4. Income Taxes

The components of income from operations before income taxes for the following years ended December 31 consisted of:


	2016		2015			2014
(dollars in millions)
United States	$	268.1	$	550.3		$	344.3
Foreign		395.6		(200.9	)		101.5

	$	663.7	$	349.4		$	445.8

The income tax provision for the following years ended December 31 consisted of:


	2016			2015			2014
(dollars in millions)
Current provision
Federal	$	132.3		$	196.8		$	130.1
Foreign		44.5			40.8			32.3
State		20.9			21.5			15.8

		197.7			259.1			178.2

Deferred (benefit) provision
Federal		(62.1	)		(18.3	)		(17.8	)
Foreign		4.4			(26.5	)		(3.9	)
State		(7.7	)		(0.3	)		(5.2	)

		(65.4	)		(45.1	)		(26.9	)

	$	132.3		$	214.0		$	151.3

Deferred tax assets and deferred tax liabilities at December 31 consisted of:


	2016			2015
(dollars in millions)
Deferred tax assets
Employee benefits	$	184.2		$	180.1
Inventory		12.4			12.2
Receivables and rebates		31.7			29.6
Accrued expenses		259.8			165.2
Loss carryforwards and credits		77.7			81.4
Other		2.5			—

Gross deferred tax assets		568.3			468.5
Valuation allowance		(53.3	)		(51.1	)

		515.0			417.4
Deferred tax liabilities
Intangibles		346.2			338.8
Accelerated depreciation		16.9			16.3
Receivables and other		106.4			59.0

		469.5			414.1

	$	45.5		$	3.3

As discussed in Note 1 of the notes to consolidated financial statements, the company retrospectively adopted an accounting standard update early. This update requires all deferred tax assets and liabilities to be reported as non-current in the consolidated balance sheets. The adoption of this update had the following impact on the 2015 consolidated balance sheet amounts as previously reported: short-term deferred tax assets decreased by $123.9 million, deferred tax assets increased by $28.7 million, accrued expenses decreased by $1.1 million and deferred tax liabilities decreased by $94.1 million.

At December 31, 2016, the company had federal net operating loss carryforwards of $34.3 million, which expire between 2027 and 2036, state net operating loss carryforwards of $415.2 million, which expire between 2017 and 2037, foreign net operating loss carryforwards of $158.4 million, which expire between 2018 and 2027, and foreign net operating loss carryforwards of $24.5 million with an indefinite life. The company also had various tax credits of $11.5 million with an indefinite life and $12.3 million that expire between 2018 and 2033.

The company records valuation allowances to reduce its deferred tax assets to the amount that it believes is more likely than not to be realized. The company considers future taxable income and the periods over which it must be earned in assessing the need for valuation allowances. In the event the company determines it would not be able to realize all or part of its net deferred tax assets in the future, an adjustment to the deferred tax assets would be charged to expense in the period such determination was made. At December 31, 2016, the valuation allowance primarily related to state and foreign net operating loss carryforward and credits, and to certain other state deferred tax assets.

A reconciliation between the effective income tax rate and the federal statutory rate for the following years ended December 31 is:


	2016			2015			2014
Federal statutory rate		35	%		35	%		35	%
State taxes, net of federal benefit		1	%		4	%		2	%
Operations taxed at other than U.S. rate		(13	)%		24	%^(A)		(2	)%^(A)
Research and development tax credit		(1	)%		(2	)%		(1	)%
Other		(2	)%		—			—

		20	%		61	%		34	%

^(A)	Includes the tax effects of litigation charges, net, which consist primarily of product liability claims allocated to a low tax jurisdiction.

The company’s foreign tax incentives consist of incentive tax grants in Malaysia and Puerto Rico. The company’s grant in Malaysia expired during 2015 and the company’s grant in Puerto Rico will expire in 2028. The approximate dollar and per share effects of the Malaysian and Puerto Rican tax grants were as follows:


	2016		2015^(A)		2014^(A)
(dollars in millions, except per share amounts)
Tax benefit	$	92.2	$	2.3	$	7.0
Per share benefit	$	1.23	$	0.03	$	0.09

^(A)	Litigation charges, net, reduced the tax benefit recognized from the incentive tax grant in Puerto Rico.

A tax benefit from an uncertain tax position may be recognized only if it is more likely than not that the position is sustainable based on its technical merits. The tax benefit of a qualifying position is the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement with a taxing authority having full knowledge of all relevant information. A reconciliation of the gross amounts of unrecognized tax benefits, excluding interest and penalties, is as follows:


	2016			2015
(dollars in millions)
Balance, January 1	$	22.3		$	36.1
Additions related to prior year tax positions		0.7			2.9
Reductions related to prior year tax positions		(2.7	)		(4.8	)
Additions for tax positions of the current year		3.4			2.1
Settlements		(1.1	)		(12.4	)
Lapse of statutes of limitation		(1.1	)		(1.6	)

Balance, December 31	$	21.5		$	22.3

The company operates in multiple taxing jurisdictions and faces audits from various tax authorities regarding transfer pricing, the deductibility of certain expenses, intercompany transactions and other matters. As of December 31, 2016, the liability for unrecognized tax benefits related to federal, state and foreign taxes was $21.5 million (of which $18.4 million would impact the effective tax rate if recognized), plus $2.6 million of accrued interest. As of December 31, 2015, the liability for unrecognized tax benefits was $22.3 million plus $2.8 million of accrued interest. Interest and penalties associated with uncertain tax positions amounted to expense of $0.3 million in both 2016 and 2015, and a credit of $0.2 million in 2014.

The company is currently under examination in several tax jurisdictions and remains subject to examination until the statutes of limitation expire. Within specific countries, the company may be subject to audit by various tax authorities, and subsidiaries operating within the country may be subject to different statutes of limitation expiration dates. As of December 31, 2016, a summary of the tax years that remain subject to examination in the company’s major tax jurisdictions are:


United States – federal		2014 and forward
United States – states		2008 and forward
China		2008 and forward
Germany		2010 and forward
Japan		2012 and forward
Malaysia		2010 and forward
Puerto Rico		2012 and forward
United Kingdom		2015 and forward

In 2016 and 2014, the company’s income tax provision was reduced by $2.6 million and $10.9 million, respectively, as a result of the completion of certain U.S. Internal Revenue Service (“IRS”) examinations. Depending upon open tax examinations and/or the expiration of applicable statutes of limitation, the company believes that it is reasonably possible that the total amount of unrecognized tax benefits may decrease by up to $5.1 million within the next 12 months.

At December 31, 2016, the company did not provide for income taxes on the undistributed earnings of certain foreign operations of approximately $2.5 billion as it is the company’s intention to permanently reinvest these undistributed earnings outside of the United States. Determination of the amount of unrecognized deferred tax liability related to these permanently reinvested earnings is not practicable.