Note 8: Income Taxes

The source of earnings before income taxes and equity earnings consisted of the following:


(Amounts in millions)	2016		2015		2014
United States	$	644.0	$	578.4	$	481.1
Foreign		157.4		132.1		149.8

Total	$	801.4	$	710.5	$	630.9

The provision (benefit) for income taxes consisted of the following:


(Amounts in millions)	2016		2015		2014
Current:
Federal		$ 175.9		$ 165.8		$ 137.6
Foreign		39.9		40.8		41.2
State		27.2		19.7		17.5

Total current		243.0		226.3		196.3


Deferred:
Federal		6.3		(8.7)		10.0
Foreign		(6.7)		3.9		(8.2)
State		1.7		(0.3)		1.4

Total deferred		1.3		(5.1)		3.2

Total income tax provision		$ 244.3		$ 221.2		$ 199.5


The following is a reconciliation of the statutory federal income tax rate to Snap-on’s effective tax rate:

	2016		2015		2014
Statutory federal income tax rate		35.0%		35.0%		35.0%
Increase (decrease) in tax rate resulting from:
State income taxes, net of federal benefit		2.4		2.3		2.2
Noncontrolling interests		(0.6)		(0.6)		(0.5)
Repatriation of foreign earnings		(0.1)		(3.0)		(0.4)
Change in valuation allowance for deferred tax assets		(1.0)		0.1		(0.9)
Adjustments to tax accruals and reserves		0.3		0.8		0.5
Foreign rate differences		(2.1)		(1.9)		(2.2)
Domestic production activities deduction		(1.9)		(1.9)		(2.0)
Excess tax benefits related to equity compensation		(1.8)		–		–
Other		0.3		0.3		(0.1)

Effective tax rate		30.5%		31.1%		31.6%

Snap-on’s effective income tax rate on earnings attributable to Snap-on Incorporated was 31.0% in 2016, 31.7% in 2015, and 32.1% in 2014. The effective tax rate for 2016 included tax benefits from the reversal of deferred tax asset valuation allowances that are now expected to be realized in future years, as well as tax benefits associated with the January 3, 2016 adoption of ASU No. 2016-09; these tax benefits were partially offset by tax contingency reserves established for certain non-U.S. tax audits. See Note 1 for further information on the company’s adoption of ASU No. 2016-09.

Temporary differences that give rise to the net deferred income tax asset (liability) as of 2016, 2015 and 2014 year end are as follows:



(Amounts in millions)	2016		2015		2014
Long-term deferred income tax assets (liabilities):
Inventories		$ 33.3		$ 29.4		$ 29.2
Accruals not currently deductible		77.7		71.1		72.7
Tax credit carryforward		15.1		10.2		–
Employee benefits		108.1		101.2		91.5
Net operating losses		42.8		44.4		53.5
Depreciation and amortization		(209.8)		(199.3)		(191.2)
Valuation allowance		(21.7)		(32.0)		(34.8)
Equity-based compensation		24.3		22.7		19.6
Cash flow hedge		(5.5)		–		–
Other		(4.6)		(1.6)		(5.7)

Net deferred income tax asset		$ 59.7		$ 46.1		$ 34.8

As of 2016 year end, Snap-on had tax net operating loss carryforwards totaling $253.8 million as follows:


(Amounts in millions)	State		Federal		Foreign		Total
Year of expiration:
2017-2021		$ –		$ –		$ 37.6		$ 37.6
2022-2026		0.3		–		6.5		6.8
2027-2031		122.1		–		37.6		159.7
2032-2036		–		–		–		–
Indefinite		–		–		49.7		49.7

Total net operating loss carryforwards		$ 122.4		$ –		$ 131.4		$ 253.8

A valuation allowance totaling $21.7 million, $32.0 million and $34.8 million as of 2016, 2015 and 2014 year end, respectively, has been established for deferred income tax assets primarily related to certain subsidiary loss carryforwards that may not be realized. For the year ended December 31, 2016, the net valuation allowance decreased by $10.3 million primarily due to a non-U.S. subsidiary having, in part, attained three years of cumulative pretax income and, as a result, management concluded there is sufficient positive evidence that it is more-likely-than-notthat additional deferred taxes are realizable. Realization of the net deferred income tax assets is dependent on generating sufficient taxable income prior to their expiration. Although realization is not assured, management believes it is more-likely-than-not that the net deferred income tax assets will be realized. The amount of the net deferred income tax assets considered realizable, however, could change in the near term if estimates of future taxable income during the carryforward period fluctuate.

The following is a reconciliation of the beginning and ending amounts of unrecognized tax benefits for 2016, 2015 and 2014:


(Amounts in millions)	2016		2015		2014
Unrecognized tax benefits at beginning of year		$ 7.2		$ 6.4		$ 4.6
Gross increases – tax positions in prior periods		2.5		1.7		2.1
Gross decreases – tax positions in prior periods		(0.3)		(0.5)		–
Gross increases – tax positions in the current period		0.5		0.5		1.8
Settlements with taxing authorities		–		–		(1.6)
Lapsing of statutes of limitations		(0.5)		(0.9)		(0.5)

Unrecognized tax benefits at end of year		$ 9.4		$ 7.2		$ 6.4

The unrecognized tax benefits of $9.4 million, $7.2 million and $6.4 million as of 2016, 2015 and 2014 year end, respectively, would impact the effective income tax rate if recognized. As of December 31, 2016, unrecognized tax benefits of $3.4 million, $2.4 million and $3.6 million were included in “Deferred income tax assets,” “Other accrued liabilities” and “Other long-term liabilities,” respectively, on the accompanying Consolidated Balance Sheet. Interest and penalties related to unrecognized tax benefits are recorded in income tax expense. As of 2016, 2015 and 2014 year end, the company had provided for $0.9 million, $0.5 million and $0.5 million, respectively, of accrued interest and penalties related to unrecognized tax benefits. During 2016, the company increased the reserve attributable to interest and penalties associated with unrecognized tax benefits by a net $0.4 million. As of December 31, 2016, $0.4 million and $0.5 million of accrued interest and penalties were included in “Other accrued liabilities” and “Other long-term liabilities,” respectively, on the accompanying Consolidated Balance Sheet.

Snap-on and its subsidiaries file income tax returns in the United States and in various state, local and foreign jurisdictions. It is reasonably possible that certain unrecognized tax benefits may either be settled with taxing authorities or the statutes of limitations for such items may lapse within the next 12 months, causing Snap-on’s gross unrecognized tax benefits to decrease by a range of zero to $4.0 million. Over the next 12 months, Snap-on anticipates taking certain tax positions on various tax returns for which the related tax benefit does not meet the recognition threshold. Accordingly, Snap-on’s gross unrecognized tax benefits may increase by a range of zero to $1.2 million over the next 12 months for uncertain tax positions expected to be taken in future tax filings.

With few exceptions, Snap-on is no longer subject to U.S. federal and state/local income tax examinations by tax authorities for years prior to 2011, and Snap-on is no longer subject to non-U.S. income tax examinations by tax authorities for years prior to 2010.

The undistributed earnings of all non-U.S. subsidiaries totaled $800.6 million, $624.1 million and $619.1 million as of 2016, 2015 and 2014 year end, respectively. Snap-on has not provided any deferred taxes on these undistributed earnings as it considers the undistributed earnings to be permanently invested. Determination of the amount of unrecognized deferred income tax liability related to these earnings is not practicable.