Income Taxes

Deferred tax assets and liabilities are determined based on the differences between the financial statement and tax bases of assets and liabilities as measured by the enacted tax rates that are expected to be in effect when these differences reverse. Deferred tax expense (benefit) is generally the result of changes in the assets or liabilities for deferred taxes.

The following summarizes pretax income (loss) (in millions):



	Year Ended December 31,
	2013		2012			2011
U.S.	$	516.3	$	580.1		$	273.5
International	28.6		(60.6		)	0.5
Total	$	544.9	$	519.5		$	274.0

Provision for income taxes (benefits) consists of the following components (in millions):



	Year Ended December 31,
	2013			2012			2011
Current
Federal	$	154.6		$	167.9		$	69.6
State and local	32.8			25.7			10.4
International	15.8			12.9			9.4
Total current	203.2			206.5			89.4
Deferred
Federal	(6.0		)	(3.2		)	11.0
State and local	(0.6		)	(4.7		)	0.4
International	(4.3		)	(3.1		)	(5.0		)
Total deferred	(10.9		)	(11.0		)	6.4
Total provision for income taxes	$	192.3		$	195.5		$	95.8

Differences between the Company's effective income tax rate and the U.S. federal income tax statutory rate are as follows (in millions):



	Year Ended December 31,
	2013			2012			2011
Provision for income taxes using the statutory rate in effect	$	190.5		$	181.8		$	95.9
Tax effect of:
State and local income taxes, net	6.1			6.6			7.0
International income taxes, net	2.4			25.8			1.8
Earnings of U.S. unconsolidated affiliates	(2.3		)	(2.9		)	(2.8		)
Valuation allowance	(1.7		)	3.0			1.8
Tax credits	(4.9		)	(20.3		)	(10.5		)
Uncertain tax positions	15.9			15.0			7.7
Dividend received deduction	(2.5		)	(3.0		)	(2.2		)
Domestic production activities deduction	(17.3		)	(9.7		)	(6.9		)
Repatriation	7.5			0.6			2.0
Other	(1.4		)	(1.4		)	2.0
Total provision for income taxes	$	192.3		$	195.5		$	95.8
Effective tax rate	35.3		%	37.6		%	35.0		%
Statutory federal tax rate	35.0		%	35.0		%	35.0		%

The federal and state deferred tax assets (liabilities) recorded on the Consolidated Balance Sheet are as follows (in millions):



	December 31,
	2013			2012
Liabilities:
Deferred cancellation of debt income	$	(92.4	)	$	(93.0	)
Investments in available for sale securities	(201.1		)	(173.4		)
Unconsolidated affiliates and investments	—			(12.2		)
Accumulated depreciation and amortization	(36.9		)	(34.8		)
Prepaid expenses	(7.0		)	(4.9		)
Debenture original issue discount	—			(19.3		)
Total deferred tax liabilities	(337.4		)	(337.6		)
Assets:
Deferred compensation and other employee benefits	30.4			46.3
Net operating loss	14.1			16.9
Book accruals	36.4			29.9
Unconsolidated affiliates and investments	1.5			—
Other	1.4			1.9
Total deferred tax assets	83.8			95.0
Valuation allowance	(10.2		)	(14.6		)
Net deferred tax liability	$	(263.8	)	$	(257.2	)

The Company has approximately $1.3 million of federal net operating losses as of December 31, 2013 as a result of previous business combinations. These net operating losses expire in 2025 and are available to reduce future income taxes. Since these net operating losses were generated by an entity prior to its acquisition by DST, their utilization is subject to certain limitations imposed by the Internal Revenue Code. The Company does not anticipate that such limitations will prohibit the utilization of the federal net operating loss carryforwards prior to their expiration. The Company has approximately $26.0 million of state net operating losses as of December 31, 2013 as a result of previous business combinations. These net operating losses begin to expire in 2022.

The Company has approximately $55.8 million of net operating loss carryforwards as of December 31, 2013 in international jurisdictions. These carryforwards do not expire but may be limited in their ability to offset only certain income. A net benefit of approximately $8.1 million of these net operating losses will be recorded in additional paid-in capital in the Consolidated Balance Sheet upon realization. Authoritative accounting guidance requires a valuation allowance against deferred tax assets if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. In evaluating the realizability of certain international net deferred tax assets, the Company also anticipates that limitations may result in the benefit of these amounts not being realized and has established corresponding valuation allowances as of December 31, 2013 and 2012 of $10.2 million and $14.6 million, respectively.

