INCOME TAXES

Income Tax Provision. We calculate our provision for federal, state and international income taxes based on current tax law. The reported tax provision differs from the amounts currently receivable or payable because some income and expense items are recognized in different time periods for financial reporting purposes than for income tax purposes. The following is a summary of our net provision for income taxes for continuing operations:



Year Ended December 31	2010			2011			2012
Current:
U.S. federal	$	951		$	951		$	892
State	7			20			(9		)
International	148			181			138
Total current	1,106			1,152			1,021
Deferred:
U.S. federal	60			87			(172		)
State	3			—			(5		)
International	(7		)	(73		)	29
Total deferred	56			14			(148		)
Provision for income taxes, net	$	1,162		$	1,166		$	873
Net income tax payments	$	1,060		$	1,083		$	1,155

The provision for state and local income taxes that is allocable to U.S. government contracts is included in operating costs and expenses in the Consolidated Statements of Earnings (Loss) and, therefore, not included in the provision above.

The reconciliation from the statutory federal income tax rate to our effective income tax rate follows:



Year Ended December 31	2010		2011		2012
Statutory federal income tax rate	35.0	%	35.0	%	35.0	%
State tax on commercial operations, net of federal benefits	0.2		0.4		(1.6	)
Impact of international operations	(2.4	)	(1.0	)	53.8
Domestic production deduction	(1.6	)	(1.8	)	(11.2	)
Domestic tax credits	(0.6	)	(0.6	)	(1.4	)
Goodwill impairment	—		—		92.1
Other, net	0.1		(0.6	)	(5.3	)
Effective income tax rate	30.7	%	31.4	%	161.4	%

Our 2012 effective tax rate was unfavorably impacted by two items. Due to the non-deductible nature of a substantial portion of our goodwill, there was a limited tax benefit recognized on the impairment. In addition, due to the unfavorable market conditions impacting certain of our international subsidiaries, a valuation allowance was established for their net deferred tax assets, including the operating losses resulting from the charges discussed in Note N at our European Land Systems business in the fourth quarter of 2012 (see deferred tax assets table below).

Deferred Tax Assets. The tax effects of temporary differences between reported earnings and taxable earnings consisted of the following:



December 31	2011			2012
Retirement benefits	$	1,398		$	1,746
Tax loss and credit carryforwards	410			561
Salaries and wages	258			261
Workers’ compensation	222			260
A-12 termination	95			94
Other	521			536
Deferred assets	2,904			3,458
Valuation allowance	(102		)	(335		)
Net deferred assets	$	2,802		$	3,123
Intangible assets	$	(1,137	)	$	(950	)
Contract accounting methods	(626		)	(566		)
Capital Construction Fund	(239		)	(239		)
Other	(522		)	(390		)
Deferred liabilities	$	(2,524	)	$	(2,145	)
Net deferred tax asset	$	278		$	978

Our net deferred tax asset was included on the Consolidated Balance Sheets in other assets and liabilities as follows:



December 31	2011			2012
Current deferred tax asset	$	269		$	44
Current deferred tax liability	(131		)	(173		)
Noncurrent deferred tax asset	310			1,251
Noncurrent deferred tax liability	(170		)	(144		)
Net deferred tax asset	$	278		$	978

We believe it is more likely than not that we will generate sufficient taxable income in future periods to realize our deferred tax assets, subject to valuation allowances recognized.

Our retirement benefits deferred tax amount includes a deferred tax asset of $1.6 billion on December 31, 2011, and $2.1 billion on December 31, 2012, related to the amounts recorded in accumulated other comprehensive loss (AOCI) to recognize the funded status of our retirement plans. See Notes L and P for further discussion.

One of our deferred tax liabilities results from our participation in the Capital Construction Fund (CCF). The CCF is a program, established by the U.S. government and administered by the Maritime Administration, that affects the timing of a portion of our tax payments. The program supports the acquisition, construction, reconstruction or operation of U.S. flag merchant marine vessels. It allows us to defer federal and state income taxes on earnings derived from eligible programs as long as the funds are deposited and used for qualified activities. Unqualified withdrawals are subject to taxation plus interest. The CCF is collateralized by qualified assets as defined by the Maritime Administration. We had U.S. government accounts receivable invested in the CCF of $683 on December 31, 2011, and $684 on December 31, 2012.

On December 31, 2012, we had net operating loss carryforwards of $1.4 billion and R&D and investment tax credit carryforwards of $204, both of which begin to expire in 2013.

Earnings from continuing operations before income taxes included foreign income (loss) of $640 in 2010, $473 in 2011 and ($194) in 2012. We intend to reinvest indefinitely the undistributed earnings of most of our non-U.S. subsidiaries. On December 31, 2012, we had approximately $1.6 billion of earnings from these non-U.S. subsidiaries that had not been remitted to the United States. In general, should these earnings be distributed, a portion would be treated as dividends under U.S. tax law and thus subject to U.S. federal income tax at the statutory rate of 35 percent, but would generate partially offsetting foreign tax credits. However, it is not practicable to estimate the additional amount of taxes payable.

Tax Uncertainties. For all periods open to examination by tax authorities, we periodically assess our liabilities and contingencies based on the latest available information. Where we believe there is more than a 50 percent chance that our tax position will not be sustained, we record our best estimate of the resulting tax liability, including interest, in the Consolidated Financial Statements. We include any interest or penalties incurred in connection with income taxes as part of income tax expense. The Internal Revenue Service (IRS) has examined all of our consolidated federal income tax returns through 2010.

We participate in the IRS’s Compliance Assurance Process, a real-time audit of our consolidated corporate federal income tax return. We have recorded liabilities for tax uncertainties for the years that remain open to review. We do not expect the resolution of tax matters for these years to have a material impact on our results of operations, financial condition, cash flows or effective tax rate.

Based on all known facts and circumstances and current tax law, we believe the total amount of unrecognized tax benefits on December 31, 2012, is not material to our results of operations, financial condition or cash flows, and if recognized, would not have a material impact on our effective tax rate. We further believe that there are no tax positions for which it is reasonably possible that the unrecognized tax benefits will significantly vary over the next 12 months, producing, individually or in the aggregate, a material effect on our results of operations, financial condition or cash flows.