Note 19—Income Taxes

The Company’s income before taxes by fiscal year consisted of the following:



	2013		2012		2011
	(in millions)
U.S.	$	5,992	$	1,030	$	4,650
Non-U.S.	1,265		1,177		1,006
Total income before taxes and non-controlling interest	$	7,257	$	2,207	$	5,656

U.S. income before taxes included $2.0 billion, $1.6 billion and $1.3 billion from non-U.S. clients for fiscal 2013, 2012 and 2011, respectively.

Income tax provision by fiscal year consisted of the following:



	2013			2012			2011
	(in millions)
Current:
U.S. federal	$	568		$	1,376		$	1,365
State and local	(58		)	165			311
Non-U.S.	239			214			168
Total current taxes	749			1,755			1,844
Deferred:
U.S. federal	1,401			(1,276		)	160
State and local	114			(415		)	(2		)
Non-U.S.	13			1			8
Total deferred taxes	1,528			(1,690		)	166
Total income tax provision	$	2,277		$	65		$	2,010

The tax effect of temporary differences that give rise to significant portions of deferred tax assets and liabilities at September 30, 2013 and 2012, are presented below:



	2013			2012
	(in millions)
Deferred Tax Assets:
Accrued compensation and benefits	$	154		$	103
Comprehensive (income) loss	(8		)	102
Investments in joint ventures	14			11
Accrued litigation obligation	1			1,654
Client incentives	226			227
Net operating loss carryforward	31			33
Tax credits	22			23
Federal benefit of state taxes	176			90
Federal benefit of foreign taxes	13			16
Other	108			92
Valuation allowance	(25		)	(13		)
Deferred tax assets	712			2,338
Deferred Tax Liabilities:
Property, equipment and technology, net	(310		)	(288		)
Intangible assets	(4,003		)	(4,027		)
Foreign taxes	(55		)	(44		)
Other	(12		)	(10		)
Deferred tax liabilities	(4,380		)	(4,369		)
Net deferred tax liabilities	$	(3,668	)	$	(2,031	)

Total net deferred tax assets and liabilities are included in the Company’s consolidated balance sheets as follows:



	September 30, 2013			September 30, 2012
	(in millions)
Current deferred tax assets	$	481		$	2,027
Non-current deferred tax liabilities	(4,149		)	(4,058		)
Net deferred tax liabilities	$	(3,668	)	$	(2,031	)

The decrease in the deferred tax asset for accrued litigation obligation reflects the $1.6 billion reduction in tax payable due to the fiscal 2013 tax deductions of the $4.4 billion covered litigation payments. See Note 3—Retrospective Responsibility Plan and Note 20—Legal Matters.

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that all or some portion of the deferred tax assets will not be realized. The ultimate realization of the deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences are deductible. The fiscal 2013 and 2012 valuation allowances relate primarily to foreign net operating losses from subsidiaries acquired in recent years.

As of September 30, 2013, the Company had $56 million state and $115 million foreign net operating loss carryforwards. The state net operating loss carryforwards will expire in fiscal 2025 through 2031. The foreign net operating loss may be carried forward indefinitely. The Company expects to fully utilize the state net operating loss carryforwards in future years.

As of September 30, 2013, the Company also had federal and state research and development tax credit carryforwards of $2 million and $21 million, respectively. The federal carryforwards will expire in fiscal 2029. The state carryforwards may be carried forward indefinitely. The Company also has federal alternative minimum tax credits of approximately $1 million, which do not expire. The Company expects to realize the benefit of the credit carryforwards in future years.

The income tax provision differs from the amount of income tax determined by applying the applicable U.S. federal statutory rate of 35% to pretax income, as a result of the following:



	For the Years Ended September 30,
	2013					2012					2011
	Dollars			Percent		Dollars			Percent		Dollars			Percent
	(in millions, except percentages)
U.S. federal income tax at statutory rate	$	2,540		35	%	$	772		35	%	$	1,980		35	%
State income taxes, net of federal benefit	42			1	%	36			2	%	203			4	%
Non-U.S. tax effect, net of federal benefit	(328		)	(5	)%	(257		)	(12	)%	(150		)	(2	)%
Reversal of tax reserves related to the deductibility of covered litigation expense	—			—	%	(299		)	(14	)%	—			—	%
Remeasurement of deferred taxes due to:
California state apportionment rule changes	—			—	%	(208		)	(9	)%	—			—	%
Other state apportionment changes	(6		)	—	%	11			1	%	(3		)	—	%
Revaluation of Visa Europe put option	—			—	%	—			—	%	(43		)	(1	)%
Other, net	29			—	%	10			—	%	23			—	%
Income tax provision	$	2,277		31	%	$	65		3	%	$	2,010		36	%

The effective income tax rate in fiscal 2013 differs from the rates in fiscal 2012 and 2011 mainly due to:


•	the decrease in overall ongoing state tax rate beginning in fiscal 2012 as a result of changes in California apportionment rules adopted in that year;


