Income Taxes

Selected income tax data from continuing operations (in millions):



	2012		2011		2010
Components of income before income taxes:
United States	$	469.6	$	364.3	$	144.9
Non-United States	496.3		503.3		399.3
Total	$	965.9	$	867.6	$	544.2



Components of the income tax provision:
Current:
United States	$	71.3	$	51.0		$	9.7
Non-United States	72.3		75.0			36.7
State and local	3.1		(2.0		)	(0.1		)
Total current	146.7		124.0			46.3
Deferred:
United States	76.8		46.6			41.2
Non-United States	0.4		(5.2		)	13.1
State and local	5.0		5.1			3.2
Total deferred	82.2		46.5			57.5
Income tax provision	$	228.9	$	170.5		$	103.8

Total income taxes paid	$	167.5	$	118.6		$	100.7

During 2012, we recognized net discrete tax benefits of $2.1 million primarily related to the favorable resolution of worldwide tax matters.

During 2011, we recognized net discrete tax benefits of $25.0 million related to the favorable resolution of worldwide tax matters and the retroactive extension of the U.S. federal research credit.

During 2010, we recognized discrete tax benefits of $27.2 million primarily related to the favorable resolution of tax matters, partially offset by discrete tax expenses of $9.6 million primarily related to the impact of a change in Mexican tax law and interest related to unrecognized tax benefits.

Effective Tax Rate Reconciliation

The reconciliation between the U.S. federal statutory rate and our effective tax rate was:



	2012		2011		2010
Statutory tax rate	35.0	%	35.0	%	35.0	%
State and local income taxes	0.8		0.7		0.3
Non-United States taxes	(10.3	)	(12.7	)	(12.8	)
Foreign tax credit utilization	0.4		0.9		1.3
Employee stock ownership plan benefit	(0.3	)	(0.3	)	(0.4	)
Change in valuation allowances	(0.2	)	0.8		(3.2	)
Domestic manufacturing deduction	(1.1	)	(0.8	)	(0.2	)
Resolution of prior period tax matters	(0.6	)	(2.9	)	(4.1	)
Other	—		(1.0	)	3.2
Effective income tax rate	23.7	%	19.7	%	19.1	%

We operate in certain non-U.S. tax jurisdictions under various government sponsored tax incentive programs, which expire during 2016 through 2019 and may be extended if certain additional requirements are met. The tax incentive programs reduced our effective income tax rate by 4.3, 5.0 and 5.9 percentage points in 2012, 2011 and 2010, respectively.

Deferred Taxes

The tax effects of temporary differences that give rise to our net deferred income tax assets and liabilities were (in millions):



	2012			2011
Current deferred income tax assets:
Compensation and benefits	$	28.7		$	26.1
Product warranty costs	14.3			14.1
Inventory	58.4			57.3
Allowance for doubtful accounts	15.6			15.2
Deferred credits	9.5			9.4
Returns, rebates and incentives	47.5			44.3
Self-insurance reserves	2.7			2.2
Restructuring reserves	2.4			1.1
Net operating loss carryforwards	3.7			1.6
U.S. federal tax credit carryforwards	—			8.4
State tax credit carryforwards	0.9			—
Other — net	24.9			19.9
Current deferred income tax assets	208.6			199.6
Long-term deferred income tax assets (liabilities):
Retirement benefits	$	369.3		$	335.4
Property	(90.3		)	(80.3		)
Intangible assets	(34.1		)	(28.9		)
Environmental reserves	13.7			11.9
Share-based compensation	40.1			33.6
Self-insurance reserves	6.2			5.7
Deferred gains	3.3			3.8
Net operating loss carryforwards	38.5			41.6
Capital loss carryforwards	17.2			18.3
U.S. federal tax credit carryforwards	1.5			1.5
State tax credit carryforwards	3.4			3.5
Other — net	14.1			22.9
Subtotal	382.9			369.0
Valuation allowance	(31.8		)	(32.8		)
Net long-term deferred income tax assets	351.1			336.2
Total deferred income tax assets	$	559.7		$	535.8

Total deferred tax assets were $715.9 million at September 30, 2012 and $682.8 million at September 30, 2011. Total deferred tax liabilities were $124.4 million at September 30, 2012 and $114.2 million at September 30, 2011.

