Taxes on Earnings

The provision for income taxes on earnings from continuing operations consists of the following:



	2014			2013			2012
Income taxes:
Currently payable:
Federal	$	252		$	268		$	221
State	30			24			29
Non-U.S.	42			47			43
	324			339			293
Deferred:
Federal	32			(58		)	31
State	2			(6		)	2
Non-U.S.	(11		)	—			(1		)
	23			(64		)	32
	$	347		$	275		$	325

Earnings from continuing operations before income taxes:
United States	$	995		$	815		$	918
Non-U.S.	78			140			131
	$	1,073		$	955		$	1,049

The following is a reconciliation of the effective income tax rate on continuing operations to the U.S. federal statutory income tax rate:



	2014		2013		2012
Federal statutory income tax rate	35.0	%	35.0	%	35.0	%
State income taxes (net of federal tax benefit)	2.0		1.1		2.0
Tax effect of international items	(1.0	)	(2.6	)	(3.8	)
Settlement of tax contingencies	—		(0.1	)	(0.1	)
Federal manufacturing deduction	(2.3	)	(2.7	)	(1.9	)
Other	(1.4	)	(1.9	)	(0.2	)
Effective income tax rate	32.3	%	28.8	%	31.0	%

Deferred tax liabilities and assets are comprised of the following:



	2014			2013
Depreciation	$	300		$	302
Amortization	541			484
Other	17			66
Deferred tax liabilities	858			852
Benefits and compensation	294			316
Pension benefits	63			61
Tax loss carryforwards	49			95
Capital loss carryforwards	112			104
Other	70			73
Gross deferred tax assets	588			649
Deferred tax asset valuation allowance	(151		)	(148		)
Net deferred tax assets	437			501
Net deferred tax liability	$	421		$	351

At August 3, 2014, U.S. and non-U.S. subsidiaries of the company had tax loss carryforwards of approximately $190. Of these carryforwards, $145 expire between 2015 and 2033, and $45 may be carried forward indefinitely. The current statutory tax rates in these countries range from 15% to 35%. At August 3, 2014, deferred tax asset valuation allowances have been established to offset $147 of these tax loss carryforwards. Additionally, at August 3, 2014, non-U.S. subsidiaries of the company had capital loss carryforwards of approximately $418, which were fully offset by valuation allowances.

The net change in the deferred tax asset valuation allowance in 2014 was an increase of $3. The increase was primarily due to the impact of currency and the recognition of additional valuation allowances on foreign loss carryforwards. The net change in the deferred tax asset valuation allowance in 2013 was an increase of $6. The increase was primarily due to the impact of currency and the recognition of additional valuation allowances on foreign loss carryforwards.

As of August 3, 2014, other deferred tax assets included $9 of state tax credit carryforwards related to various states that expire between 2018 and 2024. As of July 28, 2013, other deferred tax assets included $7 of foreign tax credit carryforwards that expire in 2023, and $10 of state tax credit carryforwards related to various states that expire between 2014 and 2022. No valuation allowances have been established related to these deferred tax assets.

As of August 3, 2014, U.S. income taxes have not been provided on approximately $740 of undistributed earnings of non-U.S. subsidiaries, which are deemed to be permanently reinvested. It is not practical to estimate the tax liability that might be incurred if such earnings were remitted to the U.S.

A reconciliation of the activity related to unrecognized tax benefits follows:



	2014			2013			2012
Balance at beginning of year	$	61		$	48		$	43
Increases related to prior-year tax positions	—			28			2
Decreases related to prior-year tax positions	(1		)	(7		)	(1		)
Increases related to current-year tax positions	11			9			9
Settlements	—			(15		)	—
Lapse of statute	—			(2		)	(5		)
Balance at end of year	$	71		$	61		$	48

The increase in 2013 for prior-year tax positions was primarily due to the acquisition of Bolthouse Farms and Plum.

The amount of unrecognized tax benefits that, if recognized, would impact the annual effective tax rate was $23 as of August 3, 2014 and July 28, 2013, and $18 as of July 29, 2012. The total amount of unrecognized tax benefits can change due to audit settlements, tax examination activities, statute expirations and the recognition and measurement criteria under accounting for uncertainty in income taxes. The company believes it is reasonably possible that the amount of unrecognized tax benefits could change by approximately $27 within the next 12 months. It is likely that an intercompany pricing agreement between the U.S. and Canada will be settled that covers the years 2006 through 2013. The impact of the settlement is not expected to be material to the financial statements. As of August 3, 2014, $28 of unrecognized tax benefit liabilities, including interest and penalties, were reported as accrued taxes payable in the Consolidated Balance Sheet. Approximately $2 of unrecognized tax benefits, including interest and penalties, were reported as accounts receivable in the Consolidated Balance Sheets as of August 3, 2014, and July 28, 2013.

The company’s accounting policy with respect to interest and penalties attributable to income taxes is to reflect any expense or benefit as a component of its income tax provision. The total amount of interest and penalties recognized in the Consolidated Statements of Earnings was not material in 2014, 2013 and 2012. The total amount of interest and penalties recognized in the Consolidated Balance Sheets was $3 as of August 3, 2014, and $2 as of July 28, 2013.

The company does business internationally and, as a result, files income tax returns in the U.S. federal jurisdiction and various state and non-U.S. jurisdictions. In the normal course of business, the company is subject to examination by taxing authorities throughout the world, including such major jurisdictions as the U.S., Australia, Canada and Denmark. The 2014 tax year is currently under audit by the Internal Revenue Service. In addition, several state income tax examinations are in progress for the years 2006 to 2013.

With limited exceptions, the company has been audited for income tax purposes in Denmark through 2008, and in Canada and Australia through 2009.