INCOME TAXES

On February 10, 2009, the Company entered into a tax matters agreement with Bristol-Myers Squibb Company (“BMS”). This agreement governs the tax relationship between the Company and BMS for the tax periods through the December 23, 2009 separation of the Company from BMS. Under this agreement, responsibility is allocated between BMS and MJN for the payment of taxes resulting from filing (i) tax returns on a combined, consolidated or unitary basis and (ii) single entity tax returns for entities that have both MJN and non-MJN operations. Accordingly, BMS prepared returns for MJN for all periods during which MJN was included in a combined, consolidated or unitary group with BMS for federal, state, local or foreign tax purposes, as if MJN itself was filed as a combined, consolidated or unitary group. BMS also prepared returns for the Company for all periods during which a single-entity tax return was filed for an entity that has both MJN and non-MJN operations. MJN made payments to BMS and BMS made payments to MJN with respect to such returns, as if such returns were actually required to be filed under the laws of the applicable taxing jurisdiction and BMS was the relevant taxing authority of such jurisdiction.

On December 18, 2009, the Company and BMS entered into an Amended and Restated Tax Matters Agreement in anticipation of the separation from BMS. With respect to the period before the separation, the Amended and Restated Tax Matters Agreement allocates the responsibility of BMS and MJN for the payment of taxes in the same manner as discussed above with respect to the tax matters agreement. Pursuant to the Amended and Restated Tax Matters Agreement, the Company consented to join BMS in electing to allocate items ratably between the portion of the taxable year in which the Company was included in the BMS consolidated tax group, and the short period beginning after the separation and ending on December 31, 2009, when the Company is a separate taxpayer. Additionally under the Amended and Restated Tax Matters Agreement, BMS agreed to indemnify the Company for (i) any tax attributable to a MJN legal entity for any taxable period ending on or before December 31, 2008, (ii) any tax arising solely as a result of the IPO and the restructuring preceding the IPO, and (iii) any transaction tax associated with the separation transaction. The Company agreed to indemnify BMS for (i) any tax payable with respect to any separate return that the Company is required to file or cause to be filed, (ii) any tax incurred as a result of any gain which may be recognized by a member of the BMS affiliated group with respect to a transfer of certain foreign affiliates by the Company in preparation for the IPO, and (iii) any tax arising from the failure or breach of any representation or covenant made by the Company which failure or breach results in the intended tax consequences of the separation transaction not being achieved.

The components of earnings before income taxes were:



	Years Ended December 31,
(In millions)	2012		2011		2010
U.S.	$	131.8	$	153.7	$	108.4
Non-U.S.	673.2		568.2		525.9
Total	$	805.0	$	721.9	$	634.3

The above amounts are categorized based on the applicable taxing authorities.

The provision (benefit) for income taxes attributable to operations consisted of:



	Years Ended December 31,
(In millions)	2012			2011			2010
Current:
U.S. federal	$	37.1		$	81.3		$	38.0
U.S. states	(1.3		)	10.7			4.0
Non-U.S.	139.7			144.2			114.9
Total current income tax expense	175.5			236.2			156.9

Deferred:
U.S. federal	15.8			(5.2		)	21.8
U.S. states	(3.3		)	(4.4		)	(0.8		)
Non-U.S.	4.6			(23.7		)	(1.8		)
Total deferred income tax expense	17.1			(33.3		)	19.2

Total	$	192.6		$	202.9		$	176.1

Effective Tax Rate—MJN’s provision for income taxes in the years ended December 31, 2012, 2011 and 2010 was different from the amount computed by applying the statutory U.S. federal income tax rate to earnings before income taxes as a result of the following:



(Dollars in millions)	2012					2011					2010
U.S. statutory rate	$	281.7		35.0	%	$	252.6		35.0	%	$	222.0		35.0	%
State and local taxes	0.8			0.1		3.7			0.5		1.5			0.2
Foreign income taxed at different rates	(67.7		)	(8.4	)	(42.1		)	(5.8	)	(21.7		)	(3.4	)
Repatriation of foreign income	21.6			2.7		21.8			3.0		16.6			2.7
Tax rulings	(46.4		)	(5.8	)	(51.9		)	(7.2	)	(42.1		)	(6.7	)
Reversal of deferred tax on prior years' unremitted foreign earnings due to a permanent reinvestment assertion	(8.7		)	(1.1	)	—			—		(3.8		)	(0.6	)
Other	11.3			1.4		18.8			2.6		3.6			0.6

Total provision / effective tax rate	$	192.6		23.9	%	$	202.9		28.1	%	$	176.1		27.8	%

The Company negotiated a tax ruling effective from January 1, 2010, under which certain profits in the Netherlands are exempt from taxation through the year ending December 31, 2019. This ruling is superseded by a subsequent tax agreement effective July 26, 2012, whereby the Company and the Dutch tax authorities agreed to the appropriate remuneration attributable to Dutch manufacturing activities through the year ending December 31, 2019.