Prior to 1993, the Company generally did not provide deferred income taxes for unremitted earnings of certain investees accounted for under the equity method because those earnings have been and will continue to be reinvested indefinitely. Beginning in 1993, pursuant to the provisions of the authoritative accounting guidance related to income taxes, the Company began providing deferred taxes for unremitted earnings of U.S. unconsolidated affiliates net of the 80% dividends received deduction provided for under current tax law. Through December 31, 2013, the cumulative amount of such unremitted earnings was $73.2 million. These amounts would become taxable to the Company if distributed by the affiliates as dividends, in which case the Company would be entitled to the dividends received deduction for 80% of the dividends; alternatively, these earnings could be realized by the sale of the affiliates' stock, which would give rise to tax at federal capital gains rates and state ordinary income tax rates, to the extent the stock sale proceeds exceeded the Company's tax basis. Deferred taxes provided on unremitted earnings through December 31, 2013 and 2012 were $5.9 million and $14.7 million, respectively.

The Company records U.S. tax on the undistributed earnings of foreign subsidiaries unless the subsidiaries' earnings are considered indefinitely reinvested outside the U.S. During fourth quarter 2013, the Company assessed the forecasted cash needs and the overall financial position of its foreign subsidiaries and determined that a portion of previously permanently reinvested earnings would no longer be reinvested overseas. As a result, during 2013 the Company made distributions from and/or reversed its permanently reinvested assertions with respect to its Thailand, Mauritius and South Africa subsidiaries, as well as issued a one-time dividend from one of its Canadian subsidiaries. These 2013 distributions resulted in incremental U.S. tax of $7.5 million. Additionally in 2011, the Company's ongoing evaluation of its ability to redeploy foreign cash sources resulted in the Company making a distribution from and reversing its permanently reinvested assertion with respect to its India subsidiary. As a result, the Company recorded approximately $0.4 million and $0.1 million of related income tax liability, net of credits, on unremitted earnings in 2013 and 2012, respectively. The Company intends to indefinitely reinvest the earnings in the businesses of its other foreign subsidiaries. As a consequence, no federal or state income taxes or foreign withholding taxes have been provided for amounts which would become payable, if any, on the distribution of such earnings. In the event of such a distribution, the Company may be able to offset, at least in part, the U.S. federal income tax consequences of such a distribution with foreign income tax credits which would become creditable as a result of such a distribution. It is not practicable for the Company to determine the income tax it would incur, if any, if such earnings were distributed. As of December 31, 2013, accumulated undistributed earnings considered permanently reinvested were $52.6 million.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in millions):



	Year Ended December 31,
	2013			2012			2011
Balance at beginning of year	$	101.2		$	93.5		$	75.0
Additions based on tax positions related to the current year	14.6			15.9			7.3
Additions for tax positions of prior years	5.2			18.3			14.4
Reductions for tax positions of prior years	(17.3		)	(24.3		)	(2.2		)
Settlements	(0.9		)	—			(0.4		)
Statute expirations	(0.6		)	(2.2		)	(0.6		)
Balance at end of year	$	102.2		$	101.2		$	93.5

Included in the Company's net unrecognized tax benefit at December 31, 2013, 2012 and 2011 are $74.7 million, $63.0 million and $49.9 million, respectively, of tax positions which, if recognized, would affect the effective tax rate. The Company recognizes interest and penalties accrued related to unrecognized tax benefits in income taxes, which is consistent with the recognition of these items in prior reporting periods. The liability for interest and penalties associated with unrecognized tax benefits increased $3.5 million during the year ended December 31, 2013 to $16.8 million. The liability for interest and penalties increased $1.9 million during the year ended December 31, 2012.

Although it is difficult to predict when all uncertain tax positions will reverse due to the unknown timing of the completion of examination periods, it is possible that aggregate U.S. domestic income tax amounts up to approximately $30.0 million may reverse during 2014.

The Company files income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. An IRS examination for the tax years ended December 31, 2006 and 2007 was completed in March 2011. An IRS examination for the tax years ended December 31, 2008 and 2009 was completed in April 2013. Various state, local, and foreign income tax returns are under examination by taxing authorities. The Company does not believe that the outcome of any examination will have a material impact on its financial statements.

The Company filed federal income tax refund claims for research and experimentation credits for the tax years 2002 through 2009. During 2012, the Company and the IRS reached a resolution in regards to 2002 through 2005 refund claims. As a result, the Company recorded an income tax benefit of $16.0 million. This income tax benefit relates to the resolved claim years and certain post-audit periods that are still subject to examination.

The Company filed federal income tax refund claims for the tax years 2005 through 2009 related to its Domestic Manufacturing Deduction under Internal Revenue Code Section 199 based on technical developments and interpretations that have occurred since filing the original returns. During 2012, the Company and the IRS reached a resolution in regards to the 2005 refund claim. As a result, the Company recorded an income tax benefit of $2.3 million.

During 2013, the IRS completed its examination of the previously filed federal income tax refund claims for Domestic Manufacturing Deductions and research and experimentation credits for the periods 2006 through 2009. As a result, during 2013 the Company has recognized income tax benefits of $16.1 million, resulting from the reversal of previously reserved tax positions related to these matters. The income tax benefit for the research and experimentation credits relates to the resolved claim years and certain post-audit periods that are still subject to examination. The income tax benefit for the Domestic Manufacturing Deductions relates only to the resolved claim years.