Income Taxes

The components of income before income taxes and equity earnings were as follows:



	2012		2011		2010
U.S.	$	127	$	66	$	44
Foreign	509		521		570
	$	636	$	587	$	614

The provision for income taxes consisted of the following:



	2012		2011		2010
Current tax:
U.S. federal	—		—		—
State and foreign	$	84	$	111	$	113
	$	84	$	111	$	113



	2012			2011		2010
Deferred tax:
U.S. federal	$	(131	)	$	69	$	50
State and foreign	30			14		2
	(101		)	83		52
Total	$	(17	)	$	194	$	165

The provision for income taxes differs from the amount of income tax determined by applying the U.S. statutory federal income tax rate to pre-tax income as a result of the following items:



	2012			2011			2010
U.S. statutory rate at 35%	$	223		$	205		$	215
Tax on foreign income	(70		)	(50		)	(52		)
Valuation allowance	56			(19		)	(6		)
Nontaxable settlement of legal dispute	—			—			(7		)
Tax law changes	2			(4		)	8
Other items, net	(228		)	62			7
Income tax provision	$	(17	)	$	194		$	165

The other items caption in 2012 includes an income tax benefit of $213, before valuation allowance as described below, primarily related to the recognition of previously unrecognized U.S. foreign tax credits.

In the third quarter of 2012, the Company committed to a formal repatriation plan, including certain steps that were completed in September with the filing of its 2011 U.S. income tax return, which will allow it to claim foreign tax credits on its 2012 income tax return. The Company's plan involved finalization of earnings and profits in certain foreign subsidiaries, evaluation of expiring U.S. tax law provisions and anticipated utilization of existing net operating loss and foreign tax credit carryforwards. The Company has been utilizing existing net operating losses which will be fully utilized this year and will begin to utilize existing foreign tax credits in 2013. Once the Company claims these credits on its tax return, it has ten years to utilize the credits.

In connection with this action, the Company determined that it will amend its 2003 U.S. income tax return to claim foreign taxes paid as a credit rather than as a tax deduction. The Company recorded a valuation allowance of $38 against certain of these credits that expire in 2013 which, at this time, the Company does not believe are more likely than not to be realized prior to expiration. The Company will continue to search for and evaluate tax planning strategies which may allow it to accelerate taxable income into 2013 in order to use the credits. If the Company is able to identify a feasible tax planning strategy, it is possible that it will release a portion of the valuation allowance in 2013.

Realization of the foreign tax credits is dependent upon the amount and timing of future taxable income. If actual results are different than the Company's projections, it is possible that the Company may record additional valuation allowance in the future.

The other items caption in 2012 also includes a benefit of $10 from the receipt of non-taxable insurance proceeds related to the 2011 flooding in Thailand.

The other items caption in 2011 includes $55 of increase due to tax charges in connection with the relocation of the Company’s European headquarters and management to Switzerland. The tax charges were partially offset by $30 of valuation allowance release included in the valuation allowance caption.

The Company has certain income tax incentives in Brazil which allow it pay reduced income taxes. The tax incentives expire at various dates beginning in 2016. In 2012, these incentives reduced net income attributable to the Company by $11.

The Company paid taxes of $92, $107 and $102 in 2012, 2011 and 2010, respectively.

The components of deferred taxes at December 31 are:



	2012					2011
	Assets			Liabilities		Assets			Liabilities
Tax loss and credit carryforwards	$	744		$	—	$	599		$	—
Postretirement and postemployment benefits	130			—		128			—
Pensions	246			10		233			12
Property, plant and equipment	7			114		9			113
Asbestos	97			—		95			—
Accruals and other	86			140		91			157
Valuation allowances	(400		)	—		(359		)	—
Total	$	910		$	264	$	796		$	282

At December 31, 2012 and 2011, $104 and $99 of deferred tax assets were included in prepaid expenses and other current assets.

Tax loss and credit carryforwards expire as follows:



2013	$	102
2014	22
2015	17
2016	13
2017	25
Thereafter	410
Unlimited	155

Tax loss and credit carryforwards expiring after 2017 include $193 of state tax loss carryforwards. The unlimited category includes $138 of French tax loss carryforwards. The tax loss carryforwards presented above exclude $53 of U.S. windfall tax benefits that will be recorded in additional paid-in capital when realized.

