INCOME TAXES FROM CONTINUING OPERATIONS

Earnings from continuing operations before income taxes for the years ended December 31 consist of the following ($ in millions):



	2013		2012		2011
United States	$	1,713.7	$	1,349.9	$	1,168.1
International	1,852.3		1,660.9		1,279.7
Total	$	3,566.0	$	3,010.8	$	2,447.8

The provision for income taxes from continuing operations for the years ended December 31 consist of the following ($ in millions):



	2013		2012		2011
Current:
Federal U.S.	$	292.5	$	290.5	$	(6.3	)
Non-U.S.	247.6		197.2		206.0
State and local	76.3		38.9		41.4
Deferred:
Federal U.S.	239.5		175.0		265.9
Non-U.S.	13.3		0.8		(13.3		)
State and local	1.8		9.1		18.8
Income tax provision	$	871.0	$	711.5	$	512.5

The provision for income taxes from discontinued operations for the years ended December 31, 2012 and 2011 was $55 million and $146 million, respectively.

Net current deferred income tax assets are reflected in prepaid expenses and other current assets and net long-term deferred income tax liabilities are included in other long-term liabilities in the accompanying Consolidated Balance Sheets. Deferred income tax assets and liabilities as of December 31 consist of the following ($ in millions):



	2013			2012
Deferred tax assets:
Allowance for doubtful accounts	$	26.1		$	18.2
Inventories	116.8			113.9
Pension and post-retirement benefits	298.3			397.8
Environmental and regulatory compliance	27.5			26.5
Other accruals and prepayments	297.5			442.3
Stock-based compensation expense	118.7			111.1
Tax credit and loss carryforwards	801.0			916.4
Other	2.9			22.0
Valuation allowances	(398.0		)	(382.5		)
Total deferred tax asset	1,290.8			1,665.7
Deferred tax liabilities:
Property, plant and equipment	(135.3		)	(214.2		)
Insurance, including self-insurance	(616.4		)	(381.2		)
Basis difference in LYONs	(57.2		)	(99.7		)
Goodwill and other intangibles	(2,086.9		)	(2,146.3		)
Deferred service income	—			(71.6		)
Unrealized gains on marketable securities	(104.5		)	(72.7		)
Total deferred tax liability	(3,000.3		)	(2,985.7		)
Net deferred tax liability	$	(1,709.5	)	$	(1,320.0	)

Deferred taxes associated with temporary differences resulting from timing of recognition for income tax purposes of fees paid for services rendered between consolidated entities are reflected as deferred service income in the above table. These fees are fully eliminated in consolidation and have no effect on reported revenue, income or reported income tax expense. The Company evaluates the future realizability of tax credits and loss carryforwards considering the anticipated future earnings of the Company’s subsidiaries as well as tax planning strategies in the associated jurisdictions. Deferred taxes associated with U.S. entities consist of net deferred tax liabilities of approximately $1.7 billion and $1.3 billion as of December 31, 2013 and 2012, respectively. Deferred taxes associated with non-U.S. entities consist of net deferred tax liabilities of $57 million and $33 million as of December 31, 2013 and 2012, respectively. During 2013, the Company's valuation allowance increased by $16 million primarily due to foreign net operating losses.

The effective income tax rate for the years ended December 31 varies from the U.S. statutory federal income tax rate as follows:



	Percentage of Pre-Tax Earnings
	2013		2012		2011
Statutory federal income tax rate	35.0	%	35.0	%	35.0	%
Increase (decrease) in tax rate resulting from:
State income taxes (net of federal income tax benefit)	1.1		1.1		1.0
Foreign income taxed at lower rate than U.S. statutory rate	(12.6	)	(14.1	)	(12.8	)
Resolution and adjustments of uncertain tax positions/statute expirations	0.5		(0.3	)	(2.4	)
Acquisition costs	0.1		0.1		0.4
Research and experimentation credits and other	0.3		1.8		(0.3	)
Effective income tax rate	24.4	%	23.6	%	20.9	%

The Company’s effective tax rate for each of 2013, 2012 and 2011 differs from the U.S. federal statutory rate of 35% due principally to the Company’s earnings outside the United States that are indefinitely reinvested and taxed at rates lower than the U.S. federal statutory rate. In addition, the effective tax rates of 24.4% in 2013, 23.6% in 2012 and 20.9% in 2011 are lower than that U.S. federal statutory rate due to recognition of tax benefits associated with favorable resolutions of certain international and domestic uncertain tax positions and the lapse of certain statutes of limitations. The effective tax rate for 2013 also benefits from the retroactive reinstatement of certain tax benefits and credits resulting from the enactment of the American Tax Relief Act of 2012. These favorable items were offset by adjustments of reserve estimates related to prior period uncertain tax positions and on-going audit settlement estimates in various jurisdictions. The matters referenced above have been treated as discrete items in the periods they occurred and in the aggregate reduced the provision for income taxes by approximately 20 basis points in 2013, 30 basis points in 2012 and 240 basis points in 2011.

The Company made income tax payments related to continuing operations of $529 million, $355 million and $303 million in 2013, 2012 and 2011, respectively. In addition, the Company made tax payments related to discontinued operations, including the gain on the sale of ASI, KEO and PSA (refer to Note 3) totaling $55 million and $129 million in 2012 and 2011, respectively. Current income tax payable has been reduced by $80 million, $106 million, and $40 million in 2013, 2012 and 2011, respectively, for tax deductions attributable to stock-based compensation, of which, the excess tax benefit over the amount recorded for financial reporting purposes was $49 million, $70 million and $25 million, respectively, and has been recorded as an increase to additional paid-in capital and is reflected as a financing cash inflow in the accompanying Consolidated Statements of Cash Flows.