Deferred Taxes and Valuation Allowance—The components of current and noncurrent deferred income tax assets (liabilities) were:



	December 31,
(In millions)	2012			2011
Deferred tax assets:
Accrued expenses	$	28.0		$	38.2
Accrued rebates and returns	44.5			43.9
Pension, post retirement and post employment liabilities	65.3			54.1
Stock-based compensation	18.3			16.3
Intercompany profit and other inventory items	6.3			39.6
Net operating loss carryforwards	17.2			14.2
Other—net	23.2			13.4
Valuation allowance	(6.1		)	(7.0		)
Total deferred tax assets	196.7			212.7
Deferred tax liabilities:
Depreciation and amortization	(76.5		)	(64.5		)
Unremitted earnings	(26.1		)	(18.8		)
Total deferred tax liabilities	(102.6		)	(83.3		)
Deferred tax assets—net	$	94.1		$	129.4

Recognized as:
Net deferred income taxes—current	85.5			118.1
Net deferred income taxes—noncurrent	8.6			11.3
Total	$	94.1		$	129.4

As of December 31, 2012, the Company had definite-lived and indefinite-lived gross foreign net operating loss (“NOL”) carryforwards of $63.6 million. Indefinite-lived NOL carryforwards totaled $28.9 million with the remainder being definite-lived. An immaterial amount of these definite-lived NOL carryforwards will begin to expire in 2013, with the remainder of the definite-lived NOL carryforwards to expire no later than 2032. The valuation allowance recorded for NOL carryforwards decreased by $0.9 million during the year ended December 31, 2012.

Income taxes paid were $226.8 million, $174.3 million, and $217.7 million in the years ended December 31, 2012, 2011, and 2010, respectively. The income taxes were paid to federal, state and foreign taxing authorities and BMS pursuant to the terms of the Amended and Restated Tax Matters Agreement.

As of December 31, 2012, U.S. taxes have not been provided on approximately $821 million of foreign earnings as these undistributed earnings have been or are expected to be permanently invested offshore. If, in the future, these earnings are repatriated to the U.S., or if such earnings are determined to be remitted in the foreseeable future, additional tax provisions would be required. It is impracticable to define a precise estimate of the additional provision required. However, it would not be more than if these earnings were repatriated to the United States in such a manner that the entire amount of foreign earnings would be subject to the U.S. statutory tax rate with no U.S. tax relief for foreign taxes already paid. Based on the current U.S. statutory tax rate of 35%, and assuming no U.S. tax relief for foreign taxes already paid, an estimated $287 million U.S. tax liability would result. However, the Company has no plans to repatriate these foreign earnings.

The Company’s tax returns are routinely audited by federal, state and foreign tax authorities and these tax audits are at various stages of completion at any given time. The Internal Revenue Service has completed examinations of the Company’s U.S. income tax filings through December 31, 2007. At December 31, 2012, tax years remaining open to examination outside the U.S. include 2003 and forward.

A reconciliation of the Company’s changes in gross uncertain tax positions is as follows:



	Years Ended December 31,
(In millions)	2012			2011			2010
Balance at January 1:	$	29.7		$	13.6		$	12.8
Increases based on current year tax positions	17.8			14.6			0.1
Decreases based on current year tax positions	—			—			—
Increases based on prior year tax positions	21.4			1.7			1.1
Decreases based on prior year tax positions	—			(0.3		)	(0.3		)
Settlements	—			(0.1		)	(0.4		)
Lapse of statute of limitations	(5.2		)	—			—
Cumulative translation adjustment	1.0			0.2			0.3
Balance at December 31:	$	64.7		$	29.7		$	13.6

Uncertain tax positions have been recorded as part of other liabilities with a reversal of approximately $4 million expected in the next 12 months due to the expiration of statutes of limitations with no impact to the Company's overall effective tax rate. The amounts of uncertain tax positions that, if recognized, would impact the effective tax rate were $18.9 million, $10.9 million, and $3.0 million as of December 31, 2012, 2011 and 2010, respectively.

Interest and penalties related to uncertain tax positions were $11.2 million, $8.2 million, and $6.2 million for the years ended December 31, 2012, 2011 and 2010, respectively, and are included as a component of other liabilities. The Company classifies interest and penalties related to uncertain tax positions as a component of provision for income taxes. The amount of interest and penalties included as a component of provision for income taxes was $5.0 million, $0.6 million and $0.3 million for the years ended December 31, 2012, 2011 and 2010, respectively.

The Company believes that it has provided adequately for all uncertain tax positions. Pursuant to the Amended and Restated Tax Matters Agreement, BMS maintains responsibility for all uncertain tax positions which may exist for any taxable period ending on or before December 31, 2008 or which may exist as a result of the IPO transaction. Pursuant to the Amended and Restated Tax Matters Agreement, the Company continues to maintain responsibility for all uncertain tax positions which may exist for any taxable period ending after December 31, 2008. It is reasonably possible that new issues may be raised by tax authorities and that these issues may require increases in the balance of uncertain tax positions.