Provision for Income Taxes

The components of income from consolidated operations before income taxes and the related provision for income taxes for 2013, 2012, and 2011 are as follows:

Income Taxes—Consolidated Operations



(In millions)	2013			2012			2011
Income (loss) before income taxes:
Domestic	$	141.4		$	(170.3	)	$	107.7
Foreign	219.2			149.7			199.3
Total	$	360.6		$	(20.6	)	$	307.0
Benefit from (provision for) income taxes:
Federal—current	$	1.4		$	(51.2	)	$	16.7
Federal—deferred	(73.1		)	82.0			(49.3		)
State and local—current	(0.7		)	(4.4		)	(2.3		)
State and local—deferred	38.2			70.2			—
Foreign—current	(83.5		)	(43.1		)	(52.5		)
Foreign—deferred	14.8			8.1			(0.5		)
Total	$	(102.9	)	$	61.6		$	(87.9	)

The preceding allocation of income between jurisdictions does not reflect $25.9 million, $22.1 million, and $30.1 million of domestic income resulting from repatriated earnings in 2013, 2012, and 2011, respectively.

The difference between the provision for income taxes at the U.S. federal income tax rate of 35% and Grace's overall income tax provision is summarized as follows:

Income Tax Provision Analysis



(In millions)	2013			2012			2011
Tax benefit (provision) at U.S. federal income tax rate	$	(126.2	)	$	7.2		$	(107.4	)
Change in benefit (provision) resulting from:
Release of state valuation allowance	24.4			44.0			—
Effect of tax rates in foreign jurisdictions	16.6			14.9			17.6
Benefits from domestic production activities	—			14.0			0.9
Nontaxable income/non-deductible expenses	(9.7		)	(8.1		)	(7.3		)
U.S. taxes on repatriated foreign earnings	3.7			(2.2		)	(1.1		)
State and local income taxes, net of federal income tax	(0.7		)	0.1			(1.5		)
Adjustments to uncertain tax positions and other items	(11.0		)	(8.3		)	10.9
Benefit from (provision for) income taxes	$	(102.9	)	$	61.6		$	(87.9	)

Deferred Tax Assets and Liabilities

At December 31, 2013 and 2012, the tax attributes giving rise to deferred tax assets and liabilities consisted of the following items:

Deferred Tax Analysis



(In millions)	2013			2012
Deferred tax assets:
Liability for asbestos-related litigation	$	657.1		$	717.5
Federal tax credit carryforwards	16.9			2.4
Foreign net operating loss carryforwards	18.0			22.7
Deferred state taxes	90.3			88.4
Liability for environmental remediation	47.1			49.2
Other postretirement benefits	18.2			22.9
Pension liabilities	96.7			133.1
Reserves and allowances	60.4			51.6
Research and development	32.6			34.0
Accrued interest on pre-petition debt	66.7			121.9
Other	16.3			20.8
Total deferred tax assets	$	1,120.3		$	1,264.5
Deferred tax liabilities:
Asbestos-related insurance receivable	$	(175.0	)	$	(175.0	)
Pension assets	(3.7		)	(14.9		)
Properties and equipment	(30.3		)	(35.3		)
Other	(7.3		)	(14.7		)
Total deferred tax liabilities	$	(216.3	)	$	(239.9	)
Valuation allowance:
Deferred state taxes	$	(13.6	)	$	(40.3	)
Federal credits	(4.4		)	—
Foreign net operating loss carryforwards	(0.3		)	(0.5		)
Total valuation allowance	(18.3		)	(40.8		)
Net deferred tax assets	$	885.7		$	983.8

U.S. Federal deferred tax assets decreased year over year by $123.8 million. The $98.1 million reduction in net deferred tax assets was primarily the result of Grace's ability to accelerate the deductibility of certain emergence deductions, including the utilization of a qualified settlement fund. This overall reduction was partially offset by an increase in state deferred tax assets, mostly the result of a valuation allowance release.

