Income Taxes

The Company’s net loss for the year ended December 31, 2012 included $295.9 million of impairment of goodwill and other intangible assets, which is a permanent difference between its loss for financial reporting and tax purposes. The Company had net deferred income tax liabilities of $150.9 million at December 31, 2012 primarily related to the purchase accounting adjustment associated with the Molycorp Canada acquisition. At December 31, 2012, the Company's management determined that a valuation allowance of $20.6 million was required. Furthermore, primarily due to the acquisition of Molycorp Canada, liabilities for uncertain tax positions increased by a net amount of $5.7 million in fiscal 2012.

For the years ended December 31, 2012, 2011, and 2010 our effective income tax rate was 10.3%, 19.5% and 0%, respectively. Our December 31, 2012 effective income tax rate was impacted primarily by the permanent difference between financial reporting and tax income for impairment of goodwill and other intangible assets, settlements related to uncertain tax positions, and the difference in income tax rates between the U.S. and foreign jurisdictions adjusted for the U.S. taxation of foreign profits.

The Company had undistributed earnings of certain foreign subsidiaries at December 31, 2012 for which deferred taxes of $32.6 million have been provided. Also, it had undistributed earnings of certain foreign subsidiaries at December 31, 2012, for which deferred taxes have not been provided. Such earnings are considered indefinitely invested in the foreign subsidiaries. If such earnings were repatriated, additional tax expense may result, although the calculation of such additional taxes is not practicable.

The net tax effect of the elimination in consolidation of intercompany balances and transactions resulted in a deferred charge and income tax payable of $9.4 million at December 31, 2012.

Income tax expense for the year ended December 31, 2010 was zero as a full valuation allowance was required. Income tax expense consisted of the following for the years ended December 31, 2012 and 2011(in thousands):



	Years Ended December 31,
	2012			2011
Current
Federal	$	(22,418	)	$	18,721
Foreign	8,994			—
State	(4,197		)	6,952
Total current	(17,621		)	25,673
Deferred
Federal	(20,786		)	3,687
Foreign	(11,777		)	—
State	(3,891		)	(784		)
Total deferred	(36,454		)	2,903
Total tax provision	$	(54,075	)	$	28,576

The components of earnings before income taxes, by tax jurisdiction, were as follows for the years ended December 31, 2012, 2011 and 2010 (in thousands):



	Years Ended December 31,
	2012			2011		2010
United States	$	(161,129	)	$	141,801	$	(50,774	)
Foreign	(364,799		)	5,109		—
Total	$	(525,928	)	$	146,910	$	(50,774	)

Income tax expense for the year ended December 31, 2010 was zero as a full valuation allowance was required. A reconciliation of the statutory federal income tax rate of 35% to Molycorp’s effective income tax rate is as follows for the years ended December 31, 2012 and 2011 (in thousands):



	Years Ended December 31,
	2012			2011
Federal tax computed at the statutory rate	$	(184,075	)	$	51,419
State taxes, net of federal benefit	(5,970		)	5,255
Change in valuation allowance	19,515			(22,730		)
Impairment of goodwill and other long-lived assets	103,563			—
Acquisition costs	4,945			—
Changes related to uncertain tax positions	(14,176		)	—
Federal and State tax credits	(6,817		)	(2,627		)
Domestic production activities deduction	2,493			(2,493		)
Foreign income tax rate differential adjusted for U.S. taxation of foreign profits ⁽¹⁾	15,716			(1,735		)
Deferred charges	11,341			—
Other items, net	(610		)	1,487
Income tax expense	$	(54,075	)	$	28,576


(1)	The “U.S. Taxation of foreign profits” represents the U.S. tax net of foreign tax credits associated with actual and deemed repatriations of earnings from the Company's non-U.S. subsidiaries.

The tax effect of temporary differences and net operating losses, which give rise to deferred tax assets and liabilities, consisted of the following at December 31, 2012 and 2011 (in thousands):



	At December 31,
	2012			2011
Deferred tax assets:
Current:
Inventory	$	11,951		$	—
Other	2,468			806
Total current	14,419			806
Non-current:
Asset retirement obligation	165			419
Mineral resources	16,780			16,975
Intangible assets	13,435			—
Stock compensation	1,724			835
Net operating losses	56,156			852
Research and energy tax credits	10,473			—
Alternative Minimum Tax Credit	1,611			—
Other	823			116
Total non-current	101,167			19,197
Deferred tax liabilities:
Current
Inventory	3,395			1,849
Other	541			313
Total current	3,936			2,162
Non-current:
Development costs	—			217
Foreign subsidiary earnings and withholding taxes	32,637			—
Property, plant and equipment and intangible assets	137,010			3,647
Section 174 costs	24,814			20,094
Convertible debt (Notes)	40,478			14,138
Other	6,966			—
Total non-current	241,905			38,096
Net deferred taxes, before valuation allowance	(130,255		)	(20,255		)
Valuation allowance	(20,631		)	—
Total deferred tax	$	(150,886	)	$	(20,255	)

At December 31, 2012, the Company had tax credit carryforwards of $12.1 million available to offset future income taxes. Of this amount, $1.6 million are available to carry forward indefinitely, while of the remaining $10.5 million, $3.1 million will expire in 2031 and $7.4 million will expire in 2032, if not utilized.

The U.S. federal tax loss carryforwards of $85.4 million, of which $29.8 million expires in 2024 and $55.6 million expires in 2032. The U.S. state tax loss carry forward of approximately $86.5 million will expire in 2031 and 2032. The federal loss carryforward is subject to examination by the tax authorities until three years after the carry forward is utilized while the state carryforward is subject to examination until four years after the carryforward is utilized. Additionally, the Company had approximately $96.7 million of tax loss carryforwards for controlled foreign corporations at December 31, 2012 with various expiration periods.

We conduct business in a country that grants “holidays” from income taxes for five- to ten-year periods. This “holiday” expires in 2020. The current operations in the tax “holiday” country have not resulted in aggregate income taxes and related earnings per share impacts as of December 31, 2012.

Each quarter the Company evaluates the liability for uncertain tax positions. As a result of the acquisition of Molycorp Canada on June 11, 2012, uncertain tax positions increased $20.1 million. However, due to a lapse of the applicable statute of limitations, which totaled to $1.4 million, and due to resolution with tax authorities for $13.7 million, some liabilities decreased. These decreases have been recorded as a discrete income tax benefit in the third quarter of 2012. As a result of the statute of limitations that expire in the next 12 months in various jurisdictions, and possible settlements of audit-related issues with taxing authorities in various jurisdictions, the Company believes that it is reasonably possible that the total amount of its net unrecognized income tax benefits will decrease by approximately $4.0 million to $6.0 million in the next 12 months and, if recognized, would affect the Company's effective income tax rate. A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows (in thousands):



	Years Ended December 31,
	2012			2011
Balance, beginning of year	$	519		$	—
Tax position related to current year:
Additions	4,737			519
Tax positions related to prior years:
Additions	16,109			—
Settlements	(13,740		)	—
Statute of limitations closures	(1,406		)	—
Balance, end of year	$	6,219		$	519

The company operates and accordingly files income tax returns in the U.S. federal jurisdiction, various U.S. state jurisdictions, as well as foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state, and non-U.S. income tax examinations by tax authorities for years prior to 2009.

The Company recognized accrued interest and penalties related to uncertain tax positions in income tax expense for the year ended December 31, 2012 and for the year ended December 31, 2011, as applicable.