Included in deferred income taxes as of December 31, 2013 are tax benefits for U.S. and non-U.S. net operating loss carryforwards totaling $303 million (net of applicable valuation allowances of $393 million). Certain of the losses can be carried forward indefinitely and others can be carried forward to various dates from 2014 through 2033. In addition, the Company had general business and foreign tax credit carryforwards of $100 million (net of applicable valuation allowances of $5 million) as of December 31, 2013.

As of December 31, 2013, gross unrecognized tax benefits totaled $689 million ($634 million, net of $179 million of indirect tax benefits and including $124 million associated with potential interest and penalties). As of December 31, 2012, gross unrecognized tax benefits totaled $613 million ($534 million, net of offsetting indirect tax benefits and including $145 million associated with potential interest and penalties). The Company recognized approximately $43 million, $34 million and $56 million in potential interest and penalties associated with uncertain tax positions during 2013, 2012 and 2011, respectively. To the extent unrecognized tax benefits (including interest and penalties) are not assessed with respect to uncertain tax positions, substantially all amounts accrued will be reduced and reflected as a reduction of the overall income tax provision. Unrecognized tax benefits and associated accrued interest and penalties are included in taxes, income and other in accrued expenses as detailed in Note 9.

A reconciliation of the beginning and ending amount of unrecognized tax benefits, excluding amounts accrued for potential interest and penalties, is as follows ($ in millions):



	2013			2012			2011
Unrecognized tax benefits, beginning of year	$	613.2		$	518.3		$	517.5
Additions based on tax positions related to the current year	47.8			60.8			46.6
Additions for tax positions of prior years	166.9			94.7			77.1
Reductions for tax positions of prior years	(57.4		)	(38.4		)	(59.7		)
Acquisitions and other	18.2			19.7			85.5
Lapse of statute of limitations	(96.1		)	(20.7		)	(124.3		)
Settlements	(3.8		)	(23.2		)	(21.2		)
Effect of foreign currency translation	0.2			2.0			(3.2		)
Unrecognized tax benefits, end of year	$	689.0		$	613.2		$	518.3

The Company conducts business globally, and files numerous consolidated and separate income tax returns in the United States federal, state and foreign jurisdictions. The Company and its subsidiaries are routinely examined by various domestic and international taxing authorities. During 2013, the Internal Revenue Service (“IRS”) completed examinations of certain of the Company's federal income tax returns for the years 2008 and 2009 and has commenced its examinations of the Company's federal income tax returns for 2010 and 2011. In addition, the Company has subsidiaries in Belgium, Brazil, Canada, Denmark, France, Finland, Germany, India, Italy, Japan, Norway, Singapore, Sweden, the United Kingdom and various other countries, states and provinces that are currently under audit for years ranging from 2000 through 2012.

Tax authorities in Denmark and Germany have raised significant issues related to the deductibility and taxability of interest accrued by certain of the Company's subsidiaries. On December 10, 2013, the Company received assessments from the Danish tax authority (“SKAT”) totaling approximately DKK 1.1 billion (approximately $200 million based on exchange rates as of December 31, 2013) imposing withholding tax and interest thereon relating to interest accrued in Denmark on borrowings from certain of the Company's subsidiaries for the years 2004-2009. If the SKAT claims are successful, it is likely that the Company would be assessed additional amounts for years through 2013 totaling approximately DKK 800 million (approximately $144 million based on exchange rates as of December 31, 2013) as well as future interest on the disputed withholding tax for subsequent periods prior to such a determination. Discussions with the German tax authorities are ongoing and final assessments have not been issued.

Management believes the positions the Company has taken in both Denmark and Germany are in accordance with the relevant tax laws and intends to vigorously defend its positions, including contesting the SKAT assessment; however, the ultimate resolution of these matters is uncertain, could take many years, and individually or in the aggregate could result in a material adverse impact to the Company's financial statements, including its effective tax rate.

Management estimates that it is reasonably possible that the amount of unrecognized tax benefits may be reduced by approximately $90 million within twelve months as a result of resolution of worldwide tax matters, tax audit settlements and/or statute expirations.

The Company operates in various non–U.S. tax jurisdictions where “tax holiday” income tax incentives have been granted for a specified period. These tax benefits are not material to the Company’s financial statements.

As of December 31, 2013, the Company held $2.2 billion of cash and cash equivalents outside of the United States. While repatriation of some cash held outside the United States may be restricted by local laws, most of the Company's foreign cash balances could be repatriated to the United States but, under current law, could be subject to U.S. federal income taxes, less applicable foreign tax credits. For most of its foreign subsidiaries, the Company makes an election regarding the amount of earnings intended for indefinite reinvestment, with the balance available to be repatriated to the United States. A deferred tax liability has been accrued for the funds that are available to be repatriated to the United States. No provisions for U.S. income taxes have been made with respect to earnings that are planned to be reinvested indefinitely outside the United States, and the amount of U.S. income taxes that may be applicable to such earnings is not readily determinable given the various tax planning alternatives the Company could employ if it repatriated these earnings. The cash that the Company’s foreign subsidiaries hold for indefinite reinvestment is generally used to finance foreign operations and investments, including acquisitions. As of December 31, 2013 and 2012, the total amount of earnings planned to be reinvested indefinitely outside the United States for which deferred taxes have not been provided was approximately $10.6 billion and $9.3 billion, respectively.