Income Taxes

Income Tax Provision

Earnings (loss) from continuing operations before tax by jurisdiction are as follows:



	Year Ended December 31,
	2011	2010	2009
	(In $ millions)
US	310	214	294
International	445	324	(43	)
Total	755	538	251

The income tax provision (benefit) consists of the following:



	Year Ended December 31,
	2011	2010		2009
	(In $ millions)
Current
US	24	62		11
International	32	35		148
Total	56	97		159
Deferred
US	89	16		(404	)
International	4	(1	)	2
Total	93	15		(402	)
Total	149	112		(243	)

A reconciliation of the significant differences between the US federal statutory tax rate of 35% and the effective income tax rate on income from continuing operations is as follows:



	Year Ended December 31,
	2011		2010		2009
	(In $ millions, except percentages)
Income tax provision computed at US federal statutory tax rate	264		188		88
Change in valuation allowance	7		39		(314	)
Equity income and dividends	(25	)	(41	)	(20	)
(Income) expense not resulting in tax impact	(16	)	8		4
US tax effect of foreign earnings and dividends	48		28		10
Foreign tax credits	(66	)	(33	)	—
Other foreign tax rate differentials	(61	)	(11	)	(2	)
Legislative changes	—		(71	)	71
Tax-deductible interest on foreign equity investments and other related items	(3	)	(3	)	(76	)
State income taxes, net of federal benefit	10		5		6
Other, net	(9	)	3		(10	)
Income tax provision (benefit)	149		112		(243	)

Effective income tax rate	20	%	21	%	(97	)%

Federal and state income taxes have not been provided on accumulated but undistributed earnings of $2.7 billion as of December 31, 2011 as such earnings have been permanently reinvested in the business. The determination of the amount of the unrecognized deferred tax liability related to the undistributed earnings is not practicable. The effective tax rate for 2011 was favorably impacted by increased foreign tax credit benefits realized in the US and changes in valuation allowances on certain deferred tax assets, partially offset by foreign losses not providing tax benefits. The effective rate for the year ended December 31, 2010 was favorably impacted by amendments to tax legislation in Mexico.

Prior to 2009, the Company maintained a valuation allowance against its US net deferred tax assets. During 2009, the Company concluded that, due to cumulative profitability, it is more likely than not that it will realize its net US deferred tax assets with the exception of certain state net operating loss carryforwards. Accordingly, during the year ended December 31, 2009, the Company recorded a deferred tax benefit of $492 million for the release of the beginning-of-the-year US valuation allowance associated with those US net deferred tax assets expected to be realized in 2009 and subsequent years.

The Company operates under tax holidays in various countries which are effective through December 2012. For 2011, the Company's tax rate in China is 50% of the statutory rate, or 12.5% based on the statutory rate of 25%. In Singapore, one of the Company's entities had a tax holiday that provided for a 0% tax rate through October 2011. The Company realized $6 million of tax benefits in 2011 from tax holidays.

Deferred Income Taxes

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. Significant components of the consolidated deferred tax assets and liabilities are as follows:



	As of December 31,
	2011		2010
	(In $ millions)
Deferred tax assets
Pension and postretirement obligations	529		356
Accrued expenses	57		233
Inventory	1		10
Net operating loss	359		341
Tax credit carryforwards	94		81
Other	159		193
Subtotal	1,199		1,214
Valuation allowance ⁽¹⁾	(363	)	(385	)
Total	836		829
Deferred tax liabilities
Depreciation and amortization	319		323
Investments in affiliates	50		47
Other	51		68
Total	420		438
Net deferred tax assets (liabilities)	416		391

_____________________

⁽¹⁾Includes deferred tax asset valuation allowances primarily for the Company's deferred tax assets in the US, Luxembourg, France, Spain, China, the United Kingdom and Germany, as well as other foreign jurisdictions. These valuation allowances relate primarily to net operating loss carryforward benefits and other net deferred tax assets, all of which may not be realizable.

For the year ended December 31, 2011, the valuation allowance decreased by $22 million consisting of: (a) an increase of $7 million related to income tax expense, (b) a decrease of $3 million related to foreign currency translation adjustments and (c) $26 million of other decreases related to uncertain tax positions and other adjustments to deferred taxes. The change in valuation allowance associated with foreign currency translation adjustments is related to changes in deferred tax assets for unrealized foreign exchange gains and losses on effective hedges and on foreign income previously taxed but not yet received in the US. The change also relates to foreign currency translation adjustments for deferred tax assets recorded in various foreign jurisdictions. The decrease related to uncertain tax positions and other adjustments to deferred taxes includes adjustments to temporary differences and net operating loss carryforwards due to changes in uncertain tax positions in jurisdictions where valuation allowances are recorded.