Realization of any portion of the Company’s deferred tax assets is dependent upon the availability of taxable income in the relevant jurisdictions. The Company considers all sources of taxable income, including (i) taxable income in any available carry back period, (ii) the reversal of taxable temporary differences, (iii) tax-planning strategies, and (iv) taxable income expected to be generated in the future other than from reversing temporary differences. The Company also considers whether there have been cumulative losses in recent years. The Company records a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized.

The Company’s valuation allowances at December 31, 2012 include $202 in the U.S., $83 in France, $84 in Canada and $13 in Belgium.

The Company’s valuation allowance in the U.S. includes $160 for state tax loss carryforwards and $38 for U.S. foreign tax credits as described above. The Company does not believe that it is more likely than not that these deferred tax assets will be utilized prior to their expiration. The Company’s ability to utilize state tax loss carryforwards is impacted by several factors including expiration dates, limitations imposed by certain states on the amount of loss carryforwards that can be used in a given year to offset taxable income and whether the state permits the Company to file a combined return.

The Company continues to maintain a full valuation allowance against its net deferred tax assets in France because the Company does not believe at this time that it is more likely than not that it will realize any deferred tax benefits in France, primarily due to significant interest costs which are in excess of operating profits.

The Company maintains a full valuation allowance against its net deferred tax assets in Canada because the Company does not believe at this time that it is more likely than not that it will realize any deferred tax benefits in Canada. The Company’s Canadian operations remain in a three year cumulative loss position and continue to project losses in the near-term.

The Company’s valuation allowance in Belgium is for tax loss carryforwards in a dormant entity that do not expire but the Company does not believe at this time it will be able to utilize the loss carryforwards.

Management’s estimates of the appropriate valuation allowance in any jurisdiction involve a number of assumptions and judgments, including the amount and timing of future taxable income. Should future results differ from management’s estimates, it is possible there could be future adjustments to the valuation allowances that would result in an increase or decrease in tax expense in the period such changes in estimates are made.

The Company has not provided deferred taxes on $580 of earnings in certain non-U.S. subsidiaries because such earnings are indefinitely reinvested in its international operations. Upon distribution of such earnings in the form of dividends or otherwise, the Company would be subject to incremental tax. It is not practicable to estimate the amount of tax that might be payable.

A reconciliation of unrecognized tax benefits for 2012, 2011 and 2010 follows.



	2012			2011			2010
Balance at January 1	$	37		$	37		$	38
Additions for current year tax positions	—			8			4
Reductions to prior period tax positions	—			(5		)	—
Lapse of statute of limitations	(3		)	(2		)	(3		)
Settlements	—			—			—
Foreign currency translation	1			(1		)	(2		)
Balance at December 31	$	35		$	37		$	37

The Company’s reserves as presented primarily include potential liabilities related to transfer pricing, foreign withholding taxes, and non-deductibility of expenses and exclude $2 of penalties as of December 31, 2012. Interest and penalties are recorded in the statement of operations as interest expense and provision for income taxes, respectively. The total interest and penalties recorded in the statement of operations was $1 in each of the last three years.

The unrecognized tax benefits as of December 31, 2012 include $28 that, if recognized, would affect the effective tax rate. The remaining balance would have no effect due to valuation allowances in certain jurisdictions. The Company’s unrecognized tax benefits are expected to increase in the next twelve months as it continues its current transfer pricing policies, and are expected to decrease as open tax years lapse or claims are settled. The Company is unable to estimate a range of reasonably possible changes in its unrecognized tax benefits in the next twelve months as it is unable to predict when, or if, the tax authorities will commence their audits, the time needed for the audits, and the audit findings that will require settlement with the applicable tax authorities, if any.

The tax years that remained subject to examination by major tax jurisdiction as of December 31, 2012 were 2004 and subsequent years for France; 2006 and subsequent years for Spain; 2008 and subsequent years for Italy; 2009 and subsequent years for the U.S. and Canada; 2010 and subsequent years for the U.K. and Germany.