Income Taxes

 

 

Income before provision for income taxes, classified by source of income, was as follows:

 

 

 

In millions		2011				2010				2009
U.S.		$	3,202.8			$	2,763.0			$	2,700.4
Outside the U.S.			4,809.4				4,237.3				3,786.6
Income before provision for income taxes		$	8,012.2			$	7,000.3			$	6,487.0

The provision for income taxes, classified by the timing and location of payment, was as follows:

 

 

 

In millions		2011				2010				2009
U.S. federal		$	1,173.4			$	1,127.1			$	792.0
U.S. state			165.2				161.1				152.1
Outside the U.S.			982.1				841.5				788.9
Current tax provision			2,320.7				2,129.7				1,733.0
U.S. federal			189.0				(66.8	)			186.9
U.S. state			8.6				13.8				8.6
Outside the U.S.			(9.2	)			(22.7	)			7.5
Deferred tax provision (benefit)			188.4				(75.7	)			203.0
Provision for income taxes		$	2,509.1			$	2,054.0			$	1,936.0

 

Net deferred tax liabilities consisted of:

 

 

 

In millions		December 31, 2011				2010
Property and equipment			$ 1,651.3			$	1,655.2
Other			541.7				489.8
Total deferred tax liabilities			2,193.0				2,145.0
Property and equipment			(355.4	)			(352.4	)
Employee benefit plans			(406.3	)			(356.4	)
Intangible assets			(256.2	)			(268.6	)
Deferred foreign tax credits			(173.9	)			(310.7	)
Capital loss carryforwards			(26.0	)			(37.5	)
Operating loss carryforwards			(71.1	)			(56.8	)
Indemnification liabilities			(33.4	)			(36.5	)
Other			(312.6	)			(284.0	)
Total deferred tax assets before valuation allowance			(1,634.9	)			(1,702.9	)
Valuation Allowance			102.0				104.7
Net deferred tax liabilities			660.1				546.8
Balance sheet presentation:
Deferred income taxes			1,344.1				1,332.4
Other assets-miscellaneous			(606.3	)			(590.4	)
Current assets-prepaid expenses and other current assets			(77.7	)			(195.2	)
Net deferred tax liabilities			$    660.1			$	546.8

The statutory U.S. federal income tax rate reconciles to the effective income tax rates as follows:

 

 

 

		2011				2010				2009
Statutory U.S. federal income tax rate			35.0	%			35.0	%			35.0	%
State income taxes, net of related federal income tax benefit			1.4				1.6				1.6
Benefits and taxes related to foreign operations			(4.7	)			(6.9	)			(6.3	)
Other, net			(0.4	)			(0.4	)			(0.5	)
Effective income tax rates			31.3	%			29.3	%			29.8	%

As of December 31, 2011 and 2010, the Company’s gross unrecognized tax benefits totaled $565.0 million and $572.6 million, respectively. After considering the deferred tax accounting impact, it is expected that about $420 million of the total as of December 31, 2011 would favorably affect the effective tax rate if resolved in the Company’s favor.

The following table presents a reconciliation of the beginning and ending amounts of unrecognized tax benefits:

 

 

 

In millions		2011				2010
Balance at January 1		$	572.6			$	492.0
Decreases for positions taken in prior years			(50.6	)			(27.1	)
Increases for positions taken in prior years			24.3				53.3
Increases for positions related to the current year			54.8				102.0
Settlements with taxing authorities			(14.4	)			(17.4	)
Lapsing of statutes of limitations			(21.7	)			(30.2	)
Balance at December 31(1)		$	565.0			$	572.6

 

(1)	Of this amount, $564.3 and $535.9 are included in long-term liabilities on the Consolidated balance sheet for 2011 and 2010, respectively. The remainder is included in deferred income taxes and income taxes payable on the Consolidated balance sheet.

In 2010, the Internal Revenue Service (IRS) concluded its field examination of the Company’s U.S. federal income tax returns for 2007 and 2008. In connection with this examination, the Company received notices of proposed adjustments from the IRS related to certain foreign tax credits of about $400 million, excluding interest and potential penalties. The Company disagrees with the IRS’ proposed adjustments. The Company has filed a protest with the IRS Appeals Office and expects resolution on this issue in 2012. The Company believes that the liabilities recorded related to this matter are appropriate and adequate and have been determined in accordance with ASC 740 – Income Taxes.

The Company is also under audit in multiple state tax jurisdictions where it is reasonably possible that the audits could be completed within 12 months. Due to the expected resolution of the 2007 and 2008 IRS Appeals process, the possible completion of the aforementioned audits and the expiration of the statute of limitations in multiple tax jurisdictions, it is reasonably possible that the total amount of unrecognized tax benefits could decrease within the next 12 months by $130 million to $140 million, of which $30 million to $40 million could favorably affect the effective tax rate.

In addition, the Company is currently under audit in multiple tax jurisdictions where completion of the tax audits is not expected within 12 months. However, it is reasonably possible that, as a result of audit progression within the next 12 months, there may be new information that causes the Company to reassess the total amount of unrecognized tax benefits recorded. While the Company cannot estimate the impact that new information may have on our unrecognized tax benefit balance, we believe that the liabilities that are recorded are appropriate and adequate as determined under ASC 740.

The Company is generally no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years prior to 2005.

The Company had $39.6 million and $44.4 million accrued for interest and penalties at December 31, 2011 and 2010, respectively. The Company recognized interest and penalties related to tax matters of $4.8 million in 2011, $29.0 million in 2010, and $1.5 million in 2009, which are included in the provision for income taxes.

Deferred U.S. income taxes have not been recorded for temporary differences related to investments in certain foreign subsidiaries and corporate joint ventures. These temporary differences were approximately $12.6 billion at December 31, 2011 and consisted primarily of undistributed earnings considered permanently invested in operations outside the U.S. Determination of the deferred income tax liability on these unremitted earnings is not practicable because such liability, if any, is dependent on circumstances existing if and when remittance occurs.