Income taxes

The provision for income taxes includes the following for the years ended December 31, 2013, 2012 and 2011 (in millions):



	2013			2012			2011
Current provision:
Federal	$	54		$	438		$	551
State	26			47			54
Foreign	191			158			148
Total current provision	271			643			753
Deferred provision (benefit):
Federal	(86		)	83			(273		)
State	19			(43		)	(12		)
Foreign	(20		)	(19		)	(1		)
Total deferred provision (benefit)	(87		)	21			(286		)
Total provision	$	184		$	664		$	467

Deferred income taxes reflect the tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, tax credit carryforwards and the tax effects of net operating loss (NOL) carryforwards.

Significant components of our deferred tax assets and liabilities are as follows as of December 31, 2013 and 2012 (in millions):



	2013			2012
Deferred income tax assets:
NOL and credit carryforwards	$	1,017		$	427
Expense accruals	697			805
Expenses capitalized for tax	196			195
Stock-based compensation	211			115
Deferred revenue	40			40
Other	104			83
Total deferred income tax assets	2,265			1,665
Valuation allowance	(314		)	(273		)
Net deferred income tax assets	1,951			1,392

Deferred income tax liabilities:
Acquired intangibles	(4,430		)	(1,249		)
Fixed assets	(8		)	(117		)
Unremitted foreign earnings	(55		)	(106		)
Other	(200		)	(145		)
Total deferred income tax liabilities	(4,693		)	(1,617		)
Total deferred income taxes, net	$	(2,742	)	$	(225	)

At December 31, 2013 and 2012, we had net noncurrent deferred tax liabilities of $3.5 billion and $0.9 billion, respectively, related primarily to the difference between the book basis and tax basis of intangible assets acquired in business combinations. These amounts are included in Other noncurrent liabilities on the Consolidated Balance Sheets.

Valuation allowances are provided to reduce the amounts of our deferred tax assets to an amount that is more likely than not to be realized based on an assessment of positive and negative evidence, including estimates of future taxable income necessary to realize future deductible amounts.

The valuation allowance for deferred tax assets increased by $41 million and $147 million in 2013 and 2012, respectively, due primarily to valuation allowances established as part of acquisitions and the Company’s expectation that some state R&D credits will not be utilized.

At December 31, 2013, we had $341 million of federal tax credit carryforwards available to reduce future federal income taxes and have provided a valuation allowance for $4 million of those federal tax credits. The federal tax credit carryforwards for which no valuation allowance has been provided expire between 2018 and 2033. We had $313 million of tax credit carryforwards available to reduce future state income taxes and have provided a valuation allowance for $202 million of those state tax credit carryforwards. The majority of the state tax credit carryforwards have no expiry; the remainder expires between 2018 and 2020.

At December 31, 2013, we had $425 million of NOL carryforwards available to reduce future federal income taxes and have provided a valuation allowance for $80 million of those federal NOL carryforwards. The federal NOL carryforwards for which no valuation allowance has been provided expire between 2023 and 2033. We had $883 million of NOL carryforwards available to reduce future state income taxes and have provided a valuation allowance for $266 million of those state NOL carryforwards. The state NOLs for which no valuation allowance has been provided expire between 2014 and 2033. We had $1.3 billion of NOL carryforwards available to reduce future foreign income taxes and have provided a valuation allowance for $770 million of those foreign NOL carryforwards. The majority of the foreign NOLs have no expiry; the remainder of the foreign NOLs expire between 2014 and 2022.

The reconciliation of the total gross amounts of UTBs (excluding interest, penalties, foreign tax credits and the federal tax benefit of state taxes related to UTBs) for the years ended December 31, 2013, 2012 and 2011 is as follows (in millions):



	2013			2012			2011
Balance at beginning of year	$	1,200		$	975		$	920
Additions based on tax positions related to the current year	335			300			283
Additions based on tax positions related to prior years	96			5			1
Reductions for tax positions of prior years	(192		)	(50		)	(8		)
Settlements	(24		)	(30		)	(221		)
Balance at end of year	$	1,415		$	1,200		$	975

Substantially all of the UTBs as of December 31, 2013, if recognized, would affect our effective tax rate. During the year ended December 31, 2013, we settled our examination with the Internal Revenue Service (IRS) for the years ended December 31, 2007, 2008, and 2009. During the year ended December 31, 2012, we settled examinations with various state and foreign tax authorities for prior tax years. During the year ended December 31, 2011, we settled our examination with the IRS related to certain transfer pricing tax positions for the years ended December 31, 2007, 2008 and 2009. As a result of these developments, we remeasured our UTBs accordingly. As of December 31, 2013, we believe it is reasonably possible that our gross liabilities for UTBs may decrease by approximately $70 million within the succeeding twelve months due to the resolution of state audits.