•	a tax benefit recognized in fiscal 2013 as a result of new guidance issued by the state of California regarding apportionment rules for years prior to fiscal 2012;


•	certain foreign tax credit benefits related to prior years recognized in fiscal 2013; and


•	the absence of the following in fiscal 2013:


•	the fiscal 2012 reversal of previously recorded tax reserves associated with uncertainties related to the deductibility of covered litigation expense;


•	a fiscal 2012 one-time, non-cash benefit from the remeasurement of existing net deferred tax liabilities due to the changes in California apportionment rules adopted in that year;


•	the effect of applying the aforementioned fiscal 2012 tax benefits to a fiscal 2012 pre-tax income that was reduced by the $4.1 billion covered litigation provision; and


•	the nontaxable revaluation of the Visa Europe put option recorded in fiscal 2011.

Current income taxes receivable were $142 million and $179 million at September 30, 2013 and 2012, respectively. Non-current income taxes receivable of $253 million were included in other assets at September 30, 2013. See Note 5—Prepaid Expenses and Other Assets. At September 30, 2013 and 2012, income taxes payable of $64 million and $58 million, respectively, were included in accrued income taxes as part of accrued liabilities, and accrued income taxes of $453 million and $171 million, respectively, were included in other long-term liabilities. See Note 8—Accrued and Other Liabilities.

Cumulative undistributed earnings of the Company’s international subsidiaries that are intended to be reinvested indefinitely outside the United States amounted to $3.8 billion at September 30, 2013. The amount of income taxes that would have resulted had such earnings been repatriated is not practicably determinable.

The Company’s largest operating hub outside the United States is located in Singapore. It operates under a tax incentive agreement which is effective through September 30, 2014, and may be extended through September 30, 2023, if certain additional requirements are satisfied. The tax incentive agreement is conditional upon certain employment and investment thresholds being met by the Company. The tax incentive agreement decreased Singapore tax by $158 million, $130 million and $111 million, and the benefit of the tax incentive agreement on diluted earnings per share was $0.24, $0.19 and $0.16 in fiscal 2013, 2012 and 2011, respectively.

In accordance with Accounting Standards Codification 740, the Company is required to inventory, evaluate and measure all uncertain tax positions taken or to be taken on tax returns, and to record liabilities for the amount of such positions that may not be sustained, or may only partially be sustained, upon examination by the relevant taxing authorities.

At September 30, 2013 and 2012, the Company’s total gross unrecognized tax benefits were $1.0 billion and $679 million, respectively, exclusive of interest and penalties described below. Included in the $1.0 billion and $679 million are $801 million and $537 million of unrecognized tax benefits, respectively, that if recognized, would reduce the effective tax rate in a future period.

A reconciliation of beginning and ending unrecognized tax benefits by fiscal year is as follows:



	2013			2012
	(in millions)
Beginning balance at October 1	$	679		$	850
Increases of unrecognized tax benefits related to prior years	335			186
Decreases of unrecognized tax benefits related to prior years	(133		)	(445		)
Increases of unrecognized tax benefits related to current year	144			89
Reductions related to lapsing statute of limitations	(2		)	(1		)
Ending balance at September 30	$	1,023		$	679

It is the Company’s policy to account for interest expense and penalties related to uncertain tax positions in non-operating income, and general and administrative expense, respectively, in its consolidated statements of operations. In fiscal 2013, the Company recognized $9 million of interest expense, related to uncertain tax positions. In fiscal 2012 and 2011, the Company reversed $45 million, and recognized $7 million, of interest expense, respectively, related to uncertain tax positions. In fiscal 2013, 2012 and 2011, the Company reversed $4 million, $1 million and $2 million of penalties, respectively. At September 30, 2013 and 2012, the Company had accrued interest of $29 million and $20 million, respectively, and accrued penalties of $3 million and $7 million, respectively, related to uncertain tax positions in its other long-term liabilities.

In September 2012, the IRS completed the examination of the Company's fiscal 2006, 2007 and 2008 U.S. federal income tax returns with no significant adjustments. The statute of limitations for these years is expected to expire in December of 2013.

The IRS began the examination of the Company's fiscal 2009, 2010 and 2011 tax returns in fiscal 2013. The Company's California fiscal 2006, 2007 and 2008 tax returns are currently under examination. Except for certain outstanding refund claims, the federal and California statutes of limitations have expired for fiscal years prior to fiscal 2006. During fiscal 2013, the Canada Revenue Agency (CRA) completed its examination of the Company's fiscal 2003 to 2011 Canadian tax returns and proposed certain assessments. The Company has filed or will file notices of objection against these assessments and believes that its income tax provision adequately reflects its obligations to the CRA. The Company is also subject to examinations by various state and foreign tax authorities. All material state and foreign tax matters have been concluded for years through fiscal 2002. The timing and outcome of the final resolutions of the federal, state and foreign tax examinations and refund claims are uncertain. As such, it is not reasonably possible to estimate the impact that the final outcomes could have on the Company's unrecognized tax benefits in the next 12 months.