Income Taxes (Tables)

12 Months Ended

Dec. 31, 2012

Provision for (Benefit From) Income Taxes

The provision for (benefit from) income taxes consists of the following:

	Year Ended December 31,
	2012		2011		2010
Current
Federal	$	(109)	$	-	$	-
State		(16)		(3)		2
Foreign		7		36		36
Current income tax provision		(118)		33		38
Deferred
Federal		93		36		(7)
State		20		10		8
Foreign		15		(14)		(21)
Deferred income tax benefit		128		32		(20)
Provision for income taxes	$	10	$	65	$	18

Pretax Income (Loss) for Domestic and Foreign Operations

Pretax income (loss) for domestic and foreign operations consists of the following:

	Year Ended December 31,
	2012		2011		2010
United States	$	233	$	74	$	(17)
Foreign (a)		67		(38)		89
Pretax income	$	300	$	36	$	72

^(a)  2011 includes $128 million of transaction-related costs.

Deferred Income Tax Assets and Liabilities

Current and non-current deferred income tax assets and liabilities are comprised of the following:

	As of December 31,
	2012		2011
Current deferred income tax assets:
Accrued liabilities and deferred income	$	179	$	175
Provision for doubtful accounts		10		9
Acquisition and integration-related liabilities		8		8
Convertible note hedge		3		7
Valuation allowance (a)		(22)		(45)
Current deferred income tax assets		178		154
Current deferred income tax liabilities:
Accrued liabilities and deferred income		6		8
Prepaid expenses		26		26
Current deferred income tax liabilities		32		34
Current net deferred income tax assets	$	146	$	120
Non-current deferred income tax assets:
Net tax loss carryforwards (b)	$	1,454	$	358
Accrued liabilities and deferred income		151		155
Depreciation and amortization		54		74
Tax credits		62		62
Convertible note hedge		2		13
Acquisition and integration-related liabilities		16		18
Other		36		39
Valuation allowance (a)		(276)		(228)
Non-current deferred income tax assets		1,499		491
Non-current deferred income tax liabilities:
Depreciation and amortization		42		43
Other		3		4
Non-current deferred income tax liabilities		45		47
Non-current net deferred income tax assets	$	1,454	$	444

^(a)  The valuation allowance of $298 million at December 31, 2012 relates to tax loss carryforwards, foreign tax credits and certain state deferred tax assets of $227 million, $53 million and $18 million, respectively. The valuation allowance will be reduced when and if the Company determines it is more likely than not that the related deferred income tax assets will be realized. The valuation allowance of $273 million at December 31, 2011 relates to tax loss carryforwards, foreign tax credits and certain state deferred tax assets of $195 million, $53 million and $25 million, respectively. The valuation allowance will be reduced when and if the Company determines it is more likely than not that the related deferred income tax assets will be realized.

^(b)  The increase in net tax loss carryforwards is primarily due to an increase in U.S. federal net operating losses as a result of accelerated tax depreciation on vehicles.

Reconciliation of U.S Federal Income Tax Statutory Rate and Effective Income Tax Rate

The reconciliation between the U.S. federal income tax statutory rate and the Company’s effective income tax rate is as follows:

	Year Ended December 31,
	2012		2011		2010
U.S. federal statutory rate		35.0%		35.0%		35.0%
Adjustments to reconcile to the effective rate:
State and local income taxes, net of federal tax benefits		4.9		4.2		(7.0)
Changes in valuation allowances		0.9		(1.3)		15.1
Taxes on foreign operations at rates different than statutory U.S. federal rates (a)		-		(13.2)		(22.0)
Resolution of prior years’ examination issues		(42.5)		-		-
Non-deductible transaction-related costs		0.3		146.5		-
Other non-deductible expenses		5.3		10.1		5.4
Other		(0.6)		(0.7)		(1.5)
		3.3%		180.6%		25.0%

^(a)  In 2010, the Company realized a benefit relating to additional tax depreciation within the Company’s operations in Australia.

Changes in Gross Unrecognized Tax Benefits

The following is a tabular reconciliation of the gross amount of unrecognized tax benefits for the year:

	2012		2011		2010
Balance at January 1	$	186	$	40	$	603
Additions based on tax positions related to the current year		4		-		-
Additions for tax positions for prior years		5		143		9
Additions associated with the acquisition of Avis Europe		-		34		-
Reductions for tax positions for prior years		(140)		(3)		(443)
Settlements		(1)		-		(129)
Statute of limitations		-		(28)		-
Balance at December 31	$	54	$	186	$	40

Unrecognized Tax Benefits

The following table presents unrecognized tax benefits reflected as of December 31:

	As of December 31,
	2012		2011
Unrecognized tax benefit in non-current income taxes payable (a)	$	39	$	169
Accrued interest payable on potential tax liabilities (b)		22		21

^(a)  Pursuant to the agreements governing the Separation entered into in connection with the Separation (as defined below), the Company is entitled to indemnification for non-Avis Budget Car Rental tax contingencies for taxable periods prior to and including the Separation. As of December 31, 2012, $15 million of unrecognized tax benefits are non-Avis Budget Car Rental tax contingencies.

^(b)  The Company recognizes potential interest related to unrecognized tax benefits within interest expense related to corporate debt, net on the accompanying Consolidated Statements of Operations. Penalties incurred during the twelve months ended December 31, 2012, 2011 and 2010, were not significant and were recognized as a component of income taxes.

Vehicle Programs

Deferred Income Tax Assets and Liabilities

Deferred income tax assets and liabilities related to vehicle programs are comprised of the following:

	As of December 31,
	2012		2011
Deferred income tax assets:
Depreciation and amortization	$	49	$	35
Unrealized hedge loss		-		8
		49		43
Deferred income tax liabilities:
Depreciation and amortization		2,212		1,025
		2,212		1,025
Net deferred income tax liabilities under vehicle programs	$	2,163	$	982