Income Taxes

Components of earnings (loss) from continuing operations before income taxes are as follows:



Years ended December 31	2014			2013		2012
United States	$	(1,355	)	$	585	$	566
Other nations	194			295		315
	$	(1,161	)	$	880	$	881

Components of income tax expense (benefit) are as follows:



Years ended December 31	2014			2013			2012
United States	$	14		$	29		$	5
Other nations	67			234			91
States (U.S.)	11			12			1
Current income tax expense	92			275			97
United States	(503		)	(368		)	192
Other nations	(11		)	35			(29		)
States (U.S.)	(43		)	(1		)	(49		)
Deferred income tax expense (benefit)	(557		)	(334		)	114
Total income tax expense (benefit)	$	(465	)	$	(59	)	$	211

Deferred tax balances that were recorded within Accumulated other comprehensive loss in the Company’s consolidated balance sheets resulted from retirement benefit adjustments, currency translation adjustments, net gains (losses) on derivative instruments and fair value adjustments to available-for-sale securities. The adjustments were $286 million, $606 million and $(272) million for the years ended December 31, 2014, 2013 and 2012, respectively.

The Company evaluates its permanent reinvestment assertions with respect to foreign earnings at each reporting period and, except for certain earnings that the Company intends to reinvest indefinitely due to the capital requirements of the foreign subsidiaries or due to local country restrictions, accrues for the U.S. federal and foreign income tax applicable to the earnings. During the fourth quarter of 2014, the Company reassessed its unremitted earnings position and concluded that certain of its non-U.S. subsidiaries’ earnings were permanently reinvested overseas. The Company intends to utilize these offshore earnings for working capital needs in its international operations. During 2014, the Company recorded a net tax benefit of $19 million related to reversals of deferred tax liabilities related to undistributed foreign earnings due to the change in permanent reinvestment assertion. During 2013, the Company reassessed its unremitted earnings position concluding that certain of its non-U.S. subsidiaries' earnings were permanently reinvested overseas. As a result, the Company recognized a tax benefit of $25 million during 2013 for the reversal of related deferred tax liabilities.

Undistributed earnings that the Company intends to reinvest indefinitely, and for which no income taxes have been provided, aggregate to $1.5 billion December 31, 2014. The Company currently has no plans to repatriate the foreign earnings permanently reinvested and therefore, the time and manner of repatriation is uncertain. If circumstances change and it becomes apparent that some or all of the permanently reinvested earnings will be remitted to the U.S. in the foreseeable future, an additional income tax charge may be necessary; however, given the uncertain repatriation time and manner at December 31, 2014, it is not practicable to estimate the amount of any additional income tax charge on permanently reinvested earnings. On a cash basis, these repatriations from the Company's non-U.S. subsidiaries could require the payment of additional taxes. The portion of earnings not reinvested indefinitely may be distributed without an additional charge given the U.S. federal and foreign income tax accrued on undistributed earnings and the utilization of available foreign tax credits. At December 31, 2014, the Company has approximately $400 million of foreign earnings not considered permanently reinvested and which may be repatriated without an additional tax charge.

In 2013, the Company reorganized certain of its non-U.S. subsidiaries under a holding company structure in order to facilitate the efficient movement of non-U.S. cash and provide a platform to fund foreign investments, such as potential acquisitions and capital expenditures. During 2013, the Company recognized a $337 million tax benefit associated with the excess tax credits relating to the earnings of certain non-U.S. subsidiaries reorganized under the holding company structure.

Differences between income tax expense (benefit) computed at the U.S. federal statutory tax rate of 35% and income tax expense (benefit) as reflected in the consolidated statements of operations are as follows:



Years ended December 31	2014			2013			2012
Income tax expense at statutory rate	$	(406	)	$	308		$	308
Tax on non-U.S. earnings	(27		)	17			(10		)
State income taxes, net of federal benefit	(30		)	8			(32		)
Recognition of previously unrecognized income tax benefits	(29		)	6			—
Other provisions	9			(4		)	(10		)
Valuation allowances	55			(3		)	(60		)
Section 199 deduction	(12		)	(14		)	(14		)
Tax on undistributed non-U.S. earnings	(19		)	(22		)	29
Research credits	(6		)	(18		)	—
Tax benefit of repatriated non-U.S. earnings	—			(337		)	—
	$	(465	)	$	(59	)	$	211

Gross deferred tax assets were $3.6 billion and $3.7 billion at December 31, 2014 and 2013, respectively. Deferred tax assets, net of valuation allowances, were $3.4 billion and $3.5 billion at December 31, 2014 and 2013, respectively. Gross deferred tax liabilities were $774 million and $1.1 billion at December 31, 2014 and 2013, respectively.

