Income Taxes

The components of pretax income for the years ended December 31, 2014, 2013 and 2012 are as follows:



	Year Ended December 31,
	2014		2013		2012
	(In millions)
United States	$	173	$	594	$	605
International	3,358		2,872		2,479
	$	3,531	$	3,466	$	3,084

The provision for income taxes is comprised of the following:



	Year Ended December 31,
	2014			2013			2012
	(In millions)
Current:
Federal	$	492		$	455		$	327
State and local	20			(4		)	63
Foreign	165			190			120
	$	677		$	641		$	510
Deferred:
Federal	$	2,808		$	18		$	34
State and local	14			(22		)	(24		)
Foreign	(14		)	(27		)	(45		)
	2,808			(31		)	(35		)
	$	3,485		$	610		$	475

The following is a reconciliation of the difference between the actual provision for income taxes and the provision computed by applying the federal statutory rate of 35% for 2014, 2013 and 2012 to income before income taxes:



	Year Ended December 31,
	2014			2013			2012
	(In millions)
Provision at statutory rate	$	1,236		$	1,213		$	1,080
Permanent differences:
Prior year foreign earnings no longer considered indefinitely reinvested	2,991			—			—
Foreign income taxed at different rates	(709		)	(607		)	(617		)
Change in valuation allowance	(141		)	—			3
Stock-based compensation	42			33			(14		)
State taxes, net of federal benefit	34			(26		)	39
Research and other tax credits	(27		)	(43		)	1
Divested business	—			21			(41		)
Other	59			19			24
	$	3,485		$	610		$	475

Deferred tax assets and liabilities are recognized for the future tax consequences of differences between the carrying amounts of assets and liabilities and their respective tax bases using enacted tax rates in effect for the year in which the differences are expected to be reversed. Significant deferred tax assets and liabilities consist of the following:



	December 31,
	2014			2013
	(In millions)
Deferred tax assets:
Net operating loss, capital loss and credits	$	172		$	310
Accruals and allowances	371			341
Stock-based compensation	161			145
Net unrealized losses	19			5
Net deferred tax assets	723			801
Valuation allowance	(49		)	(186		)
	$	674		$	615
Deferred tax liabilities:
Unremitted foreign earnings	$	(2,995	)	$	(246	)
Acquisition-related intangibles	(160		)	(296		)
Depreciation and amortization	(398		)	(351		)
Available-for-sale securities	(285		)	(332		)
Other	(24		)	(28		)
	(3,862		)	(1,253		)
	$	(3,188	)	$	(638	)

As of December 31, 2014, our federal, state and foreign net operating loss carryforwards for income tax purposes were approximately $61 million, $627 million and $149 million, respectively. The federal and state net operating loss carryforwards are subject to various limitations under Section 382 of the Internal Revenue Code and applicable state tax laws. If not utilized, the federal net operating loss carryforwards will begin to expire in 2016 and the state net operating loss carryforwards will begin to expire in 2015. The carryforward periods on our foreign net operating loss carryforwards are as follows: $88 million do not expire, $39 million are subject to valuation allowance and begin to expire in 2018, and the remaining $22 million are primarily subject to expiration beginning in 2025. As of December 31, 2014, our federal and state tax credit carryforwards for income tax purposes were approximately $2 million and $67 million, respectively. If not utilized, the federal tax credit carryforwards will begin to expire in 2024 and most of the state tax credits carry forward indefinitely.

As of December 31, 2014 and 2013, our federal capital loss carryover amounted to $116 million and $403 million, respectively. The decrease in the capital loss carryover is due to the utilization of the carryover as a result of an intercompany transaction involving the sale of appreciated securities to a non-U.S. wholly owned subsidiary during the fourth quarter of 2014. The remaining capital loss carryover is expected to be utilized before expiration in 2019. As such, the valuation allowance against our capital loss carryover has been released.

At December 31, 2014 and 2013, we maintained a valuation allowance with respect to certain of our deferred tax assets relating primarily to operating losses in certain states and various non-U.S. jurisdictions that we believe are not likely to be realized.

