Income Taxes

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



Years ended December 31	2013			2012			2011
Income before income taxes:
U.K.	$	96		$	36		$	222
U.S.	349			468			305
Other	1,093			876			861
Total	$	1,538		$	1,380		$	1,388
Income tax (benefit) expense:
Current:
U.K.	$	(18	)	$	(10	)	$	13
U.S. federal	111			170			(17		)
U.S. state and local	52			57			35
Other	259			238			204
Total current	$	404		$	455		$	235
Deferred:
U.K.	$	43		$	46		$	32
U.S. federal	(48		)	(83		)	109
U.S. state and local	10			(10		)	14
Other	(19		)	(48		)	(12		)
Total deferred	$	(14	)	$	(95	)	$	143
Total income tax expense	$	390		$	360		$	378

Income 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. Due to the Redomestication, the 2013 and 2012 reconciliations are based on the U.K. statutory corporate tax rate of 23% and 24%, respectively, and 2011 is based on the U.S. statutory rate of 35%, which was the statutory rate prior to the Redomestication. The reconciliation to the provisions reflected in the Consolidated Financial Statements is as follows:



Years ended December 31	2013	2012	2011
Statutory tax rate	23.0%	24.0%	35.0%
U.S. state income taxes, net of U.S. federal benefit	2.6	2.2	2.3
Taxes on international operations (1)	(4.4)	0.6	(11.5)
Nondeductible expenses	1.4	2.0	3.5
Adjustments to prior year tax requirements	(1.6)	0.4	(1.1)
Deferred tax adjustments, including statutory rate changes	1.4	0.7	0.9
Deferred tax adjustments, international earnings	3.3	—	—
Adjustments to valuation allowances	(1.7)	(5.6)	(1.7)
Other — net	1.4	1.8	(0.1)
Effective tax rate	25.4%	26.1%	27.3%


(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 23%, 24% and 35% at December 31, 2013, 2012 and 2011, respectively.

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



As of December 31	2013			2012
Deferred tax assets:
Employee benefit plans	$	623		$	917
Net operating/capital loss and tax credit carryforwards	354			368
Other accrued expenses	142			47
Investment basis differences	50			13
Other	58			77
Total	1,227			1,422
Valuation allowance on deferred tax assets	(127		)	(154		)
Total	$	1,100		$	1,268
Deferred tax liabilities:
Intangibles and property, plant and equipment	$	(1,074	)	$	(1,128	)
Unremitted earnings	(51		)	—
Deferred revenue	(27		)	(30		)
Other accrued expenses	(39		)	(62		)
Unrealized investment gains	—			(5		)
Unrealized foreign exchange gains	(27		)	(8		)
Other	(64		)	(29		)
Total	$	(1,282	)	$	(1,262	)
Net deferred tax asset (liability)	$	(182	)	$	6

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,	2013			2012
Deferred tax assets — current (1)	$	93		$	44
Deferred tax assets — non-current	193			285
Deferred tax liabilities — current (1)	(48		)	(17		)
Deferred tax liabilities — non-current	(420		)	(306		)
Net deferred tax asset (liability)	$	(182	)	$	6


(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 $27 million in 2013, primarily attributable to the change in the valuation allowances for foreign tax credit carryforwards.

The Company recognized, as an adjustment to additional paid-in-capital, income tax benefits attributable to employee stock compensation of $74 million, $33 million and $36 million in 2013, 2012 and 2011, respectively.

During 2013 we changed our assertion on a portion of our undistributed earnings and U.S deferred income taxes of $51 million were accrued. Undistributed earnings of non-U.S. entities were approximately $3.8 billion at December 31, 2013. 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, 2013, the Company had U.K. operating loss carryforwards of $660 million and capital loss carryforwards of $270 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 2020 to 2027 and U.S. state operating loss carryforwards of $412 million that will expire at various dates from 2014 to 2031. In other non-U.S. jurisdictions there are operating and capital loss carryforwards of $287 million and $86 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 2013 was approximately $3.9 million.

Uncertain Tax Positions

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



	2013			2012
Balance at January 1	$	156		$	118
Additions based on tax positions related to the current year	22			21
Additions for tax positions of prior years	69			45
Reductions for tax positions of prior years	(70		)	(1		)
Settlements	(10		)	(22		)
Lapse of statute of limitations	(3		)	(5		)
Balance at December 31	$	164		$	156

As of December 31, 2013, $141 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 $2 million and $6 million in 2013 and 2012, respectively. The Company has recorded a liability for interest and penalties of $27 million and $23 million as of December 31, 2013 and 2012, respectively.

The Company and its subsidiaries file various income tax returns in their 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.