Legislative Changes

Mexico enacted the 2008 Fiscal Reform Bill on October 1, 2007. Effective January 1, 2008, the bill repealed the existing asset-based tax and established a dual income tax system consisting of a new minimum flat tax (the “IETU”) and the existing regular income tax system. The IETU system taxes companies on cash basis net income, consisting only of certain specified items of revenue and expense, at a rate of 17% and 17.5% for 2009 and 2010 forward, respectively. In general, companies must pay the higher of the income tax or the IETU, although the IETU is not creditable against future income tax liabilities. The Company has determined that it will primarily be subject to the IETU in future periods. Accordingly, the Company has recorded tax expense (benefit) of $4 million, $19 million, and $(5) million for the years ended December 31, 2011, 2010 and 2009, respectively, for the tax effects of the IETU system.

In December 2009, Mexico enacted the 2010 Mexican Tax Reform Bill (“Tax Reform Bill”) to be effective January 1, 2010. Under this legislation, the corporate income tax rate was temporarily increased and the recapture period for income tax loss carryforwards was accelerated and effectively required payment of taxes if a benefit was not obtained through the tax consolidation regime. In addition, significant modifications were made to the rules for income taxes previously deferred on intercompany dividends, as well as to income taxes related to differences between consolidated and individual Mexican tax earnings and profits. The income tax impact to the Company of the Tax Reform Bill at December 31, 2009 was $73 million and was recorded to Income tax (provision) benefit in the consolidated statements of operations.

During 2010, the Mexican tax authorities issued Miscellaneous Tax Resolutions (“2010 MTRs”) to clarify various provisions included in the Tax Reform Bill related to recapture amounts for 2004 and prior years, including certain aspects of the recapture rules related to income tax loss carryforwards, intercompany dividends and differences between consolidated and individual Mexican tax earnings and profits. The application of the 2010 MTRs resulted in a reduction of $70 million to the income tax impact of the Tax Reform Bill that was initially recorded by the Company in 2009.

In December 2010, the President of the United States signed a multi-billion dollar tax package, the Tax Relief, Unemployment Reauthorization and Job Creation Act of 2010 (“2010 Tax Relief Act”). The 2010 Tax Relief Act increased 50% bonus depreciation to 100% for qualified investments made after September 8, 2010 and before January 1, 2012, and also made 50% bonus depreciation available for qualified property placed in service after December 31, 2011 and before January 1, 2013. The 2010 Tax Relief Act also provided a two-year extension of expired provisions that were relevant to the Company including the research tax credit and look through treatment for controlled foreign corporations. The new legislation allowed the Company to accelerate deductions of capital improvements resulting in a reduction to income taxes payable of $27 million for the year ended December 31, 2011.

Net Operating Loss Carryforwards

As of December 31, 2011, the Company has US federal net operating loss carryforwards of $36 million that are subject to limitation. These net operating loss carryforwards begin to expire in 2021. At December 31, 2011, the Company also had state net operating loss carryforwards, net of federal tax impact, of $36 million, $34 million of which are offset by a valuation allowance due to uncertain recoverability. A portion of these net operating loss carryforwards will begin to expire in 2012.

The Company also has foreign net operating loss carryforwards as of December 31, 2011 of $1 billion for Luxembourg, France, Spain, Canada, China, the United Kingdom, Germany and other foreign jurisdictions with various expiration dates. Net operating losses in China have various carryforward periods and begin expiring in 2011. Net operating losses in most other foreign jurisdictions do not have an expiration date. Net operating losses in Mexico have a ten-year carryforward period and began to expire in 2009. However, these losses are not available for use under the new IETU tax regulations in Mexico. As the IETU is the primary system upon which the Company will be subject to tax in future periods, a deferred tax asset has not been reflected in the consolidated balance sheets as of December 31, 2011 for these income tax loss carryforwards.

Uncertain Tax Positions

FASB ASC Topic 740, Income Taxes (“FASB ASC Topic 740”), clarifies the accounting for income taxes by prescribing a minimum recognition threshold a tax benefit is required to meet before being recognized in the financial statements. FASB ASC Topic 740 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition.

A reconciliation of the amount of uncertain tax positions is as follows:



	Year Ended December 31,
	2011		2010		2009
	(In $ millions)
As of the beginning of the year	244		208		195
Increases in tax positions for the current year	—		—		19
Increases in tax positions for prior years	37		85		39
Decreases in tax positions for prior years	(54	)	(48	)	(38	)
Decreases due to settlements	(16	)	(1	)	(7	)
As of the end of the year	211		244		208

Total uncertain tax positions that, if recognized, would impact the effective tax rate	230		264		208
Total amount of interest and penalties recognized in the consolidated statements of operations	(1	)	12		7
Total amount of interest and penalties recognized in the consolidated balance sheets	55		56		45

The Company operates in the US (including multiple state jurisdictions), Germany and 40 other foreign jurisdictions including Canada, China, France, Mexico and Singapore. Examinations are ongoing in a number of those jurisdictions including, most significantly, Germany for the years 2001 to 2004 and 2005 to 2007 and the US for the years 2009 to 2010. The Company's US federal income tax returns for 2003 and forward are open for examination under statute. The Company's German corporate tax returns for 2001 and forward are open for examination under statute. A further change in uncertain tax positions may occur within the next twelve months related to the settlement of one or more tax examinations or the lapse of applicable statutes of limitations. Such amounts have been reflected as the current portion of uncertain tax positions (Note 11).