During the first quarter of 2014, we altered our capital allocation strategy, which included changing our intent with regard to the indefinite reinvestment of foreign earnings from certain of our foreign subsidiaries for 2013 and prior years. As a result, we provided for U.S. income and applicable foreign withholding taxes on $9.0 billion of undistributed foreign earnings for 2013 and prior years, and recorded a deferred tax liability of approximately $3.0 billion. Based on December 31, 2014 foreign exchange rates, these amounts have been revalued to $8.2 billion of undistributed foreign earnings and $2.8 billion of deferred tax liability. The impact of this change is reflected in other comprehensive income. The deferred tax liability is included in accrued expenses and other current liabilities on our consolidated balance sheet, which totals $2.8 billion at December 31, 2014 and $204 million at December 31, 2013. We have not repatriated any of these earnings and as such no related taxes have become payable.

We have not provided for U.S. federal or foreign income taxes, including withholding taxes on $7.9 billion of our non-U.S. subsidiaries' undistributed earnings as of December 31, 2014. We intend to indefinitely reinvest the $7.9 billion of our non-U.S. subsidiaries’ undistributed earnings in our international operations. Accordingly, we currently have no plans to repatriate those funds. As such, we do not know the time or manner in which we would repatriate those funds. Because the time or manner of repatriation is uncertain, we cannot determine the impact of local taxes, withholding taxes and foreign tax credits associated with the future repatriation of such earnings and therefore cannot quantify the tax liability. In cases where we intend to repatriate a portion of our foreign subsidiaries’ undistributed earnings, we provide U.S. and applicable foreign taxes on such earnings and such taxes are included in our deferred taxes or tax payable liabilities depending upon the planned timing and manner of such repatriation.

On a regular basis, we develop cash forecasts to estimate our cash needs internationally and domestically. We consider projected cash needs for, among other things, investments in our existing businesses, potential acquisitions and capital transactions, including repurchases of our common stock and debt repayments. We estimate the amount of cash available or needed in the jurisdictions where these investments are expected, as well as our ability to generate cash in those jurisdictions and our access to capital markets. This analysis enables us to conclude whether or not we will indefinitely reinvest the current period’s foreign earnings. We benefit from tax rulings concluded in several different jurisdictions, most significantly Switzerland, Singapore and Luxembourg. These rulings provide for significantly lower rates of taxation on certain classes of income and require various thresholds of investment and employment in those jurisdictions. These rulings resulted in a tax savings of $555 million and $540 million in 2014 and 2013, respectively, which increased earnings per share (diluted) by approximately $0.44 and $0.41 in 2014 and 2013, respectively. These tax rulings are currently in effect and expire over periods ranging from 2020 to the duration of business operations in the respective jurisdictions. We evaluate compliance with our tax ruling agreements annually.

The following table reflects changes in unrecognized tax benefits since January 1, 2012:



	2014			2013			2012
	(In millions)
Gross amounts of unrecognized tax benefits as of the beginning of the period	$	334		$	340		$	286
Increases related to prior period tax positions	35			104			60
Decreases related to prior period tax positions	(18		)	(143		)	(24		)
Increases related to current period tax positions	61			37			19
Settlements	(16		)	(4		)	(1		)
Gross amounts of unrecognized tax benefits as of the end of the period	$	396		$	334		$	340

During 2014 we increased our reserves by $96 million for various issues that related to tax examination risks assessed during the year. In addition, we reduced our reserves by $34 million based on audit findings and settlement of multiple uncertain tax positions. If the remaining balance of unrecognized tax benefits were realized in a future period, it would result in a tax benefit of $314 million. As of December 31, 2014, our liabilities for unrecognized tax benefits were included in accrued expenses and other current liabilities and deferred and other tax liabilities, net.

We recognize interest and/or penalties related to uncertain tax positions in income tax expense. In 2014, $2 million was included in tax expense for interest and penalties. The amount of interest and penalties accrued as of December 31, 2014 and 2013 was approximately $71 million and $77 million, respectively.

We are subject to both direct and indirect taxation in the U.S. and various states and foreign jurisdictions. We are under examination by certain tax authorities for the 2003 to 2012 tax years. We believe that adequate amounts have been reserved for any adjustments that may ultimately result from these or other examinations. The material jurisdictions where we are subject to potential examination by tax authorities for tax years after 2002 include, among others, the U.S. (Federal and California), France, Germany, Italy, Korea, Israel, Switzerland, Singapore, United Kingdom and Canada.

Although the timing of the resolution and/or closure of audits is highly uncertain, it is reasonably possible that the balance of gross unrecognized tax benefits could significantly change in the next 12 months. However, given the number of years remaining subject to examination and the number of matters being examined, we are unable to estimate the full range of possible adjustments to the balance of gross unrecognized tax benefits.