
Note 6.	Income Taxes

The provision for income taxes in the accompanying statement of income differs from the provision calculated by applying the statutory federal income tax rate of 35% to income from continuing operations before provision for income taxes due to the following:



	Nine Months Ended
	September 30,			October 1,
(In millions)	2017			2016

Provision for Income Taxes at Statutory Rate	$	563.2		$	480.2

Increases (Decreases) Resulting From:
Foreign rate differential	(287.0		)	(189.7		)
Foreign exchange loss on inter-company debt refinancing	(236.8		)	—
Income tax credits	(100.5		)	(233.6		)
Manufacturing deduction	(5.7		)	(25.5		)
Withholding taxes	48.7			—
Singapore tax holiday	(16.7		)	(14.0		)
Impact of change in tax laws and apportionment on deferred taxes	(60.1		)	0.3
Nondeductible expenses	9.1			6.3
Provision of tax reserves, net	12.5			—
Excess tax benefits from stock options and restricted stock units	(50.7		)	—
Tax return reassessments and settlements	4.8			(41.0		)
Valuation allowance	49.8			—
State income taxes, net of federal tax	(14.5		)	(6.3		)
Other, net	(4.5		)	2.7

Benefit from income taxes	$	(88.4	)	$	(20.6	)

The company has operations and a taxable presence in approximately 50 countries outside the U.S. All of these countries except one have a lower tax rate than the U.S. The countries in which the company has a material presence that have significantly lower tax rates than the U.S. include Germany, the Netherlands, Singapore, Sweden, Switzerland and the United Kingdom. The company’s ability to obtain a benefit from lower tax rates outside the U.S. is dependent on its relative levels of income in countries outside the U.S. and on the statutory tax rates in those countries.

In the third quarter of 2017 the company refinanced certain long term inter-company debt which resulted in an income tax benefit of $237 million related to a foreign exchange loss recognized for income tax purposes. As a result of this foreign exchange loss, the company has reduced its forecasted benefit from foreign tax credits by $100 million as this loss reduces expected U.S. taxes that these credits would have offset for 2017.

In 2017, the company continued to implement tax planning initiatives related to non U.S. subsidiaries. The company implemented foreign tax credit planning in Sweden which resulted in $20 million of foreign tax credits, with no related incremental U.S. income tax expense.

The company receives a tax deduction upon exercise of non-qualified stock options by employees, or the vesting of restricted stock units held by employees, for the difference between the exercise price and the market price of the underlying common stock on the date of exercise. Prior to 2017, the amount of the tax deduction in excess of compensation cost recognized was allocated to capital in excess of par value. Beginning in 2017, these excess tax benefits reduce the tax provision as described in Note 1. In the first nine months of 2017, the company's tax provision was reduced by $51 million of such benefits.

The company has significant activities in Singapore and has received considerable tax incentives. The local taxing authority granted the company pioneer company status which provides an incentive encouraging companies to undertake activities that have the effect of promoting economic or technological development in Singapore. This incentive equates to a tax exemption on earnings associated with most of the company’s manufacturing activities in Singapore and continues through December 31, 2026. In 2017 and 2016, the impact of this tax holiday decreased the annual effective tax rates by 1.0 percentage point and 1.0 percentage point, respectively, and increased diluted earnings per share by approximately $0.04 and $0.04, respectively. In connection with the March 2017 extension of this agreement until 2026, the company recorded a benefit in Q1 2017 of approximately $65 million ($0.16 per diluted share) for the effect on deferred tax balances of the extended tax holiday.

The company’s unrecognized tax benefits increased to $866 million at September 30, 2017, from $802 million at December 31, 2016. Increases of $43 million, as a result of a prior year foreign exchange loss recognized on the refinancing of certain long term inter-company debt, and $15 million, due to the acquisition of Patheon, were offset in part by a decrease of $12 million as a result of an adjustment to a prior year amended tax filing.