Grace has recorded a valuation allowance to reduce its net deferred tax assets to the amount that is more likely than not to be realized. Grace has considered forecasted earnings, recent past and future taxable income, the mix of earnings in the jurisdictions in which it operates and prudent and feasible tax planning strategies in determining the need for these valuation allowances. The valuation allowance decreased $22.5 million from December 31, 2012, to December 31, 2013. In the 2013 fourth quarter, Grace determined that it is more likely than not that its deductions generated at emergence will be used before their expiration. Accordingly, Grace recorded a $24.4 million release of its valuation allowance on its state deferred tax assets. Further decreases in Grace's deferred tax assets resulted from the utilization and expiration of state net operating losses ("NOLs") in the current year, and the reduction of NOLs resulting from prior-year adjustments to taxable income. These decreases were partially offset by the recording of valuation allowances on deferred tax assets associated with certain U.S. federal foreign tax credits.

The realization of deferred tax assets is dependent on the generation of sufficient taxable income in the appropriate tax jurisdictions. Although realization is not assured, Grace believes it is more likely than not that the remaining deferred tax assets will be realized. If Grace were to determine that it would not be able to realize a portion of its net deferred tax assets in the future, for which there is currently no valuation allowance, an adjustment to the net deferred tax assets would be charged to earnings in the period such determination was made. Conversely, if Grace were to make a determination that it is more likely than not that deferred tax assets, for which there is currently a valuation allowance, would be realized, the related valuation allowance would be reduced and a benefit to earnings would be recorded.

The U.S. Federal tax credit carryforwards at December 31, 2013, were $65.2 million. Grace has recorded a valuation allowance of $4.4 million against the credit carryforwards because they are expected to expire unused by 2018 while Grace continues to be in an NOL position. Grace expects to use $52.4 million of the credits that would otherwise expire in the years 2019 through 2028, as well as the remaining $8.4 million, which do not expire. In addition, as a result of certain realization requirements, the table of deferred tax assets and liabilities shown above does not include certain deferred tax assets as of December 31, 2013 and 2012, that arose directly from tax deductions related to equity compensation in excess of compensation recognized for financial reporting. Equity will be increased by $57.7 million if and when such deferred tax assets are ultimately realized.

U.S. Federal Net Operating Losses

At emergence from bankruptcy, Grace generated approximately $670 million in U.S. Federal net operating losses, which were previously recorded as deferred tax assets for temporary differences, that will be available to reduce U.S. Federal taxable income in 2014 and future years. In addition, Grace expects to receive a U.S. Federal income tax deduction of $490 million upon settlement of the warrant held by one of the asbestos trusts and $1,580 million upon payment of deferred payment obligations. Grace expects to carryforward most of its NOLs. Under U.S. Federal income tax law, a corporation is generally permitted to carryforward NOLs for a 20-year period for deduction against future taxable income. Grace believes that it will generate sufficient domestic taxable income to use all available future tax deductions prior to expiration. Grace has generally not paid U.S. Federal income taxes in cash in recent years since available tax deductions and credits have fully offset U.S. taxable income.

Unrepatriated Foreign Earnings

Grace has not provided for U.S. federal, state and foreign deferred income taxes on $1,126.5 million of undistributed earnings of foreign subsidiaries. Grace expects that these earnings will be permanently reinvested by such subsidiaries except in certain instances where repatriation attributable to current earnings results in minimal or no U.S. tax consequences. The unrecorded deferred tax liability associated with these earnings is $149.7 million. Since 2001, Grace has repatriated cash and promissory notes from foreign subsidiaries to support its Chapter 11 funding requirements. Grace repatriated earnings of $25.9 million, $22.1 million, and $30.1 million from its non-U.S. subsidiaries in 2013, 2012, and 2011, respectively, incurring an insignificant amount of U.S. income tax expense.

