Income Taxes

The components of pretax income in consolidated companies for the years ended December 31, 2011, 2010 and 2009 are as follows (in thousands):



	Year Ended December 31,
	2011		2010		2009
United States	$	1,746,101	$	847,962	$	148,773
International	2,163,945		1,250,485		2,730,378
	$	3,910,046	$	2,098,447	$	2,879,151

U.S. pre-tax income for the year ended December 31, 2011 and 2010 includes approximately $448.5 million and $400.0 million, respectively, relating to non-U.S. income recharacterized as U.S. income due to the settlement of multiple uncertain tax positions.

The provision for income taxes is comprised of the following (in thousands):



	Year Ended December 31,
	2011			2010			2009
Current:
Federal	$	517,877		$	(130,962	)	$	507,411
State and local	24,268			(13,356		)	96,496
Foreign	121,556			92,209			64,960
	$	663,701		$	(52,109	)	$	668,867
Deferred:
Federal	$	64,287		$	398,597		$	(160,811	)
State and local	(3,158		)	8,195			(20,179		)
Foreign	(44,171		)	(57,197		)	2,177
	16,958			349,595			(178,813		)
	$	680,659		$	297,486		$	490,054

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 2011, 2010 and 2009 to income before income taxes (in thousands):



	Year Ended December 31,
	2011			2010			2009
Provision at statutory rate	$	1,368,516		$	734,456		$	1,007,703
Permanent differences:
Foreign income taxed at different rates	(1,093,508		)	(441,044		)	(475,967		)
Gain on sale of Skype	321,484			—			(498,360		)
Joltid settlement	—			—			120,339
Legal entity restructuring	—			(23,649		)	184,410
Change in valuation allowance	(787		)	1,407			58,670
Stock-based compensation	31,705			7,595			41,436
State taxes, net of federal benefit	21,110			31,003			49,606
Tax credits	(8,039		)	(48,745		)	(13,352		)
Divested business	33,743			—			—
Other	6,435			36,463			15,569
	$	680,659		$	297,486		$	490,054

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 (in thousands):



	December 31,
	2011			2010
Deferred tax assets:
Net operating loss and credits	$	186,759		$	90,390
Accruals and allowances	340,074			310,075
Stock-based compensation	114,283			117,021
Discount on note receivable	67,715			—
Net unrealized losses	1,621			1,882
Net deferred tax assets	710,452			519,368
Valuation allowance	(83,059		)	(42,740		)
	627,393			476,628
Deferred tax liabilities:
Unremitted foreign earnings	(198,363		)	(230,646		)
Acquisition-related intangibles	(461,482		)	(102,894		)
Depreciation and amortization	(264,319		)	(165,563		)
Available-for-sale securities	(234,156		)	(199,421		)
Other	(21,320		)	—
	(1,179,640		)	(698,524		)
	$	(552,247	)	$	(221,896	)

As of December 31, 2011, our federal, foreign and state net operating loss carryforwards for income tax purposes were approximately $172.9 million, $186.3 million and $480.3 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 law. If not utilized, the federal net operating loss carryforwards will begin to expire in 2021 and the state net operating loss carryforwards will begin to expire in 2013. As of December 31, 2011, our state tax credit carryforwards for income tax purposes were approximately $10.2 million. If not utilized, the state tax credit carryforwards will begin to expire in 2015. As of December 31, 2011 and 2010, our federal capital loss carryover amounted to $150.7 million and $65.4 million, respectively, which is subject to a full valuation allowance. The increase in the capital loss carryover and associated valuation allowance is primarily due to our divestiture of a business. If not utilized, the federal capital loss carryover will begin to expire in 2014.

At December 31, 2011 and 2010, we maintained a valuation allowance with respect to certain of our deferred tax assets relating primarily to operating losses in certain non-U.S. jurisdictions that we believe are not likely to be realized.

We have not provided for U.S. federal income and foreign withholding taxes on $10.0 billion of our non-U.S. subsidiaries' undistributed earnings as of December 31, 2011. We intend to indefinitely reinvest the $10.0 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. 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. Such an 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 Singapore and Switzerland. These rulings provide for 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 $696.5 million and $284.0 million in 2011 and 2010, respectively, increasing earnings per share (diluted) by approximately $0.53 and $0.21 in 2011 and 2010, respectively. These tax rulings are in effect currently and expire over periods ranging from 2016 to the duration of business operations in the respective jurisdictions.

The following table reflects changes in unrecognized tax benefits since January 1, 2010:



	2011			2010
	(In thousands)
Gross amounts of unrecognized tax benefits as of the beginning of the period	$	428,344		$	838,616
Increases related to prior period tax positions	32,582			33,904
Decreases related to prior period tax positions	(138,746		)	(305,874		)
Increases related to current period tax positions	40,926			22,229
Settlements	(77,386		)	(160,531		)
Gross amounts of unrecognized tax benefits as of the end of the period	$	285,720		$	428,344

In the second quarter of 2011, we settled multiple uncertain tax positions resulting in an overall decrease in our unrecognized tax benefits. As of December 31, 2011, our liabilities for unrecognized tax benefits were included in deferred and other tax liabilities, net. As of December 31, 2010, $208.5 million of our liabilities for unrecognized tax benefits were included in accrued expenses and other current liabilities and the remaining amount is recorded as deferred and other tax liabilities.

We recognize interest and/or penalties related to uncertain tax positions in income tax expense. In 2011, we recognized interest and penalties of $18.4 million. The amount of interest and penalties accrued as of December 31, 2011 and 2010 was approximately $83.2 million and $92.3 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 2009 tax years. We believe that adequate amounts have been reserved for any adjustments that may ultimately result from these 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 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.