Income Taxes

The provision for income taxes by taxing jurisdiction and by significant components consisted of the following:



(Millions)		2013			2012			2011
Current income tax expense
	U.S. federal	153			228			107
	U.S. state and local	14			15			8
	Foreign	202			190			164
	Total current income tax	369			433			279
Deferred income tax expense
	U.S. federal	(29		)	(150		)	(3		)
	U.S. state and local	(6		)	(14		)	1
	Foreign	(1		)	(48		)	(17		)
	Total deferred income tax	(36		)	(212		)	(19		)
	Total	$	333		$	221		$	260

A reconciliation of the statutory U.S. corporate federal income tax rate to the Company's effective tax rate follows:



		2013		2012		2011
U.S. federal income tax rate		35.0	%	35.0	%	35.0	%
Changes in rate due to:
	U.S. State and local taxes	0.8		0.6		0.7
	U.S. tax benefit on foreign dividends	(2.7	)	(1.5	)	(1.0	)
	Taxes on foreign earnings	(7.8	)	(9.7	)	(10.9	)
	PPG dividends paid to the ESOP	(0.4	)	(0.2	)	(0.4	)
	U.S. tax incentives	(2.4	)	(1.9	)	(1.8	)
	Significant audit settlements	—		—		(1.4	)
	Other	(0.1	)	(1.4	)	1.1
	Effective income tax rate	22.4	%	20.9	%	21.3	%

In 2013, U.S. tax incentives include the R&D credit and the U.S. manufacturing deduction. The increase of the impact of U.S. tax incentives in 2013 is due to an increase in the manufacturing deduction and the R&D credit, including the retroactive benefit of the reinstatement of the 2012 R&D credit in January 2013. These incentives more than offset the absence of the Medicare Part D deduction in 2013.

The 2013 and 2012 increase in the U.S. tax benefit on foreign dividends was mainly due to repatriation of high taxed foreign earnings.

Income before income taxes of the Company’s U.S. operations for 2013, 2012 and 2011 was $569 million, $328 million and $386 million, respectively. Income before income taxes of the Company's foreign operations for 2013, 2012 and 2011 was $920 million, $729 million and $836 million, respectively.

Income tax payments in 2013, 2012 and 2011 totaled $319 million, $503 million and $353 million, respectively.

Deferred income taxes are provided for the effect of temporary differences that arise because there are certain items treated differently for financial accounting than for income tax reporting purposes. The deferred tax assets and liabilities are determined by applying the enacted tax rate in the year in which the temporary difference is expected to reverse. Net deferred income tax assets and liabilities as of December 31 were as follows:



(Millions)		2013			2012
Deferred income tax assets related to
	Employee benefits	$	706		$	1,000
	Contingent and accrued liabilities	613			598
	Operating loss and other carry-forwards	269			223
	Inventories	31			21
	Property	4			5
	Derivatives	—			38
	Other	47			41
	Valuation allowance	(136		)	(138		)
	Total	1,534			1,788
Deferred income tax liabilities related to
	Property	310			405
	Intangibles	450			452
	Employee benefits	55			69
	Derivatives	41			—
	Other	21			3
	Total	877			929
	Deferred income tax assets – net	$	657		$	859

As of December 31, 2013, subsidiaries of the Company had available net operating loss carryforwards of approximately $632 million for income tax purposes, of which approximately $516 million has an indefinite expiration. The remaining $116 million expires between the years 2014 and 2028. The tax effected amount of the net operating loss carryforwards is $182 million.

As of December 31, 2012, subsidiaries of the Company had available net operating loss carryforwards of approximately $611 million for income tax purposes, of which approximately $529 million had an indefinite expiration. The remaining $82 million expires between the years 2013 and 2027. The tax effected amount of the net operating loss carryforwards was $177 million.

A valuation allowance has been established for carry-forwards at December 31, 2013 and 2012, when the ability to utilize them is not likely.

The Company has $3,900 million and $3,476 million of undistributed earnings of non-U.S. subsidiaries as of December 31, 2013 and December 31, 2012, respectively. These amounts relate to approximately 200 subsidiaries in more than 60 taxable jurisdictions. No significant deferred U.S. income taxes have been provided on these earnings as they are considered to be reinvested for an indefinite period of time or will be repatriated when it is tax effective to do so. The Company estimates repatriation of undistributed earnings of non-U.S. subsidiaries as of December 31, 2013 and December 31, 2012 would have resulted in a U.S. tax cost of approximately $250 million and $110 million, respectively.

The Company files federal, state and local income tax returns in numerous domestic and foreign jurisdictions. In most tax jurisdictions, returns are subject to examination by the relevant tax authorities for a number of years after the returns have been filed. The Company is no longer subject to examinations by tax authorities in any major tax jurisdiction for years before 2006. Additionally, the Internal Revenue Service has completed its examination of the Company’s U.S. federal income tax returns filed for years through 2010. The examination of the Company’s U.S. federal income tax return for 2011 is currently underway and is expected to be finalized during 2014.

A reconciliation of the total amounts of unrecognized tax benefits (excluding interest and penalties) as of December 31 follows:



(Millions)	2013			2012			2011
Balance at January 1	$	82		$	107		$	111
Additions based on tax positions related to the current year	12			12			15
Additions for tax positions of prior years	9			2			17
Reductions for tax positions of prior years	(10		)	(12		)	(19		)
Pre-acquisition unrecognized tax benefits	—			2			—
Reductions for expiration of the applicable statute of limitations	(10		)	(6		)	(7		)
Settlements	—			(23		)	(8		)
Foreign currency translation	2			—			(2		)
Balance at December 31	$	85		$	82		$	107

The Company expects that any reasonably possible change in the amount of unrecognized tax benefits in the next 12 months would not be significant.

The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was $81 million as of December 31, 2013.

The Company recognizes accrued interest and penalties related to unrecognized tax benefits in income tax expense. As of December 31, 2013, 2012 and 2011, the Company had liabilities for estimated interest and penalties on unrecognized tax benefits of $9 million, $10 million and $15 million, respectively. The Company recognized $2 million and $5 million of income in 2013 and 2012, respectively, related to the reduction of estimated interest and penalties. The Company recognized no income or expense for estimated interest and penalties during the year ended December 31, 2011.