Uncertain Tax Positions

The amount of unrecognized tax benefits at December 31, 2013, was $84.4 million ($80.3 million excluding interest and penalties). The amount of unrecognized tax benefits at December 31, 2012, was $88.6 million ($83.1 million excluding interest and penalties). The amount of unrecognized tax benefits at December 31, 2011, was $69.3 million ($62.4 million excluding interest and penalties). A reconciliation of the unrecognized tax benefits, excluding interest and penalties, for the three years ended December 31, 2013, follows:

Rollforward of Uncertain Tax Positions



(In millions)	Unrecognized Tax Benefits
Balance as of January 1, 2011	$	79.2
Additions for current year tax positions	0.6
Additions for prior year tax positions	0.5
Reductions for prior year tax positions and reclassifications(1)(2)	(17.8		)
Reductions for expirations of statute of limitations	(0.1		)
Balance as of December 31, 2011	62.4
Additions for current year tax positions	3.4
Additions for prior year tax positions	22.0
Reductions for prior year tax positions and reclassifications	(0.8		)
Reductions for expirations of statute of limitations	(2.9		)
Settlements(3)	(1.0		)
Balance as of December 31, 2012	83.1
Additions for current year tax positions	6.3
Additions for prior year tax positions	6.4
Reductions for prior year tax positions and reclassifications(4)	(9.6		)
Reductions for expirations of statute of limitations	(5.9		)
Balance as of December 31, 2013	$	80.3

_______________________________________________________________________________

(1)

On November 3, 2011, Grace received notice from the Canadian Revenue Agency that they had completed a review of Grace's Canadian transfer pricing for the years 2002, 2003, and 2004. As a result, Grace reversed $10.6 million of uncertain tax positions because they were effectively settled pursuant to ASC 740-10-25. A tax matter is effectively settled through examination when the taxing authority has completed an examination; the entity does not intend to appeal or litigate any aspect of a particular tax position for the completed examination; and based on a tax authority's widely understood policy, the entity considers it remote that the taxing authority would subsequently examine or reexamine any of the positions once the examination process is completed.


(2)	In 2011, $6.7 million of uncertain tax positions representing pre-petition federal and state settlements were reclassified to income taxes payable.


(3)	In 2012, $1.0 million of uncertain tax positions representing withholding taxes due were paid as a result of the completion of Grace's Canadian audit for the years 2002, 2003, and 2004.


(4)	In 2013, $9.6 million of uncertain tax positions representing agreed adjustments resulting from the 2007-2009 IRS examination were reclassified to income taxes payable.

The balance of unrecognized tax benefits as of December 31, 2013, 2012, and 2011 of $79.5 million (net of $0.8 million that would be indemnified by a third party), $82.1 million (net of $1.0 million that would be indemnified by a third party), and $62.4 million, respectively, if recognized, would affect the effective tax rate. Grace accrues potential interest and any associated penalties related to uncertain tax positions in "benefit from (provision for) income taxes" in the Consolidated Statements of Operations. The balances of unrecognized tax benefits in the preceding table do not include accrued interest and penalties. The total amount of interest and penalties accrued on uncertain tax positions as of December 31, 2013, 2012, and 2011 was $4.1 million, $5.5 million and $6.9 million, respectively, net of applicable federal income tax benefits.

Grace files U.S. Federal income tax returns as well as income tax returns in various state and foreign jurisdictions. Grace's uncertain tax positions are related to income tax returns for tax years that remain subject to examination by the relevant taxing authorities. The following table summarizes these open tax years by major jurisdiction:



Tax Jurisdiction(1)	Examination in Progress	Examination Not Yet Initiated
United States—Federal	2007-2009	2010-2012
United States—State	2007-2012	2010-2012
Germany	None	2009-2012
Italy	None	2008-2012
France	2010-2011	2012
Canada	None	2006-2012

_______________________________________________________________________________


(1)	Includes federal, state, provincial or local jurisdictions, as applicable.

Grace notes that there are attributes generated in prior years that are otherwise closed by statute and were carried forward into years that are open to examination. Those attributes may still be subject to adjustment to the extent utilized in open years.

As a multi-national taxpayer, Grace is under continual audit by the various tax authorities on open-year tax positions. Based on the status of current examinations in various taxing jurisdictions and applicable judicial decisions applied to Grace's fact pattern, Grace believes it is reasonably possible that in the next 12 months the amount of the liability for unrecognized tax benefits could decrease by as much as $68 million.