Income Taxes

Income Tax Provision

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



	Year Ended December 31,
	2013	2012	2011
	(In $ millions)
US	806	195	60
International ⁽¹⁾	803	126	407
Total	1,609	321	467

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⁽¹⁾	Includes aggregate earnings generated by operations in Bermuda, Luxembourg, the Netherlands and Hong Kong of $275 million, $320 million and $317 million for the years ended December 31, 2013, 2012 and 2011, respectively, which have an aggregate effective income tax rate of 4.0%, 5.6% and 4.0% for each year, respectively.

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



	Year Ended December 31,
	2013	2012		2011
	(In $ millions)
Current
US	78	41		24
International	83	76		32
Total	161	117		56
Deferred
US	194	(66	)	(11	)
International	153	(106	)	(4	)
Total	347	(172	)	(15	)
Total	508	(55	)	41

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,
	2013		2012		2011
	(In $ millions, except percentages)
Income tax provision computed at US federal statutory tax rate	563		112		163
Change in valuation allowance	89		29		7
Equity income and dividends	(44	)	(31	)	(25	)
(Income) expense not resulting in tax impact, net	(33	)	(39	)	(16	)
US tax effect of foreign earnings and dividends	35		42		48
Foreign tax credits	(38	)	(187	)	(66	)
Other foreign tax rate differentials	(55	)	(2	)	(58	)
Legislative changes	(19	)	—		—
Tax-deductible interest on foreign equity investments and other related items	11		11		(3	)
State income taxes, net of federal benefit	11		4		4
Other, net	(12	)	6		(13	)
Income tax provision (benefit)	508		(55	)	41

Effective income tax rate	32	%	(17)	%	9	%

Federal and state income taxes have not been provided on accumulated but undistributed earnings of $3.2 billion as of December 31, 2013 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 continuing operations for the year ended December 31, 2013 was 32% compared to 17% for the year ended December 31, 2012. The effective tax rate for 2012 was favorably impacted by recognition of significant benefits from foreign tax credits.

During 2012, the Company amended certain prior year income tax returns to recognize the benefit of available foreign tax credit carryforwards. As a result the Company recognized an income tax benefit of $142 million. The available foreign tax credits are subject to a ten year carryforward period and begin to expire in 2014. The Company expects to fully utilize the credits within the prescribed carryforward period.

In February 2012, the Company amended its existing joint venture and other related agreements with its venture partner in Polyplastics Co., Ltd ("Polyplastics"). The amended agreements ("Agreements"), among other items, modified certain dividend rights, resulting in a net cash dividend payment to the Company of $72 million during the three months ended March 31, 2012. In addition, as a result of the Agreements, Polyplastics is required to pay certain annual dividends to the venture partners. Consequently, Polyplastics' undistributed earnings will no longer be invested indefinitely. Accordingly, the Company recognized a deferred tax liability of $38 million, which was charged to Income tax provision (benefit) in the consolidated statement of operations, related to the taxable outside basis difference of its investment in Polyplastics.

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,
	2013		2012
	(In $ millions)
Deferred Tax Assets
Pension and postretirement obligations	374		579
Accrued expenses	139		58
Inventory	10		—
Net operating loss	563		398
Tax credit carryforwards	94		206
Other	165		370
Subtotal	1,345		1,611
Valuation allowance ⁽¹⁾	(461	)	(399	)
Total	884		1,212
Deferred Tax Liabilities
Depreciation and amortization	479		479
Investments in affiliates	142		83
Other	94		70
Total	715		632
Net deferred tax assets (liabilities)	169		580

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⁽¹⁾	Includes deferred tax asset valuation allowances primarily for the Company's deferred tax assets in the US, Luxembourg, France, Spain, China, Singapore, 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, 2013, the valuation allowance increased by $62 million primarily due to $89 million of losses generated with no currently realizable income tax benefit as well as $8 million related to exchange rate changes partially offset by net operating loss expirations of $33 million.

Legislative Changes

On October 31, 2013, the Mexican National Congress passed new tax legislation. Among other things, the new legislation maintains a corporate tax rate of 30%, eliminates the tax consolidation rules and repeals the business flat tax ("IETU") for years beginning after December 31, 2013. The Company was subject to the IETU in 2013 and for prior periods and is now required to record deferred income taxes on an income tax basis. As a result, the Company realized a deferred income tax benefit of $46 million for the year ended December 31, 2013.

The Company has historically filed consolidated income tax returns in Mexico. Under the new tax legislation, the Company was required to recapture previously deferred income taxes related to income tax loss carryforwards, intercompany dividends and differences between consolidated and individual company taxable earnings. The Company recorded additional tax expense of $27 million related to these new rules for the year ended December 31, 2013, resulting in a net income tax benefit of $19 million.

Net Operating Loss Carryforwards

As of December 31, 2013, the Company has US federal net operating loss carryforwards of $31 million that are subject to limitation. These net operating loss carryforwards begin to expire in 2021. At December 31, 2013, the Company also had state net operating loss carryforwards, net of federal tax impact, of $43 million, $42 million of which are offset by a valuation allowance due to uncertain recoverability. A portion of these net operating loss carryforwards expired in 2013.

The Company also has foreign net operating loss carryforwards as of December 31, 2013 of $1.8 billion primarily for Luxembourg, France, Spain, Canada, China, Singapore, the United Kingdom and Germany with various expiration dates. Net operating losses in China have various carryforward periods and began to expire in 2011. Net operating losses in most other foreign jurisdictions do not have an expiration date.

Uncertain Tax Positions

Activity related to uncertain tax positions is as follows:



	Year Ended December 31,
	2013		2012		2011
	(In $ millions)
As of the beginning of the year	207		211		244
Increases in tax positions for the current year	17		6		—
Increases in tax positions for prior years	57		42		37
Decreases in tax positions for prior years	(32	)	(19	)	(54	)
Decreases due to settlements	(2	)	(33	)	(16	)
As of the end of the year	247		207		211

Total uncertain tax positions that if recognized would impact the effective tax rate	258		237		230
Total amount of interest expense (benefit) and penalties recognized in the consolidated statements of operations	4		6		(1	)
Total amount of interest expense and penalties recognized in the consolidated balance sheets	65		61		55

The Company primarily operates in the US, Germany, Canada, China, Mexico and Singapore. Examinations are ongoing in a number of these jurisdictions including Germany for the years 2001 to 2004 and 2005 to 2007, France for the years 2008 to 2010 and the US for the years 2009 and 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).

On December 23, 2013, the French Tax Authority ("FTA") issued audit assessment claims against the Company that could result in incremental tax expense of €81 million, including interest and penalties. The assessment suggests that for the years 2008 to 2010, the Company transferred value from its otherwise profitable facility in Pardies, France to subsidize other global manufacturing operations outside of France. If the FTA were to prevail on any of its claims, any amounts due would first be offset against net operating loss carryforwards of €33 million, which were generated as a result of losses incurred. The Company believes the FTA assessment lacks merit and plans to defend the matter. Based on the Company's analysis of the technical merits of the issue, no significant amounts have been accrued for this tax uncertainty.