes, net of federal (tax) benefit		(1,311)			(594)			(980)
Investment incentives		(1,900)			(1,900)			(6,413)
Tax resolutions		(3,400)			(5,188)			(7,205)
Excess tax benefits from equity compensation		(10,800)			(10,383)			—
Deferred benefits from tax rate changes		(2,800)			(5,055)			—
U.S. GILTI and BEAT		5,625			—			—
U.S. tax reform - transition tax		(2,570)			31,575			—
Results of forward contract		—			(23,883)			—
Rate differential on earnings of foreign operations		29,336			(17,318)			(12,037)
Other items, net		3,210			4,353			3,354
Actual income tax provision	$	71,254		$	74,796		$	74,893
Effective income tax rate		26.8	%		25.4	%		26.7	%

The 2018 tax provision was favorably impacted by excess tax benefits on deductible stock compensation. The tax provision for 2018 reflects a $10.8 million benefit from this item. The mix of pretax income has an unfavorable impact, reflecting the drop in the U.S. statutory rate to 21.0% for 2018, which is now below the statutory rate of our significant foreign jurisdictions. The U.S. GILTI and BEAT taxes also had a $5.6 million unfavorable impact.

The 2017 tax provision was favorably impacted by the mix of pretax income in various non-U.S. tax jurisdictions. The tax provision for 2017 reflects $10.4 million related to the excess tax benefits on deductible stock compensation, which is new for 2017. The deferred tax benefit of $5.1 million is net of a provisional benefit of $6.8 million recorded for the change in the U.S. tax rate and a charge of $1.7 million for tax rate changes in France and Argentina. The $5.2 million related to tax resolutions includes an amount of $3.2 million related to uncertain tax positions in Europe. The remaining $2.0 million is a refund from a distribution tax paid in France. Furthermore, the tax provision for 2017 reflects a provisional charge of $31.6 million from the transition tax enacted as part of the U.S. tax reform. This was partially offset by a benefit of $23.9 million from the forward contracts discussed in Note 11 – Derivative Instruments and Hedging Activities.

The state income tax provision for 2016 reflects a benefit of $1.6 million related to the reduction of valuation allowances mostly associated with U.S. state tax credits. The tax provision for 2016 also reflects benefits of $6.4 million associated with the exceptional depreciation allowances enacted in France and Italy. The $7.2 million related to tax resolutions includes an amount of $5.0 million related to dividends previously taxed in France. The remaining $2.2 million is a net amount related to uncertain tax positions in France, Italy and Germany. The rate differential on earnings of foreign operations reflects a $4.7 million benefit due to the reduction in the corporate income tax rate in France from 38.00% to 34.43%. In addition, the rate differential on earnings of foreign operations reflects benefits of $2.0 million, $2.2 million, and $2.2 million due to reductions in the corporate income tax rates in Germany, Switzerland, and China, respectively.

Significant deferred tax assets and liabilities as of December 31, 2018 and 2017 are composed of the following temporary differences:


	2018		2017
Deferred Tax Assets:
Net operating loss carryforwards	$	22,462	$	10,803
Pension liabilities		15,405		19,393
Stock compensation		10,130		9,101
U.S. federal tax credits		12,045		8,320
U.S. state tax credits		10,186		9,384
Vacation and bonus		6,891		4,748
Research and development		6,945		—
Inventory		6,038		3,052
Workers compensation		3,373		4,534
Other		13,985		9,698
Total gross deferred tax assets		107,460		79,033
Less valuation allowance		(11,189)		(5,414)
Net deferred tax assets		96,271		73,619
Deferred Tax Liabilities:
Depreciation, amortization and leases		33,174		25,062
Acquisition related intangibles		59,004		27,866
Other		10,351		8,090
Total gross deferred tax liabilities		102,529		61,018
Net deferred tax (liabilities) assets	$	(6,258)	$	12,601

The $5.7 million increase in our valuation allowance in 2018 is primarily due to acquired net operating losses along with current year foreign net operating losses.

The U.S. federal tax credits will expire in the years 2025 and 2027. There is no expiration date on $18.4 million of the tax‑effected net operating loss carry forwards and $4.0 million (tax effected) will expire in the years 2019 to 2038. The U.S. state tax credit carryforwards of $10.2 million (tax effected) will expire in the years 2019 to 2033. It is currently expected that U.S. state tax credit carryforwards of $0.9 million will expire unused in 2019.

We evaluate the deferred tax assets and record a valuation allowance when it is believed it is more likely than not that the benefit will not be realized. We have established a valuation allowance of $8.1 million of the $22.4 million of tax effected net operating loss carry forwards. These losses are generally in locations that have not produced cumulative three year operating profit. A valuation allowance of $3.1 million has also been established against the $10.2 million of U.S. state tax credit carry forwards.

As a result of U.S. tax reform and the U.S. GILTI provisions, none of the non-U.S. unremitted earnings will be subject to U.S. taxation. As of December 31, 2018, we have recognized a $2.2 million liability for distributions expected to be made to Europe early in 2019. We maintain our assertion that all other cash and distributable reserves at our non-U.S. affiliates will continue to be indefinitely reinvested. We estimate the amount of additional local and withholding tax that would be payable on distributions to be in the range of $20 million to $30 million.

We have not provided for taxes on certain tax‑deferred income of a foreign operation. The income arose predominately from government grants. Taxes of approximately $1.7 million would become payable in the event the terms of the grant are not fulfilled.

INCOME TAX UNCERTAINTIES

We provide a liability for the amount of tax benefits realized from uncertain tax positions. A reconciliation of the beginning and ending amount of income tax uncertainties is as follows:


	2018		2017		2016
Balance at January 1	$	3,080	$	6,356	$	7,934
Increases based on tax positions for the current year		360		370		270
Increases based on tax positions of prior years		610		1,562		1,283
Decreases based on tax positions of prior years		—		—		(1,472)
Settlements		(491)		(4,874)		(1,444)
Lapse of statute of limitations		—		(334)		(215)
Balance at December 31	$	3,559	$	3,080	$	6,356

The amount of income tax uncertainties that, if recognized, would impact the effective tax rate is approximately $3.6 million. We estimate that it is reasonably possible that the liability for uncertain tax positions will decrease no more than $1.5 million in the next twelve months from the resolution of various uncertain positions as a result of the completion of tax audits, litigation and the expiration of the statute of limitations in various jurisdictions.

We recognize interest and penalties accrued related to unrecognized tax benefits as a component of income taxes. As of December 31, 2018, 2017 and 2016, we had approximately $1.9 million, $1.6 million and $1.5 million, respectively, accrued for the payment of interest and penalties, of which approximately $0.4 million, $0.1 million and $0.4 million was recognized in income tax expense in the years ended December 31, 2018, 2017 and 2016, respectively.

Aptar or its subsidiaries file income tax returns in the U.S. Federal jurisdiction and various state and foreign jurisdictions. The major tax jurisdictions we file in, with the years still subject to income tax examinations, are listed below:


		Tax Years
Major Tax		Subject to
Jurisdiction		Examination
United States — Federal		2014-2018
United States — State		2009-2018
France		2016-2018
Germany		2015-2018
Italy		2013-2018
China		2009-2018