Income Taxes

The components of Income before Income Taxes follow:



(In millions)	2012		2011			2010
U.S.	$	146	$	(111	)	$	(529	)
Foreign	294		729			537
	$	440	$	618		$	8

A reconciliation of income taxes at the U.S. statutory rate to income taxes provided on Income follows:



(In millions)	2012			2011			2010
U.S. Federal income tax expense (benefit) at the statutory rate of 35%	$	154		$	216		$	3
Adjustment for foreign income taxed at different rates	(6		)	(28		)	4
U.S. (income) loss with no tax due to valuation allowance	(49		)	41			178
Net foreign operating losses with no tax due to valuation allowances	83			5			18
Net (release) establishment of valuation allowances	4			(59		)	(1		)
Net (resolution) establishment of uncertain tax positions	10			24			(15		)
Deferred tax impact of enacted tax rate and law changes	2			—			(16		)
Other	5			2			1
United States and Foreign Taxes	$	203		$	201		$	172

The components of the provision (benefit) for taxes on Income, by taxing jurisdiction, follow:



(In millions)	2012		2011			2010
Current:
Federal	$	—	$	—		$	(15	)
Foreign	184		253			180
State	3		3			1
	187		256			166
Deferred:
Federal	2		2			(7		)
Foreign	13		(56		)	12
State	1		(1		)	1
	16		(55		)	6
United States and Foreign Taxes	$	203	$	201		$	172

In 2012, income tax expense included a net tax charge of $19 million, which primarily consists of $10 million of increased tax reserves for prior years. The additional $9 million relates to various other discrete items.

In 2011, income tax expense included net tax benefits of $36 million primarily related to a $64 million benefit from the release of a valuation allowance on our Canadian operations and a $24 million charge related to the settlement of prior tax years and to increase tax reserves as a result of negative tax court rulings in a foreign jurisdiction.

In 2010, our income tax expense or benefit was allocated among operations and items charged or credited directly to shareholders’ equity. Pursuant to this allocation requirement, a $9 million non-cash tax benefit was allocated to the loss from our U.S. operations, with offsetting tax expense allocated to items, primarily attributable to employee benefits, charged directly to shareholders’ equity. Income tax expense in 2010 also included net tax benefits of $33 million primarily related to a $16 million benefit for enacted tax law changes and $20 million of tax benefits related to the settlement of tax audits and the expiration of statutes of limitations in multiple tax jurisdictions.

Temporary differences and carryforwards giving rise to deferred tax assets and liabilities at December 31 follow:



(In millions)	2012			2011
Postretirement benefits and pensions	$	1,331		$	1,237
Tax loss carryforwards and credits	1,238			949
Capitalized expenditures	456			544
Accrued expenses deductible as paid	613			595
Alternative minimum tax credit carryforwards(1)	98			99
Vacation and sick pay	39			41
Rationalizations and other provisions	73			54
Other	41			46
	3,889			3,565
Valuation allowance	(3,393		)	(3,132		)
Total deferred tax assets	496			433

Property basis differences	(384		)	(350		)
Total net deferred tax assets	$	112		$	83

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(1)	Primarily unlimited carryforward period.

At December 31, 2012, we had $461 million of tax assets for net operating loss, capital loss and tax credit carryforwards related to certain international subsidiaries that are primarily from countries with unlimited carryforward periods. A valuation allowance totaling $574 million has been recorded against these and other deferred tax assets where recovery of the asset or carryforward is uncertain. In addition, we had $654 million of Federal and $123 million of state tax assets for net operating loss and tax credit carryforwards. The Federal carryforwards consist of $50 million of Federal tax assets for net operating losses that expire in 2029 and 2030, $614 million of foreign tax credits that are subject to expiration from 2016 to 2022 and $31 million of tax assets related to research and development credits that are subject to expiration from 2027 to 2031. The amount of deferred tax assets reflected in the table above has been reduced by $41 million related to unrealized stock option deductions. The state carryforwards are subject to expiration from 2013 to 2032. A full valuation allowance has also been recorded against the Federal and state deferred tax assets as recovery is uncertain.

The American Taxpayer Relief Act of 2012, signed into law on January 2, 2013, retroactively adopts certain taxpayer relief provisions that are not reflected in our 2012 financial statements as enactment took place in 2013. The changes include a refundable alternative minimum tax provision that entitles us to a $7 million refund of our alternative minimum tax carryforwards in 2014. We will record this tax benefit in the first quarter of 2013. The act also reinstates the research and development credit and certain other foreign dividend provisions that will change the components of our deferred taxes. However, these changes will not affect tax expense as we have a full valuation allowance recorded against our U.S. deferred tax assets.

At December 31, 2012, we had unrecognized tax benefits of $82 million that if recognized, would have a favorable impact on our tax expense of $70 million. We had accrued interest of $20 million as of December 31, 2012. If not favorably settled, $24 million of the unrecognized tax benefits and all of the accrued interest would require the use of our cash. During 2010, our European entities settled various tax years, resulting in a $48 million reduction of our unrecognized tax benefits. It is reasonably possible that the total amount of unrecognized tax benefits will change during the next 12 months. However, we do not expect those changes will have a significant impact on our financial position or results of operations.



Reconciliation of Unrecognized Tax Benefits
(In millions)	2012			2011			2010
Balance at January 1	$	90		$	87		$	112
Increases related to prior year tax positions	12			17			32
Decreases related to prior year tax positions	(7		)	—			(3		)
Increases related to current year tax positions	—			3			—
Settlements	(6		)	(9		)	(51		)
Lapse of statute of limitations	(3		)	(1		)	(4		)
Foreign currency impact	(4		)	(7		)	1
Balance at December 31	$	82		$	90		$	87

Generally, years from 2006 onward are still open to examination by foreign taxing authorities, including in Germany. In the United States, we are open to examination from 2011 onward.

We have undistributed earnings of international subsidiaries of approximately $3.7 billion, a significant portion of which has already been subject to Federal income taxation. No provision for Federal income tax or foreign withholding tax on any of these undistributed earnings is required because either such earnings were already subject to tax or the amount has been or will be reinvested in property, plant and equipment and working capital. Quantification of the deferred tax liability, if any, associated with these undistributed earnings is not practicable.

Net cash payments for income taxes were $204 million, $212 million and $167 million in 2012, 2011 and 2010, respectively.