Income taxes

Income before Income Taxes



	U.S.		Non-U.S.		Total
2014	$	2,684	$	1,190	$	3,874
2013	1,507		1,247		2,754
2012	319		1,616		1,935

Provision (Benefit) for Income Taxes



	U.S. Federal			Non-U.S.		U.S. State			Total
2014
Current	$	911		$	194	$	9		$	1,114
Deferred	(73		)	11		1			(61		)
Total	$	838		$	205	$	10		$	1,053

2013
Current	$	291		$	247	$	4		$	542
Deferred	17			33		—			50
Total	$	308		$	280	$	4		$	592

2012
Current	$	(108	)	$	156	$	(2	)	$	46
Deferred	65			65		—			130
Total	$	(43	)	$	221	$	(2	)	$	176

Principal reconciling items from income tax computed at the statutory federal rate follow:



	For Years Ended December 31,
	2014			2013			2012
Computed tax at statutory rate	$	1,356		$	964		$	677
Non-U.S. effective tax rates	(212		)	(156		)	(345		)
U.S. R&D tax credit	(59		)	(129		)	—
U.S. tax benefit for manufacturing	(51		)	(66		)	(158		)
Impact of changes to uncertain tax positions	3			(14		)	(88		)
Non-deductible expenses	6			13			42
Other	10			(20		)	48
Total provision for income taxes	$	1,053		$	592		$	176

The total provision for 2013 in the reconciliation above includes $79 million of discrete tax benefits primarily for the reinstatement of the U.S. R&D tax credit retroactive to 2012.

Included in the non-U.S. effective tax rates reconciling item are benefits from tax holidays of $44 million, $40 million and $51 million in 2014, 2013 and 2012, respectively. The tax benefits relate to our operations in Malaysia and the Philippines, and expire in 2018 and 2017, respectively. The terms of the Malaysia tax holiday are currently under governmental review as required for the end of the first five years of the holiday period. We do not expect any potential change in the holiday to have a material impact on the financial statements.

The total provision for 2012 includes $252 million of discrete tax benefits primarily for additional U.S. tax benefits for manufacturing related to the years 2000 through 2011 and, to a lesser extent, audit adjustments.

The primary components of deferred income tax assets and liabilities were as follows:



	December 31,
	2014			2013
Deferred income tax assets:
Deferred loss and tax credit carryforwards	$	289		$	345
Accrued expenses	248			265
Stock-based compensation	238			262
Inventories and related reserves	157			162
Retirement costs for defined benefit and retiree health care	96			101
Other	122			148
	1,150			1,283
Valuation allowance	(195		)	(219		)
	955			1,064
Deferred income tax liabilities:
Acquisition-related intangibles and fair-value adjustments	(688		)	(804		)
International earnings	(104		)	(121		)
Property, plant and equipment	(10		)	(57		)
Other	(37		)	(31		)
	(839		)	(1,013		)
Net deferred income tax asset	$	116		$	51

The deferred income tax assets and liabilities based on tax jurisdictions are presented on the Consolidated Balance Sheets as follows:



	December 31,
	2014			2013
Current deferred income tax assets	$	347		$	393
Noncurrent deferred income tax assets	172			207
Current deferred income tax liabilities	(4		)	(1		)
Noncurrent deferred income tax liabilities	(399		)	(548		)
Net deferred income tax asset	$	116		$	51

We make an ongoing assessment regarding the realization of U.S. and non-U.S. deferred tax assets. This assessment is based on our evaluation of relevant criteria, including the existence of deferred tax liabilities that can be used to absorb deferred tax assets, taxable income in prior carryback years and expectations for future taxable income. In 2014, we recognized a net decrease of $24 million in our valuation allowance, due to unutilized tax credits.

We have U.S. and non-U.S. tax loss carryforwards of approximately $108 million, none of which will expire before the year 2024.