We have not provided U.S. deferred taxes for $2,081.0 million of undistributed earnings of the Company’s subsidiaries, since these earnings have been, and under current plans will continue to be, permanently reinvested outside the U.S. It is not practicable to estimate the amount of additional taxes that may be payable upon distribution.

We believe it is more likely than not that we will realize current and long-term deferred tax assets through the reduction of future taxable income, other than for the deferred tax assets reflected below. Significant factors we considered in determining the probability of the realization of the deferred tax assets include our historical operating results and expected future earnings.

Tax attributes and related valuation allowances at September 30, 2012 are (in millions):



	Tax Benefit		Valuation		Carryforward Period
Tax Attribute to be Carried Forward	Amount		Allowance		Ends
Non-United States net operating loss carryforward	$	7.2	$	5.3	2013-2022
Non-United States net operating loss carryforward	12.4		6.8		Indefinite
Non-United States capital loss carryforward	17.2		17.2		Indefinite
United States net operating loss carryforward	7.0		—		2019-2027
United States tax credit carryforward	1.5		—		2018-2027
State and local net operating loss carryforward	15.6		0.7		2012-2031
State tax credit carryforward	4.3		—		2015-2026
Subtotal — tax carryforwards	65.2		30.0
Other deferred tax assets	1.8		1.8		Indefinite
Total	$	67.0	$	31.8

During 2012, there was no material change in the valuation allowance. During 2011, the valuation allowance increased $6.1 million primarily due to the utilization of a non-U.S. capital loss carryforward.

Unrecognized Tax Benefits

We operate in numerous taxing jurisdictions and are subject to regular examinations by various U.S. federal, state and non-U.S. jurisdictions for various tax periods. Additionally, we have retained tax liabilities and the rights to tax refunds in connection with various divestitures of businesses in prior years. Our income tax positions are based on research and interpretations of the income tax laws and rulings in each of the jurisdictions in which we do business. Due to the subjectivity of interpretations of laws and rulings in each jurisdiction, the differences and interplay in tax laws between those jurisdictions as well as the inherent uncertainty in estimating the final resolution of complex tax audit matters, our estimates of income tax liabilities may differ from actual payments or assessments.

A reconciliation of our gross unrecognized tax benefits, excluding interest and penalties, is as follows (in millions):



	2012			2011			2010
Gross unrecognized tax benefits balance at beginning of year	$	75.1		$	66.3		$	116.7
Additions based on tax positions related to the current year	—			22.3			6.3
Additions based on tax positions related to prior years	3.3			9.3			1.0
Reductions based on tax positions related to prior years	—			(0.6		)	(12.0		)
Reductions related to settlements with taxing authorities	(6.3		)	(18.5		)	(44.0		)
Reductions related to lapses of statute of limitations	(2.4		)	(3.0		)	(3.7		)
Effect of foreign currency translation	0.6			(0.7		)	2.0
Gross unrecognized tax benefits balance at end of year	70.3			75.1			66.3
Offsetting tax benefits	(47.0		)	(44.9		)	(51.1		)
Net unrecognized tax benefits	$	23.3		$	30.2		$	15.2

The amount of gross unrecognized tax benefits that would reduce our effective tax rate if recognized was $70.3 million ($23.3 million net of offsetting tax benefits) as of September 30, 2012, $75.1 million ($30.2 million net of offsetting tax benefits) as of September 30, 2011 and $57.5 million ($9.5 million net of offsetting tax benefits) as of September 30, 2010. Offsetting tax benefits primarily consist of tax receivables that were recorded in other assets and foreign tax credit items that were recorded in deferred income taxes.

During 2012, there was no material change in the amount of gross unrecognized tax benefits.

During the next 12 months, we believe it is reasonably possible that the amount of gross unrecognized tax benefits could be reduced by up to $1.2 million and the amount of offsetting tax benefits could be reduced by up to $0.8 million as a result of the resolution of worldwide tax matters and the lapses of statutes of limitations.

We recognize interest and penalties related to income taxes in income tax expense. Benefits (expense) recognized were $(3.1) million, $9.7 million, and $0.9 million during 2012, 2011 and 2010, respectively. Accrued interest and penalties were $20.1 million and $16.9 million at September 30, 2012 and 2011, respectively.

We conduct business globally and are routinely audited by the various tax jurisdictions in which we operate. We are no longer subject to U.S. federal income tax examinations for years before 2009 and are no longer subject to state, local and non-U.S. income tax examinations for years before 2003.