INCOME TAXES

Operating loss carryforwards amounted to $4,859 million at December 31, 2011 and $4,572 million at December 31, 2010. At December 31, 2011, $644 million of the operating loss carryforwards were subject to expiration in 2012 through 2016. The remaining operating loss carryforwards expire in years beyond 2016 or have an indefinite carryforward period. Tax credit carryforwards at December 31, 2011 amounted to $403 million ($479 million at December 31, 2010), net of uncertain tax positions, of which $5 million is subject to expiration in 2012 through 2016. The remaining tax credit carryforwards expire in years beyond 2016.

Undistributed earnings of foreign subsidiaries and related companies that are deemed to be permanently invested amounted to $10,073 million at December 31, 2011, $9,798 million at December 31, 2010 and $8,707 million at December 31, 2009. It is not practicable to calculate the unrecognized deferred tax liability on those earnings.

The Company had valuation allowances that primarily related to the realization of recorded tax benefits on tax loss carryforwards from operations in the United States, Brazil and Asia Pacific of $1,152 million at December 31, 2011 and $682 million at December 31, 2010.

The tax rate for 2011 was negatively impacted by a $264 million valuation allowance recorded in the fourth quarter of 2011. The valuation allowance was recorded against the deferred tax assets of two Dow entities in Brazil. As a result of the global recession in 2008-2009, coupled with rapidly deteriorating isocyanate industry conditions and increasing local costs, these two entities were in a three-year cumulative pretax operating loss position at December 31, 2011. While the Company expects to realize the tax loss carryforwards generated by these operating losses based on several factors - including forecasted margin expansion resulting from improving economic conditions, higher industry growth rates in Brazil, improving Dow operating rates, and a restructuring of legal entities to maximize the use of existing tax loss carryforwards - Dow was unable to overcome the negative evidence of recent cumulative operating losses; and at December 31, 2011, the Company could not assert it was more likely than not that it will realize its deferred tax assets in the two Brazilian entities. Accordingly, the Company established the valuation allowance against the deferred tax assets of these companies in the fourth quarter of 2011. If in the future, as a result of the Company's plans and expectations, one or both of these entities generates sufficient profitability such that the evaluation of the recoverability of the deferred tax assets changes, the valuation allowance could be reversed in whole or in part in a future period.

The tax rate for 2011 was positively impacted by a high level of equity earnings as a percentage of total earnings, earnings in foreign locations taxed at rates less than the U.S. statutory rate, the sale of a contract manufacturing subsidiary and the reorganization of a joint venture. These factors, combined with the Brazil valuation allowance, resulted in an effective tax rate of 22.7 percent for 2011.

The tax rate for 2010 was positively impacted by a high level of equity earnings as a percentage of total earnings, the release of a tax valuation allowance, a tax law change, and improved financial results in jurisdictions with tax rates that are lower than the U.S. statutory rate. These factors resulted in an effective tax rate of 17.2 percent for 2010.

The tax rate for 2009 was reduced by several factors: a significantly higher level of equity earnings as a percent of total earnings, favorable accrual-to-return adjustments in various geographies, the recognition of domestic losses and an improvement in financial results in jurisdictions with tax rates that are lower than the U.S. statutory rate. These factors resulted in an effective tax rate of negative 20.7 percent for 2009.



Domestic and Foreign Components of Income from Continuing Operations Before Income Taxes
In millions	2011		2010			2009
Domestic	$	386	$	(821	)	$	(290	)
Foreign	3,215		3,623			759
Total	$	3,601	$	2,802		$	469



Reconciliation to U.S. Statutory Rate
In millions	2011			2010			2009
Taxes at U.S. statutory rate	$	1,260		$	981		$	164
Equity earnings effect	(459		)	(272		)	(266		)
Foreign income taxed at rates other than 35% (1)	(242		)	(262		)	(121		)
U.S. tax effect of foreign earnings and dividends	218			118			210
Goodwill impairment losses	—			—			3
Change in valuation allowances	367			(34		)	9
Unrecognized tax benefits	35			(52		)	21
Federal tax accrual adjustments	8			(13		)	(119		)
Sale of a contract manufacturing subsidiary (2)	(231		)	—			—
Joint venture reorganization	(95		)	—			—
Other – net	(44		)	15			2
Total tax provision (credit)	$	817		$	481		$	(97	)
Effective tax rate	22.7		%	17.2		%	(20.7		)%


(1)	Includes the tax provision for statutory taxable income in foreign jurisdictions for which there is no corresponding amount in “Income from Continuing Operations Before Income Taxes.”