Interest and penalties related to UTBs are included in our provision for income taxes. During 2013, 2012 and 2011, we accrued approximately $32 million, $30 million and $23 million, respectively, of interest and penalties through the income tax provision in the Consolidated Statements of Income. At December 31, 2013 and 2012, accrued interest and penalties associated with UTBs totaled approximately $99 million and $102 million, respectively.

The reconciliation between the federal statutory tax rate applied to income before income taxes and our effective tax rate for the years ended December 31, 2013, 2012 and 2011, is as follows:



	2013		2012		2011
Federal statutory tax rate	35.0	%	35.0	%	35.0	%
Foreign earnings, including earnings invested indefinitely	(21.3	)%	(17.8	)%	(19.4	)%
Credits, Puerto Rico Excise Tax	(4.7	)%	(5.2	)%	(6.5	)%
Credits, primarily federal R&D	(3.0	)%	—	%	(1.5	)%
State taxes	0.8	%	0.6	%	0.7	%
Audit settlements (federal, state, foreign)	(3.7	)%	0.3	%	—	%
Legal settlements	—	%	(0.2	)%	2.2	%
Other, net	0.4	%	0.6	%	0.8	%
Effective tax rate	3.5	%	13.3	%	11.3	%

The effective tax rates for the years ended December 31, 2013, 2012 and 2011, are different from the federal statutory rates primarily as a result of indefinitely invested earnings of our foreign operations. We do not provide for U.S. income taxes on undistributed earnings of our foreign operations that are intended to be invested indefinitely outside the United States. Substantially all of the benefit from foreign earnings on our effective tax rate results from foreign income associated with the Company’s operation conducted in Puerto Rico that is subject to a tax incentive grant that expires in 2020. At December 31, 2013, the cumulative amount of these earnings was approximately $25.5 billion. If these earnings were repatriated to the United States, we would be required to accrue and pay approximately $9.1 billion of additional income taxes based on the current tax rates in effect.

Our total foreign income before income taxes was approximately $3.7 billion, $3.3 billion and $3.0 billion for the years ended December 31, 2013, 2012 and 2011, respectively.

Puerto Rico imposes an excise tax on the gross intercompany purchase price of goods and services from our manufacturer in Puerto Rico. The rate was 4.0% in 2011, 3.75% in 2012, 2.75% in the first half of 2013 and 4.0% effective July 1, 2013 through December 31, 2017. We account for the excise tax as a manufacturing cost that is capitalized in inventory and expensed in cost of sales when the related products are sold. For U.S. income tax purposes, the excise tax results in foreign tax credits that are generally recognized in our provision for income taxes when the excise tax is incurred.

Because the American Taxpayer Relief Act of 2012 was not enacted until 2013, certain provisions of the Act benefiting the Company's 2012 federal taxes, including the retroactive extension of the R&D tax credit for 2012, were not recognized in the Company's 2012 financial results and instead are reflected in the Company's 2013 financial results. The tax benefit of the retroactive extension of the 2012 R&D tax credit that was recognized in 2013 was $70 million.

Income taxes paid during the years ended December 31, 2013, 2012 and 2011, totaled $321 million, $502 million and $595 million, respectively.

One or more of our legal entities file income tax returns in the U.S. federal jurisdiction, various U.S. state jurisdictions and certain foreign jurisdictions. Our income tax returns are routinely audited by the tax authorities in those jurisdictions. Significant disputes may arise with these tax authorities involving issues of the timing and amount of deductions, the use of tax credits and allocations of income among various tax jurisdictions because of differing interpretations of tax laws and regulations. We are no longer subject to U.S. federal income tax examinations for tax years ending on or before December 31, 2009, or to California state income tax examinations for tax years ending on or before December 31, 2005.