Significant components of deferred tax assets (liabilities) are as follows:



December 31	2014			2013
Inventory	$	34		$	46
Accrued liabilities and allowances	148			129
Employee benefits	799			814
Capitalized items	379			144
Tax basis differences on investments	(10		)	17
Depreciation tax basis differences on fixed assets	52			12
Undistributed non-U.S. earnings	(18		)	(6		)
Tax carryforwards	1,246			1,294
Business reorganization	22			39
Warranty and customer liabilities	19			19
Deferred revenue and costs	136			159
Valuation allowances	(226		)	(200		)
Deferred charges	39			38
Other	(38		)	(64		)
	$	2,582		$	2,441

At December 31, 2014 and 2013, the Company had valuation allowances of $226 million and $200 million, respectively, against its deferred tax assets, including $195 million and $178 million, respectively, relating to deferred tax assets for non-U.S. subsidiaries. The Company’s valuation allowances for its non-U.S. subsidiaries had a net increase of $17 million during 2014 and a net decrease of $56 million during 2013. The increase in the valuation allowance relating to deferred tax assets of non-U.S. subsidiaries during 2014 relates to deferred tax assets that are not more-likely-than-not to be realizable based on estimates of future taxable income. The decrease in the valuation allowance relating to deferred tax assets of non-U.S. subsidiaries during 2013 reflects current year deferred tax movements, expiration of loss carryforwards and exchange rate variances.

The Company’s U.S. valuation allowance had a net increase of $9 million during 2014 and a net decrease of $4 million during 2013. The U.S. valuation allowance of $31 million as of December 31, 2014 primarily relates to state tax carryforwards. The Company believes that the remaining deferred tax assets are more-likely-than-not to be realizable based on estimates of future taxable income and the implementation of tax planning strategies.

Tax carryforwards are as follows:



December 31, 2014	Gross Tax Loss	Tax Effected		Expiration Period
United States:
U.S. tax losses	76	$	26	2021-2033
Foreign tax credits	—	686		2018-2023
General business credits	—	174		2025-2034
Minimum tax credits	—	100		Unlimited
State tax losses	1,502	41		2015-2031
State tax credits	—	27		2018-2026
Non-U.S. Subsidiaries:
China tax losses	212	53		2015-2016
Japan tax losses	93	33		2017-2021
Germany tax losses	108	31		Unlimited
United Kingdom tax losses	102	21		Unlimited
Singapore tax losses	50	8		Unlimited
Other subsidiaries tax losses	70	18		Various
Spain tax credits	—	27		2017-2021
Other subsidiaries tax credits	—	1		Various
		$	1,246

The Company had unrecognized tax benefits of $96 million and $147 million at December 31, 2014 and December 31, 2013, respectively, of which approximately $76 million and $125 million, respectively, if recognized, would affect the effective tax rate, net of resulting changes to valuation allowances.

A roll-forward of unrecognized tax benefits is as follows:



	2014			2013
Balance at January 1	$	147		$	157
Additions based on tax positions related to current year	4			13
Additions for tax positions of prior years	21			70
Reductions for tax positions of prior years	(55		)	(10		)
Settlements and agreements	(19		)	(82		)
Lapse of statute of limitations	(2		)	(1		)
Balance at December 31	$	96		$	147

The IRS is currently examining the Company's 2012 and 2013 tax years. The Company also has several state and non-U.S. audits pending. A summary of open tax years by major jurisdiction is presented below:



Jurisdiction	Tax Years
United States	2008-2014
China	2002-2014
France	2010-2014
Germany	2008-2014
India	1997-2014
Israel	2012-2014
Japan	2011-2014
Malaysia	2009-2014
Singapore	2010-2014
United Kingdom	2008-2014

Although the final resolution of the Company’s global tax disputes is uncertain, based on current information, in the opinion of the Company’s management, the ultimate disposition of these matters will not have a material adverse effect on the Company’s consolidated financial position, liquidity or results of operations. However, an unfavorable resolution of the Company’s global tax disputes could have a material adverse effect on the Company’s consolidated financial position, liquidity or results of operations in the periods in which the matters are ultimately resolved.

Based on the potential outcome of the Company’s global tax examinations, the expiration of the statute of limitations for specific jurisdictions, or the continued ability to satisfy tax incentive obligations, it is reasonably possible that the unrecognized tax benefits will change within the next twelve months. The associated net tax impact on the effective tax rate, exclusive of valuation allowance changes, is estimated to be in the range of a $50 million tax charge to a $50 million tax benefit, with cash payments not to exceed $25 million.

At December 31, 2014, the Company had $26 million accrued for interest and $26 million accrued for penalties on unrecognized tax benefits. At December 31, 2013, the Company had $25 million and $27 million accrued for interest and penalties, respectively, on unrecognized tax benefits.