Income Taxes

The domestic and foreign components of our income before income taxes and noncontrolling interests are as follows:



	Year Ended December 31,
	2014		2013		2012
	(Millions)
U.S. income before income taxes	$	130	$	150	$	166
Foreign income before income taxes	271		194		157
Income before income taxes and noncontrolling interests	$	401	$	344	$	323

Following is a comparative analysis of the components of income tax expense:



	Year Ended December 31,
	2014			2013			2012
	(Millions)
Current —
U.S. federal	$	38		$	25		$	—
State and local	3			4			4
Foreign	92			81			89
	133			110			93
Deferred —
U.S. federal	2			(4		)	(25		)
State and local	7			2			(20		)
Foreign	(11		)	14			(29		)
	(2		)	12			(74		)
Income tax expense	$	131		$	122		$	19

Following is a reconciliation of income taxes computed at the statutory U.S. federal income tax rate (35 percent for all years presented) to the income tax expense reflected in the statements of income:



	Year Ended December 31,
	2014			2013			2012
	(Millions)
Income tax expense computed at the statutory U.S. federal income tax rate	$	140		$	120		$	113
Increases (reductions) in income tax expense resulting from:
Foreign income taxed at different rates	(21		)	(21		)	(21		)
Taxes on repatriation of dividends	4			9			8
Remeasurement of estimated tax on unremitted earnings	—			(17		)	—
State and local taxes on income, net of U.S. federal income tax benefit	8			6			4
Changes in valuation allowance for tax loss carryforwards and credits	12			27			(91		)
Foreign tax holidays	(6		)	(5		)	(5		)
Investment and R&D tax credits	(10		)	(8		)	(1		)
Foreign earnings subject to U.S. federal income tax	7			5			23
Adjustment of prior years taxes	(2		)	(1		)	(5		)
Impact of tax law changes	—			(3		)	(1		)
Tax contingencies	—			6			(6		)
Other	(1		)	4			1
Income tax expense	$	131		$	122		$	19

The components of our net deferred tax assets were as follows:



	Year Ended December 31,
	2014			2013
	(Millions)
Deferred tax assets —
Tax loss carryforwards:
U.S. federal	$	—		$	—
State	15			23
Foreign	75			78
Tax credit benefits	86			88
Postretirement benefits other than pensions	55			43
Pensions	56			36
Bad debts	2			1
Sales allowances	7			6
Payroll and other accruals	155			132
Valuation allowance	(139		)	(135		)
Total deferred tax assets	312			272
Deferred tax liabilities —
Tax over book depreciation	51			56
Other	59			51
Total deferred tax liabilities	110			107
Net deferred tax assets	$	202		$	165

State tax loss carryforwards have been presented net of uncertain tax positions that if realized, would reduce tax loss carryforwards in 2014 and 2013 by $6 million and $4 million, respectively. Additionally, foreign tax loss carryforwards, have been presented net of uncertain tax positions that if realized, would reduce tax loss carryforwards in 2014 and 2013 by $12 million and $6 million, respectively.

Following is a reconciliation of deferred taxes to the deferred taxes shown in the balance sheet:



	Year Ended December 31,
	2014			2013
	(Millions)
Balance Sheet:
Current portion — deferred tax asset	$	81		$	71
Non-current portion — deferred tax asset	143			125
Current portion — deferred tax liability shown in other current liabilities	(4		)	(3		)
Non-current portion — deferred tax liability	(18		)	(28		)
Net deferred tax assets	$	202		$	165

As a result of the valuation allowances recorded for $139 million and $135 million at December 31, 2014 and 2013, respectively, we have potential tax assets that were not recognized on our balance sheet. These unrecognized tax assets resulted primarily from foreign tax loss carryforwards, foreign investment tax credits, foreign research and development credits and U.S. state net operating losses that are available to reduce future tax liabilities.

We reported income tax expense of $131 million, $122 million and $19 million in the years ended 2014, 2013 and 2012, respectively. The tax expense recorded in 2014 includes a net tax benefit of $11 million for prior year tax adjustments primarily relating to changes to uncertain tax positions and prior year income tax estimates. The tax expense recorded in 2013 differs from the expense that would be recorded using a U.S. Federal statutory rate of 35 percent primarily due to the impact of recording a valuation allowance against a tax benefit for restructuring activities in Spain and Belgium and U.S. taxes on repatriation of dividends, partially offset by tax adjustments related to recognizing a U.S. tax benefit for foreign taxes and a favorable mix of income generated in low tax rate jurisdictions. The tax expense recorded in 2012 included the impact of the U.S. 2012 valuation allowance release and income generated in lower tax rate jurisdictions, partially offset by the impact of recording a valuation allowance against the tax benefit for tax credits and losses in certain foreign jurisdictions.