(2)	The Company recognized a tax benefit of $231 million related to the sale of a contract manufacturing subsidiary, which was reduced by a $95 million valuation allowance.



Provision (Credit) for Income Taxes
	2011								2010									2009
In millions	Current		Deferred			Total			Current			Deferred			Total			Current		Deferred			Total
Federal	$	36	$	(244	)	$	(208	)	$	(576	)	$	445		$	(131	)	$	65	$	(538	)	$	(473	)
State and local	12		(13		)	(1		)	(36		)	(21		)	(57		)	27		(15		)	12
Foreign	768		258			1,026			765			(96		)	669			463		(99		)	364
Total	$	816	$	1		$	817		$	153		$	328		$	481		$	555	$	(652	)	$	(97	)

The provision for income taxes attributable to discontinued operations (domestic) was $65 million for 2009 (see Note E). The Company did not report discontinued operations in 2011 and 2010.



Deferred Tax Balances at December 31	2011					2010
In millions	Deferred Tax Assets (1)			Deferred Tax Liabilities		Deferred Tax Assets (1)			Deferred Tax Liabilities
Property	$	102		$	2,265	$	629		$	3,084
Tax loss and credit carryforwards	2,294			—		1,957			—
Postretirement benefit obligations	3,916			1,184		3,282			1,099
Other accruals and reserves	1,954			604		2,101			545
Intangibles	152			1,076		182			1,615
Inventory	229			289		149			277
Long-term debt	—			726		3			393
Investments	186			183		174			136
Other – net	1,185			729		986			342
Subtotal	$	10,018		$	7,056	$	9,463		$	7,491
Valuation allowances	(1,152		)	—		(682		)	—
Total	$	8,866		$	7,056	$	8,781		$	7,491


(1)	Included in current deferred tax assets are prepaid tax assets totaling $210 million in 2011 and $100 million in 2010.

Uncertain Tax Positions

At December 31, 2011, the total amount of unrecognized tax benefits was $339 million ($319 million at December 31, 2010), of which $319 million would impact the effective tax rate, if recognized ($297 million at December 31, 2010).

Interest and penalties associated with uncertain tax positions are recognized as components of the “Provision (Credit) for income taxes,” and totaled $21 million in 2011, $6 million in 2010 and $10 million in 2009. The Company’s accrual for interest and penalties was $66 million at December 31, 2011 and $58 million at December 31, 2010.



Total Gross Unrecognized Tax Benefits
In millions	2011			2010			2009
Balance at January 1	$	319		$	650		$	736
Increases related to positions taken on items from prior years	5			8			57
Decreases related to positions taken on items from prior years	(11		)	(33		)	(25		)
Increases related to positions taken in the current year	70			24			71
Settlement of uncertain tax positions with tax authorities	(21		)	(300		)	(172		)
Decreases due to expiration of statutes of limitations	(23		)	(30		)	(17		)
Balance at December 31	$	339		$	319		$	650

The Company is currently under examination in a number of tax jurisdictions. It is reasonably possible that these examinations may be resolved within twelve months. As a result, it is reasonably possible that the total gross unrecognized tax benefits of the Company at December 31, 2011 may be reduced in the next twelve months by approximately $45 million to $90 million as a result of these resolved examinations. The impact on the Company’s results of operations is not expected to be material.

Tax years that remain subject to examination for the Company’s major tax jurisdictions are shown below:



Tax Years Subject to Examination by Major Tax Jurisdiction at December 31
	Earliest Open Year
Jurisdiction	2011	2010
Argentina	2005	2004
Brazil	2007	2005
Canada	2008	2006
France	2009	2008
Germany	2002	2002
Italy	2005	2005
The Netherlands	2011	2009
Spain	2008	2004
Switzerland	2009	2008
United Kingdom	2008	2008
United States:
Federal income tax	2004	2004
State and local income tax	2004	1996

The reserve for non-income tax contingencies related to issues in the United States and foreign locations was $134 million at December 31, 2011 and $156 million at December 31, 2010. This is management’s best estimate of the potential liability for non-income tax contingencies. Inherent uncertainties exist in estimates of tax contingencies due to changes in tax law, both legislated and concluded through the various jurisdictions’ tax court systems. It is the opinion of the Company’s management that the possibility is remote that costs in excess of those accrued will have a material impact on the Company’s consolidated financial statements.