Income Taxes



		2012			2011			2010
Income before income taxes
U.S.		$	3,234		$	3,964		$	4,008
Foreign		5,070			4,870			4,224
		$	8,304		$	8,834		$	8,232
Provision for income taxes
Current:	U.S. Federal	$	911		$	611		$	932
	Foreign	940			882			728
	State	153			124			137
		2,004			1,617			1,797
Deferred:	U.S. Federal	154			789			78
	Foreign	(95		)	(88		)	18
	State	27			54			1
		86			755			97
		$	2,090		$	2,372		$	1,894
Tax rate reconciliation
U.S. Federal statutory tax rate		35.0		%	35.0		%	35.0		%
State income tax, net of U.S. Federal tax benefit		1.4			1.3			1.1
Lower taxes on foreign results		(6.9		)	(8.7		)	(9.4		)
Tax benefit related to tax court decision		(2.6		)	—			—
Acquisitions of PBG and PAS		—			—			(3.1		)
Other, net		(1.7		)	(0.8		)	(0.6		)
Annual tax rate		25.2		%	26.8		%	23.0		%
Deferred tax liabilities
Investments in noncontrolled affiliates		$	48		$	41
Debt guarantee of wholly owned subsidiary		828			828
Property, plant and equipment		2,424			2,466
Intangible assets other than nondeductible goodwill		4,388			4,297
Other		260			184
Gross deferred tax liabilities		7,948			7,816
Deferred tax assets
Net carryforwards		1,378			1,373
Stock-based compensation		378			429
Retiree medical benefits		411			504
Other employee-related benefits		672			695
Pension benefits		647			545
Deductible state tax and interest benefits		345			339
Long-term debt obligations acquired		164			223
Other		863			822
Gross deferred tax assets		4,858			4,930
Valuation allowances		(1,233		)	(1,264		)
Deferred tax assets, net		3,625			3,666
Net deferred tax liabilities		$	4,323		$	4,150



	2012			2011			2010
Deferred taxes included within:
Assets:
Prepaid expenses and other current assets	$	740		$	845
Liabilities:
Deferred income taxes	$	5,063		$	4,995

Analysis of valuation allowances
Balance, beginning of year	$	1,264		$	875		$	586
Provision	68			464			75
Other (deductions)/additions	(99		)	(75		)	214
Balance, end of year	$	1,233		$	1,264		$	875

For additional unaudited information on our income tax policies, including our reserves for income taxes, see “Our Critical Accounting Policies” in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Reserves

A number of years may elapse before a particular matter, for which we have established a reserve, is audited and finally resolved. The number of years with open tax audits varies depending on the tax jurisdiction. Our major taxing jurisdictions and the related open tax audits are as follows:


•	U.S. – during 2012, we received a favorable tax court decision related to the classification of financial instruments. We continue to dispute three matters related to the 2003-2007 audit cycle with the IRS Appeals Division. We are currently under audit for tax years 2008-2009;


•	Mexico – audits have been completed for all taxable years through 2005. We are currently under audit for 2006-2008;


•	United Kingdom – audits have been completed for all taxable years through 2009;


•	Canada – domestic audits have been substantially completed for all taxable years through 2008. International audits have been completed for all taxable years through 2005; and


•	Russia – audits have been substantially completed for all taxable years through 2008. We are currently under audit for 2009-2011.

While it is often difficult to predict the final outcome or the timing of resolution of any particular tax matter, we believe that our reserves reflect the probable outcome of known tax contingencies. We adjust these reserves, as well as the related interest, in light of changing facts and circumstances. Settlement of any particular issue would usually require the use of cash. Favorable resolution would be recognized as a reduction to our annual tax rate in the year of resolution. For further unaudited information on the impact of the resolution of open tax issues, see “Other Consolidated Results” in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

We believe that it is reasonably possible that our reserves for uncertain tax positions could decrease by approximately $1.5 billion within the next twelve months as a result of the completion of audits in various jurisdictions, including the potential settlement with the IRS for the taxable years 2003-2009.

As of December 29, 2012, the total gross amount of reserves for income taxes, reported in income taxes payable and other liabilities, was $2,425 million. Any prospective adjustments to these reserves will be recorded as an increase or decrease to our provision for income taxes and would impact our effective tax rate. In addition, we accrue interest related to reserves for income taxes in our provision for income taxes and any associated penalties are recorded in selling, general and administrative expenses. The gross amount of interest accrued, reported in other liabilities, was $670 million as of December 29, 2012, of which $10 million was recognized in 2012. The gross amount of interest accrued, reported in other liabilities, was $660 million as of December 31, 2011, of which $90 million was recognized in 2011.

A rollforward of our reserves for all federal, state and foreign tax jurisdictions, is as follows:



	2012			2011
Balance, beginning of year	$	2,167		$	2,022
Additions for tax positions related to the current year	275			233
Additions for tax positions from prior years	161			147
Reductions for tax positions from prior years	(172		)	(46		)
Settlement payments	(17		)	(156		)
Statute of limitations expiration	(3		)	(15		)
Translation and other	14			(18		)
Balance, end of year	$	2,425		$	2,167

Carryforwards and Allowances

Operating loss carryforwards totaling $10.4 billion at year-end 2012 are being carried forward in a number of foreign and state jurisdictions where we are permitted to use tax operating losses from prior periods to reduce future taxable income. These operating losses will expire as follows: $0.2 billion in 2013, $8.2 billion between 2014 and 2032 and $2.0 billion may be carried forward indefinitely. We establish valuation allowances for our deferred tax assets if, based on the available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

Undistributed International Earnings

As of December 29, 2012, we had approximately $32.2 billion of undistributed international earnings. We intend to continue to reinvest earnings outside the U.S. for the foreseeable future and, therefore, have not recognized any U.S. tax expense on these earnings.