In 2012, we reversed the tax valuation allowance against our net deferred tax assets in the U.S. based on operating improvements we had made, the outlook for light and commercial vehicle production in the U.S. and the positive impact this should have on our U.S. operations. We have fully utilized our federal net operating loss ("NOL") as of June 30, 2014. The state NOLs expire in various tax years through 2032.

Valuation allowances have been established in certain foreign jurisdictions for deferred tax assets based on a “more likely than not” threshold. The ability to realize deferred tax assets depends on our ability to generate sufficient taxable income within the carryforward periods provided for in the tax law for each tax jurisdiction. We have considered the following possible sources of taxable income when assessing the realization of our deferred tax assets:


•	Future reversals of existing taxable temporary differences;


•	Taxable income or loss, based on recent results, exclusive of reversing temporary differences and carryforwards;


•	Tax-planning strategies; and


•	Taxable income in prior carryback years if carryback is permitted under the relevant tax law.

In 2012, after considering all available evidence and all possible sources of taxable income, we recorded a $19 million tax valuation allowance in Spain for tax credits that may not be utilized due to tax losses in Spain.

The valuation allowances recorded against deferred tax assets generated by taxable losses in Spain and certain other foreign jurisdictions will impact our provision for income taxes until the valuation allowances are released. Our provision for income taxes will include no tax benefit for losses incurred and no tax expense with respect to income generated in these jurisdictions until the respective valuation allowance is eliminated.

We do not provide for U.S. income taxes on unremitted earnings of foreign subsidiaries, except for the earnings of certain of our China operations, as our present intention is to reinvest the unremitted earnings in our foreign operations. Unremitted earnings of foreign subsidiaries were approximately $737 million at December 31, 2014. We estimated that the amount of U.S. and foreign income taxes that would be accrued or paid upon remittance of the assets that represent those unremitted earnings was $121 million. The estimated U.S. and foreign income taxes on unremitted earnings may be impacted in the future if we are unable to claim a U.S. foreign tax credit.

We have tax sharing agreements with our former affiliates that allocate tax liabilities for periods prior to year 2000 and establish indemnity rights on certain tax issues.

U.S. GAAP provides that a tax benefit from an uncertain tax position may be recognized when it is “more likely than not” that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits.

A reconciliation of our uncertain tax positions is as follows:



	2014			2013			2012
	(Millions)
Uncertain tax positions —
Balance January 1	$	115		$	107		$	119
Gross increases in tax positions in current period	8			15			13
Gross increases in tax positions in prior period	5			—			1
Gross decreases in tax positions in prior period	(5		)	(1		)	(12		)
Gross decreases — settlements	(2		)	—			(5		)
Gross decreases — statute of limitations expired	(7		)	(6		)	(9		)
Balance December 31	$	114		$	115		$	107

Included in the balance of uncertain tax positions were $101 million in 2014, $107 million in 2013, $101 million in 2012, of tax benefits, that if recognized, would affect the effective tax rate. We recognize accrued interest and penalties related to unrecognized tax benefits as income tax expense. Penalties of less than $1 million were accrued in 2014, 2013 and 2012. Additionally, we accrued interest income related to uncertain tax positions of less than $1 million in 2014, accrued interest expense of $2 million in 2013, and interest income of $2 million in 2012. Our liability for penalties was $2 million at December 31, 2014, $2 million at December 31, 2013 and $3 million at December 31, 2012, respectively, and our liability for interest was $6 million, $7 million, and $5 million at December 31, 2014, 2013 and 2012, respectively.

Our uncertain tax position at December 31, 2014 and 2013 included exposures relating to the disallowance of deductions, global transfer pricing and various other issues. We believe it is reasonably possible that a decrease of up to $30 million in unrecognized tax benefits related to the expiration of foreign statute of limitations and the conclusion of income tax examinations may occur within the coming year.

We are subject to taxation in the U.S. and various state and foreign jurisdictions. As of December 31, 2014, our tax years open to examination in primary jurisdictions are as follows:



	Open To Tax Year
United States	2000
China	2004
Spain	2003
Canada	2011
Brazil	2010
Mexico	2009
Belgium	2012
Germany	2010
United Kingdom	2012