12. Income Taxes

The components of income before income taxes are as follows (in millions):

Income taxes are as follows (in millions):

The significant categories of temporary differences that gave rise to deferred tax assets and liabilities are as follows (tax effected in millions):

Tax loss and credit carryforwards of certain foreign subsidiaries for 2017 and 2016 were $137.6 million and $115.1 million, respectively. If unused, tax loss and credit carryforwards of certain foreign subsidiaries of $70.7 million will expire between 2018 and 2027 and $66.9 million can be carried forward indefinitely. U.S. foreign tax credit carryforwards for 2017 and 2016 were $186.2 million and $99.6 million, respectively. If unused, U.S. foreign tax credit carryforwards begin to expire in 2020. The domestic research and development tax credit carryforward for 2017 was $4.8 million. If unused, domestic research and development tax credit carryforwards will expire in 2037. The state tax loss carryforwards for 2017 were $0.4 million. If unused, state tax loss carryforwards will expire between 2022 and 2037.

On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act, or the Act. The Act, which is also commonly referred to as “U.S. Tax Reform,” significantly changes U.S. corporate income tax laws by, among other things, reducing the U.S. corporate income tax rate to 21% starting in 2018 and creating a modified territorial tax system with a one-time mandatory tax on previously deferred foreign earnings of U.S. subsidiaries. As a result of the Act, the Company recorded a provisional net expense of $153.3 million during the fourth quarter of 2017. This amount, which is included in tax expense, predominantly consists of three components: (i) a $163.4 million charge caused by the establishment of a valuation allowance on deferred tax assets due to the Act’s changes in the sourcing and calculation of foreign income, which thereby limited the expected utilization of foreign tax credit carryforwards, (ii) a $5.5 million benefit resulting from the remeasurement of the Company’s net deferred tax liabilities in the U.S. based on the new lower corporate income tax rate, and (iii) a non-recurring benefit of $4.6 million related to additional foreign tax credits (a result of the impact of a one-time mandatory repatriation on previously unremitted earnings of certain non-U.S. subsidiaries that are owned either directly or indirectly by the U.S. parent).

For U.S. foreign tax credit purposes, the Company incurred overall domestic losses in 2017 and 2016 which limited the Company’s ability to claim foreign tax credits. In future taxable years as domestic source income is generated, no less than 50% of such income will be reclassified as foreign source income as allowed and will increase the Company’s foreign tax credit limitation, thereby enabling the use of additional foreign tax credits. The Company believes it is more likely than not that $31.4 million of foreign tax credits, resulting from the overall domestic loss, will be utilized based on the Company’s current interpretation of the Act. As described below, the Company continues to analyze the Act and related information, and accordingly the Company may record additional provisional amounts or adjustments in future periods.

Although the $153.3 million provisional net expense represents what the Company believes is a reasonable estimate of the impact of the income tax effects of the Act on the Company’s Consolidated Financial Statements as of December 31, 2017, it should be considered provisional. Provisional items include, but are not limited to, foreign tax credits and associated valuation allowance, limitations on executive compensation, and the one-time tax on previously unremitted foreign earnings of U.S. subsidiaries. Additionally, the Company continues to analyze other information and regulatory guidance, and accordingly the Company may record additional provisional amounts or adjustments to provisional amounts in future periods. Any adjustments to these provisional amounts will be reported as a component of tax expense in the reporting period in which any such adjustments are determined, which will be no later than the fourth quarter of 2018.

The Company recognizes valuation allowances on deferred tax assets reported if, based on the weight of the evidence it is more likely than not that some or all of the deferred tax assets will not be realized. As of December 31, 2017 and 2016 the Company held valuation allowances against net deferred tax assets of certain subsidiaries, primarily related to tax loss carryforwards and U.S. foreign tax credits in the amount of $299.4 million and tax loss carryforwards of $115.4 million, respectively. The change in the Company’s valuation allowance during 2017 of $184.0 million was related to $183.7 million of net additions charged to income tax expense, primarily related to the valuation allowance established for U.S. foreign tax credits described above, and $0.3 million of currency translation adjustments recognized within other comprehensive income. The change in the Company’s valuation allowance during 2016 of $5.9 million was related to $5.6 million of net reductions charged to income tax expense and $0.3 million of currency translation adjustments recognized within other comprehensive income. The change in the Company’s valuation allowance during 2015 of $208.7 million was related to $205.6 million of net reductions charged to income tax expense, primarily related to the utilization of our deferred tax asset balance related to intercompany deferred interest expense, partially offset by increases in Venezuelan tax loss carryforwards, and $3.1 million of currency translation adjustments recognized within other comprehensive income.

