15.

INCOME TAXES

The components of earnings before income taxes and the income taxes paid consisted of the following (in millions):


For the Years Ended December 31,	2013		2012		2011
United States operations	$	400.7	$	409.9	$	485.7
Foreign operations		580.4		580.2		493.2

Total	$	981.1	$	990.1	$	978.9

The provision for income taxes consisted of (in millions):


Current:
Federal	$	199.0		$	179.8		$	148.4
State		20.6			13.8			14.3
Foreign		128.5			108.4			75.9

		348.1			302.0			238.6

Deferred:
Federal		(87.7	)		(58.8	)		(2.6	)
State		(8.5	)		0.7			(0.9	)
Foreign		(30.0	)		(6.7	)		(16.2	)

		(126.2	)		(64.8	)		(19.7	)

Provision for income taxes	$	221.9		$	237.2		$	218.9

Income taxes paid	$	272.3		$	227.6		$	236.4

A reconciliation of the U.S. statutory income tax rate to our effective tax rate is as follows:


For the Years Ended December 31,	2013			2012			2011
U.S. statutory income tax rate		35.0	%		35.0	%		35.0	%
State taxes, net of federal deduction		0.8			1.0			0.7
Tax impact of foreign operations, including foreign tax credits		(12.2	)		(10.4	)		(11.0	)
Tax impact of certain significant transactions		1.6			(3.5	)		–
Tax benefit relating to U.S. manufacturer’s deduction and export sales		(1.8	)		(1.9	)		(1.6	)
R&D credit		(0.6	)		–			(0.5	)
Goodwill impairment		–			3.4			–
Other		(0.2	)		0.4			(0.2	)

Effective income tax rate		22.6	%		24.0	%		22.4	%

Our operations in Puerto Rico, Switzerland and the State of Indiana benefit from various tax incentive grants. Unless these grants are extended, they will expire between fiscal years 2014 and 2026.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Valuation allowances are recorded to reduce deferred income tax assets when it is more likely than not that an income tax benefit will not be realized.

The components of deferred taxes consisted of the following (in millions):


As of December, 31	2013			2012
Deferred tax assets:
Inventory	$	271.1		$	225.1
Net operating loss carryover		26.4			26.8
Tax credit carryover		187.1			16.4
Capital loss carryover		7.8			4.0
Accrued liabilities		72.0			67.0
Share-based compensation		74.6			106.3
Unremitted earnings of foreign subsidiaries		25.6			172.3
Other		11.2			42.3

Total deferred tax assets		675.8			660.2
Less: Valuation allowances		(42.7	)		(41.3	)

Total deferred tax assets after valuation		633.1			618.9

Deferred tax liabilities:
Fixed assets	$	(97.7	)	$	(93.9	)
Intangible assets		(106.4	)		(140.6	)
Other		(1.2	)		(1.0	)

Total deferred tax liabilities		(205.3	)		(235.5	)

Total net deferred tax assets	$	427.8		$	383.4

The net operating loss carryovers are available to reduce future federal, state and foreign taxable earnings. At December 31, 2013, these net operating loss carryovers generally expire within a period of 1 to 20 years. Valuation allowances for net operating loss carryovers have been established in the amount of $17.3 million and $17.0 million at December 31, 2013 and 2012, respectively. The tax credit carryovers are available to offset future federal, state and foreign tax liabilities. At December 31, 2013, these tax credit carryovers generally expire within a period of 1 to 10 years. We have established valuation allowances for certain tax credit carryovers in the amount of $14.9 million and $14.2 million at December 31, 2013 and 2012, respectively. The capital loss carryover is also available to reduce future federal capital gains. At December 31, 2013 these capital loss carryovers generally expire within a period of 4 to 5 years. We have established valuation allowances for certain capital loss carryovers in the amount of $7.8 million and $4.0 million at December 31, 2013 and 2012, respectively. The remaining valuation allowances of $2.7 million and $6.1 million at December 31, 2013 and 2012, respectively, relate primarily to potential capital losses.

At December 31, 2013, we had an aggregate of approximately $3,354 million of unremitted earnings of foreign subsidiaries that have been, or are intended to be, indefinitely reinvested for continued use in foreign operations. If the total undistributed earnings of foreign subsidiaries were remitted, a significant amount of the additional tax would be offset by the allowable foreign tax credits. It is not practical for us to determine the additional tax related to remitting these earnings.

The following is a tabular reconciliation of the total amounts of unrecognized tax benefits (in millions):


For the Years Ended December 31,	2013			2012			2011
Balance at January 1	$	285.5		$	158.4		$	168.0
Increases related to prior periods		16.5			118.7			11.4
Decreases related to prior periods		(17.3	)		(8.9	)		(49.0	)
Increases related to current period		22.5			19.1			34.4
Decreases related to settlements with taxing authorities		(2.9	)		(0.6	)		(4.8	)
Decreases related to lapse of statute of limitations		–			(1.2	)		(1.6	)

Balance at December 31	$	304.3		$	285.5		$	158.4

Amounts impacting effective tax rate, if recognized balance at December 31	$	186.3		$	159.0		$	132.7

We recognize accrued interest and penalties, related to unrecognized tax benefits, as income tax expense. During 2013, we accrued interest and penalties of $8.2 million, and as of December 31, 2013, had recognized a liability for interest and penalties of $42.1 million.

During 2012, we accrued interest and penalties of $23.2 million, and as of December 31, 2012, had recognized a liability for interest and penalties of $33.9 million. We decreased interest and penalties by $12.1 million during 2011, and as of December 31, 2011, had recognized a liability for interest and penalties of $10.7 million.

We operate on a global basis and are subject to numerous and complex tax laws and regulations. Our income tax filings are regularly under audit in multiple federal, state and foreign jurisdictions. Income tax audits may require an extended period of time to reach resolution and may result in significant income tax adjustments when interpretation of tax laws or allocation of company profits is disputed. The amount of unrecognized tax benefits may change within the next twelve months between $0 and $60 million due to changes in audit status, expiration of statutes of limitations, settlements of tax assessments and other events which could impact our determination of unrecognized tax benefits.

During the second quarter of 2011, the IRS concluded their examination of our U.S. federal returns for years 2005 through 2007 and during the fourth quarter of 2013, the IRS concluded their examination of our U.S. federal returns for years 2008 through 2009. For years 2006 through 2009, the IRS has proposed adjustments reallocating profits between certain of our U.S. and foreign subsidiaries. We have disputed these proposed adjustments and continue to pursue resolution with the IRS. Although the ultimate timing for resolution of the disputed tax issues is uncertain, we anticipate that within the next twelve months we may settle certain tax matters with the IRS, and pay amounts for other unresolved tax matters in order to limit the potential impact of IRS interest charges. Final resolution of these matters could have a material impact on our income tax expense, results of operations, and cash flows for future periods.

State income tax returns are generally subject to examination for a period of 3 to 5 years after filing of the respective return. The state impact of any federal changes generally remains subject to examination by various states for a period of up to one year after formal notification to the states. We have various state income tax returns in the process of examination, administrative appeals or litigation.

Our tax returns are currently under examination in various foreign jurisdictions. Foreign jurisdictions have statutes of limitations generally ranging from 3 to 5 years. Years still open to examination by foreign tax authorities in major jurisdictions include: Australia (2009 onward), Canada (2007 onward), France (2011 onward), Germany (2009 onward), Ireland (2009 onward), Italy (2010 onward), Japan (2010 onward), Korea (2008 onward), Puerto Rico (2008 onward), Switzerland (2012 onward), and the United Kingdom (2012 onward).