A provision has been made for deferred taxes on undistributed earnings of non-U.S. subsidiaries to the extent that dividend payments from these subsidiaries are expected to result in additional tax liability. The remaining undistributed earnings of approximately $7.67 billion at December 31, 2014, have been indefinitely reinvested outside of the United States; therefore, no U.S. tax provision has been made for taxes due upon remittance of these earnings. The indefinitely reinvested earnings of our non-U.S. subsidiaries are primarily invested in working capital and property, plant and equipment. Determination of the amount of unrecognized deferred income tax liability is not practical because of the complexities associated with its hypothetical calculation.

Cash payments made for income taxes, net of refunds, were $1.104 billion, $569 million and $171 million for the years ended December 31, 2014, 2013 and 2012, respectively.

Uncertain tax positions

We operate in a number of tax jurisdictions, and our income tax returns are subject to examination by tax authorities in those jurisdictions who may challenge any item on these tax returns. Because the matters challenged by authorities are typically complex, their ultimate outcome is uncertain. Before any benefit can be recorded in the financial statements, we must determine that it is “more likely than not” that a tax position will be sustained by the appropriate tax authorities. We recognize accrued interest related to uncertain tax positions and penalties as components of OI&E.

The changes in the total amounts of uncertain tax positions are summarized as follows:



	2014			2013			2012
Balance, January 1	$	91		$	184		$	210
Additions based on tax positions related to the current year	10			7			12
Additions for tax positions of prior years	52			19			45
Reductions for tax positions of prior years	(9		)	(10		)	(92		)
Settlements with tax authorities	(36		)	(96		)	39
Expiration of the statute of limitations for assessing taxes	—			(13		)	(30		)
Balance, December 31	$	108		$	91		$	184

Interest income (expense) recognized in the year ended December 31	$	6		$	(10	)	$	32

Interest receivable (payable) as of December 31	$	—		$	(5	)	$	8

The liability for uncertain tax positions and interest payable are components of Deferred credits and other liabilities on our Consolidated Balance Sheets. Interest receivable is a component of Other assets on our Consolidated Balance Sheets.

The $108 million liability for uncertain tax positions as of December 31, 2014, is comprised of positions that, if recognized, would impact the tax rate. If these tax liabilities are ultimately realized, $56 million of existing deferred tax assets would also be realized, related to refunds from counterparty jurisdictions resulting from procedures for relief from double taxation. Regarding the $108 million liability:

•

About $76 million of the liability represents uncertain tax positions for tax years in jurisdictions in which audit assessments have not been made. Of this liability, $52 million relates to the cumulative effect of a tax depreciation-related method change. The balance of this liability is primarily related to transfer pricing issues for which procedures for relief from double taxation will mitigate the tax rate impact of any difference between the actual tax assessments and our estimates.

•

About $32 million of the liability represents audit assessments. Of the liability, $29 million is related to transfer pricing issues for which there are ongoing procedures for relief from double taxation. Settlement of the $29 million is subject to timely completion of the tax treaty processes and a significant portion of that liability may be settled within the next 12 months. Settlement will not have a significant tax rate impact, as the tax rates of the counterparty jurisdictions are similar.

All of the $91 million liability for uncertain tax positions as of December 31, 2013, is made up of positions that, if recognized, would impact the tax rate. If these tax liabilities are ultimately realized, $76 million of deferred tax assets would also be realized, primarily related to refunds from counterparty jurisdictions resulting from procedures for relief from double taxation.

As of December 31, 2014, the statute of limitations remains open for U.S. federal tax returns for 2010 and following years. Audit activities related to our U.S. federal tax returns through 2009 have been completed except for certain pending tax treaty procedures for relief from double taxation and the review of refunds claimed on amended returns for years prior to 2010. The procedures for relief from double taxation pertain to U.S. federal tax returns for the years 2004 through 2010.

In non-U.S. jurisdictions, the years open to audit represent the years still open under the statute of limitations. With respect to major jurisdictions outside the United States, our subsidiaries are no longer subject to income tax audits for years before 2007.