As of December 31, 2017, the Company’s U.S. consolidated group had approximately $97.9 million of unremitted earnings that were permanently reinvested relating to certain foreign subsidiaries. In addition, as of December 31, 2017, Herbalife Ltd. had approximately $2.4 billion of permanently reinvested unremitted earnings relating to its operating subsidiaries. Since Herbalife Ltd.’s unremitted earnings have been permanently reinvested, deferred taxes were not provided on these unremitted earnings. Further, it is not practicable to determine the amount of unrecognized deferred taxes with respect to these unremitted earnings. If the Company were to remit these unremitted earnings then it would be subject to income tax on these remittances. Deferred taxes have been accrued for earnings that are not considered indefinitely reinvested. The deferred tax on the unremitted foreign earnings as of December 31, 2017 and 2016 was a deferred tax liability of $29.1 million (net of valuation allowance) and $5.5 million, respectively.

The applicable statutory income tax rate in the Cayman Islands was zero for Herbalife Ltd. for the years being reported. For purposes of the reconciliation between the provision for income taxes at the statutory rate and the provision for income taxes at the effective tax rate, a notional 35% tax rate is applied as follows:

As of December 31, 2017, the total amount of unrecognized tax benefits, including related interest and penalties was $62.0 million. If the total amount of unrecognized tax benefits was recognized, $44.4 million of unrecognized tax benefits, $9.9 million of interest and $1.5 million of penalties would impact the effective tax rate. As of December 31, 2016, the total amount of unrecognized tax benefits, including related interest and penalties was $62.0 million. If the total amount of unrecognized tax benefits was recognized, $44.8 million of unrecognized tax benefits, $9.4 million of interest and $2.1 million of penalties would impact the effective tax rate.

The Company accounts for the interest and penalties generated by tax contingencies as a component of income tax expense. During the year ended December 31, 2017, the Company recorded a decrease in interest and penalty expense related to uncertain tax positions of less than $0.1 million and $0.8 million, respectively. During the year ended December 31, 2016, the Company recorded an increase in interest and penalty expense related to uncertain tax positions of $2.7 million and $0.7 million, respectively. During the year ended December 31, 2015, the Company recorded an increase in interest and penalty expense related to uncertain tax positions of $2.0 million and $0.6 million, respectively. As of December 31, 2017, total amount of interest and penalties related to unrecognized tax benefits recognized in the statement of financial position were $9.9 million and $1.5 million, respectively. As of December 31, 2016, total amount of interest and penalties related to unrecognized tax benefits recognized in the statement of financial position were $9.4 million and $2.1 million, respectively. As of December 31, 2015, total amount of interest and penalties related to unrecognized tax benefits recognized in the statement of financial position were $7.1 million and $1.5 million, respectively.

The following changes occurred in the amount of unrecognized tax benefits during the years ended December 31, 2017, 2016, and 2015 (in millions):

The amount of income taxes the Company pays is subject to ongoing audits by taxing jurisdictions around the world. The Company’s estimate of the potential outcome of any uncertain tax position is subject to management’s assessment of relevant risks, facts, and circumstances existing at that time. The Company believes that it has adequately provided for these matters. However, the Company’s future results may include favorable or unfavorable adjustments to its estimates in the period the audits are resolved, which may impact the Company’s effective tax rate. As of December 31, 2017, the Company’s tax filings are generally subject to examination in major tax jurisdictions for years ending on or after December 31, 2012.

The Company believes that it is reasonably possible that the amount of unrecognized tax benefits could decrease by up to approximately $7.0 million within the next twelve months. Of this possible decrease, $0.7 million would be due to the settlement of audits or resolution of administrative or judicial proceedings. The remaining possible decrease of $6.3 million would be due to the expiration of statute of limitations in various jurisdictions.