10. Income Taxes

Income from continuing operations before income tax and the provision for income tax consist of the following (in millions):

Years ended December 31	2012			2011			2010


Income from continuing operations before income taxes:
U.K.	$	36		$	222		$	147
U.S.		469			301			21
Other		876			861			891

Total	$	1,381		$	1,384		$	1,059

Income tax expense (benefit):
Current:
U.K.	$	(10	)	$	13		$	(9	)
U.S. federal		170			(17	)		16
U.S. state and local		57			35			10
Other		238			204			211

Total current	$	455		$	235		$	228

Deferred:
U.K.	$	46		$	32		$	57
U.S. federal		(83	)		109			47
U.S. state and local		(10	)		14			13
Other		(48	)		(12	)		(45	)

Total deferred	$	(95	)	$	143		$	72

Total income tax expense	$	360		$	378		$	300

Income from continuing operations before income taxes shown above is based on the location of the business unit to which such earnings are attributable for tax purposes. In addition, because the earnings shown above may in some cases be subject to taxation in more than one country, the income tax provision shown above as U.K., U.S., or Other may not correspond to the geographic attribution of the earnings.

A reconciliation of the income tax provisions based on the Company's domicile and statutory rate at each reporting period is performed. The 2012 reconciliation is based on the U.K. statutory corporate tax rate of 24% and 2011 and 2010 are based on the U.S. statutory rate of 35%. The reconciliation to the provisions reflected in the Consolidated Financial Statements is as follows:

Years ended December 31


Statutory tax rate	24.0	%	35.0	%	35.0	%
U.S. state income taxes, net of U.S. federal benefit	2.2		2.3		1.1
Taxes on international operations (1)	0.6		(11.5	)	(12.5	)
Nondeductible expenses	2.0		3.5		3.9
Adjustments to prior year tax requirements	0.4		(1.1	)	0.2
Deferred tax adjustments, including statutory rate changes	0.7		0.9		0.7
Adjustments to valuation allowances	(5.6	)	(1.7	)	(0.2	)
Other — net	1.8		(0.1	)	0.2

Effective tax rate	26.1		27.3		28.4

(1): The Company determines the adjustment for taxes on international operations based on the difference between the statutory tax rate applicable to earnings in each foreign jurisdiction and the enacted rate of 24%, 35% and 35% at December 31, 2012, 2011 and 2010, respectively.

The components of the Company's deferred tax assets and liabilities are as follows (in millions):

As of December 31	2012			2011


Deferred tax assets:
Employee benefit plans	$	917		$	940
Net operating/capital loss and tax credit carryforwards		368			484
Other accrued expenses		47			154
Investment basis differences		13			17
Other		77			100

Total		1,422			1,695
Valuation allowance on deferred tax assets		(154	)		(219	)

Total	$	1,268		$	1,476

Deferred tax liabilities:
Intangibles and property, plant and equipment	$	(1,128	)	$	(1,333	)
Deferred revenue		(30	)		(83	)
Other accrued expenses		(62	)		(121	)
Unrealized investment gains		(5	)		(21	)
Unrealized foreign exchange gains		(8	)		(23	)
Other		(29	)		(40	)

Total	$	(1,262	)	$	(1,621	)

Net deferred tax asset (liability)	$	6		$	(145	)

Deferred income taxes (assets and liabilities have been netted by jurisdiction) have been classified in the Consolidated Statements of Financial Position as follows (in millions):

As of December 31,	2012			2011


Deferred tax assets — current (1)	$	44		$	19
Deferred tax assets — non-current		285			258
Deferred tax liabilities — current (1)		(17	)		(121	)
Deferred tax liabilities — non-current		(306	)		(301	)

Net deferred tax asset (liability)	$	6		$	(145	)

(1): Included in Other current assets and Other current liabilities.

Valuation allowances have been established primarily with regard to the tax benefits of certain net operating loss and tax credit carryforwards. Valuation allowances decreased by $65 million in 2012, primarily attributable to the change of the following items: a decrease in valuation allowances of $19 million related to net operating loss carryforwards due to a legal entity restructuring, a decrease of $27 million in the valuation allowances for foreign tax credit carryforwards, and a decrease of $22 million in the valuation allowances of an interest expense carryforward.

The Company recognized, as an adjustment to additional paid-in-capital, income tax benefits attributable to employee stock compensation of $33 million, $36 million and $20 million in 2012, 2011 and 2010, respectively.

Undistributed earnings of non-U.S. entities were approximately $2.8 billion at December 31, 2012. U.S. income taxes have not been provided on these undistributed earnings because they are considered to be permanently invested in those subsidiaries. It is not practicable to estimate the amount of unrecognized deferred tax liabilities, if any, for these undistributed foreign earnings.

At December 31, 2012, the Company had U.K. operating loss carryforwards of $552 million and capital loss carryforwards of $251 million, nearly all of which have an indefinite carryforward. In addition there are U.S federal operating loss carryforwards of $25 million that will expire at various dates from 2013 to 2027 and U.S. state operating loss carryforwards of $605 million that will expire at various dates from 2013 to 2031. In other non-U.S. jurisdictions there are operating and capital loss carryforwards of $283 million and $65 million, respectively, which have various carryforward periods and will begin to expire in 2015.

During 2012, we were granted a tax holiday for the period from October 1, 2012 through September 30, 2022, with respect to withholding taxes and certain income derived from services in Singapore. This tax holiday and reduced withholding tax rate may be extended when certain conditions are met or may be terminated early if certain conditions are not met. The benefit realized during 2012 was approximately $11 million.

Uncertain Tax Positions

The following is a reconciliation of the Company's beginning and ending amount of uncertain tax positions (in millions):

	2012			2011


Balance at January 1	$	118		$	100
Additions based on tax positions related to the current year		21			8
Additions for tax positions of prior years		45			5
Reductions for tax positions of prior years		(1	)		(16	)
Settlements		(22	)		(15	)
Lapse of statute of limitations		(5	)		(4	)
Acquisitions		—			40

Balance at December 31	$	156		$	118

As of December 31, 2012, $156 million of uncertain tax positions would impact the effective tax rate if recognized. The Company does not expect the uncertain tax positions to change significantly over the next twelve months.

The Company recognizes interest and penalties related to uncertain tax positions in its provision for income taxes. Aon accrued potential interest and penalties of $6 million in 2012 and 2011. The Company has recorded a liability for interest and penalties of $23 million and $19 million as of December 31, 2012 and 2011, respectively.

The Company and its subsidiaries file income tax returns in their respective jurisdictions. The Company has substantially concluded all U.S. federal income tax matters for years through 2006. Material U.S. state and local income tax jurisdiction examinations have been concluded for years through 2005. The Company has concluded income tax examinations in its primary non-U.S. jurisdictions through 2005.