Income Taxes

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



($ in millions)		2014			2013			2012
Current income tax expense
	U.S. federal	128			83			176
	U.S. state and local	25			6			11
	Foreign	195			180			168
	Total current income tax	348			269			355
Deferred income tax expense
	U.S. federal	(78		)	(8		)	(151		)
	U.S. state and local	(1		)	(5		)	(14		)
	Foreign	(10		)	(3		)	(42		)
	Total deferred income tax	(89		)	(16		)	(207		)
	Total	$	259		$	253		$	148

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



		2014		2013		2012
U.S. federal income tax rate		35.0	%	35.0	%	35.0	%
Changes in rate due to:
	U.S. State and local taxes	0.9		0.6		0.5
	U.S. tax benefit on foreign dividends	(3.8	)	(3.3	)	(1.9	)
	Taxes on foreign earnings	(8.7	)	(7.4	)	(10.6	)
	PPG dividends paid to the ESOP	(0.4	)	(0.4	)	(0.2	)
	U.S. tax incentives	(2.2	)	(2.8	)	(2.4	)
	Other	(2.6	)	(1.1	)	(2.5	)
	Effective income tax rate	18.2	%	20.6	%	17.9	%

In 2014, U.S. tax incentives include the R&D credit and the U.S. manufacturing deduction. The decrease of the impact of U.S. tax incentives in 2014 is due to the absence of the retroactive benefit of the reinstatement of the 2012 R&D credit in January 2013. This decrease was partly offset by an increase in the manufacturing deduction and the R&D credit in 2014.

The 2014 and 2013 increase in the U.S. tax benefit on foreign dividends was mainly due to repatriation of high taxed foreign earnings.

In 2014, Other includes the prior year benefit and remeasurement of temporary differences in a foreign jurisdiction as a result of receiving a favorable tax rate ruling for the tax years from 2008 to 2018. The retroactive benefit lowered 2014 tax expense by $29 million.

Income before income taxes of the Company’s U.S. operations for 2014, 2013 and 2012 was $377 million, $447 million and $220 million, respectively. Income before income taxes of the Company's foreign operations for 2014, 2013 and 2012 was $1,040 million, $779 million and $608 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:



($ in millions)		2014			2013
Deferred income tax assets related to
	Employee benefits	$	877		$	706
	Contingent and accrued liabilities	671			613
	Operating loss and other carry-forwards	380			269
	Inventories	24			31
	Property	29			4
	Derivatives	24			—
	Other	99			47
	Valuation allowance	(181		)	(136		)
	Total	1,923			1,534
Deferred income tax liabilities related to
	Property	401			310
	Intangibles	805			450
	Employee benefits	69			55
	Derivatives	—			41
	Undistributed foreign earnings	263			—
	Other	180			21
	Total	1,718			877
	Deferred income tax assets – net	$	205		$	657

As of December 31, 2014, subsidiaries of the Company had available net operating loss carryforwards of approximately $637 million for income tax purposes, of which approximately $419 million has an indefinite expiration. The remaining $218 million expires between the years 2015 and 2028. The tax effected amount of the net operating loss carryforwards is $189 million.

Also, as of December 31, 2014, the Company and its subsidiaries had available credit carryforwards of approximately $191 million for income tax purposes. The carryforwards expire between the years 2015 and 2024.

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 had an indefinite expiration. The remaining $116 million expires between the years 2014 and 2028. The tax effected amount of the net operating loss carryforwards was $182 million.

Also, as of December 31, 2013, the Company and its subsidiaries had available credit carryforwards of approximately $87 million for income tax purposes. The carryforwards expire between the years 2014 and 2023.

A valuation allowance has been established for carry-forwards at December 31, 2014 and 2013, when the ability to utilize them is not likely. It is at least reasonably possible that a valuation allowance established on approximately $40 million of after-tax foreign net operating losses at December 31, 2014 will meet the reversal criteria within the next twelve months. The increase in the total valuation allowance from December 31, 2013 is due to deferred tax assets acquired in 2014 and not expected to be realized by the Company prior to their expiration.

The Company has $5.0 billion and $3.9 billion of undistributed earnings of non-U.S. subsidiaries as of December 31, 2014 and December 31, 2013, respectively. These amounts relate to approximately 200 subsidiaries in more than 60 taxable jurisdictions. As discussed in Note 2, "Acquisitions and Dispositions", PPG recorded a deferred U.S. income tax liability of $247 million on the foreign earnings generated from the sale of its Transitions Optical joint venture in 2014. No significant deferred U.S. income taxes have been provided on the remaining $4.2 billion of PPG's undistributed 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, 2014 and December 31, 2013 would have resulted in a U.S. tax cost of approximately $200 million and $250 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 2011. The examination of the Company’s U.S. federal income tax return for 2012 is currently underway.

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



($ in millions)	2014			2013			2012
Balance at January 1	$	85		$	82		$	107
Additions based on tax positions related to the current year	12			12			12
Additions for tax positions of prior years	3			9			2
Reductions for tax positions of prior years	(15		)	(10		)	(12		)
Pre-acquisition unrecognized tax benefits	—			—			2
Reductions for expiration of the applicable statute of limitations	(2		)	(10		)	(6		)
Settlements	(6		)	—			(23		)
Foreign currency translation	(6		)	2			—
Balance at December 31	$	71		$	85		$	82

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 $67 million as of December 31, 2014.

The Company recognizes accrued interest and penalties related to unrecognized tax benefits in income tax expense. As of December 31, 2014, 2013 and 2012, the Company had liabilities for estimated interest and penalties on unrecognized tax benefits of $7 million, $9 million and $10 million, respectively. The Company recognized $2 million, $2 million, and $5 million of income in 2014, 2013, and 2012 respectively, related to the reduction of estimated interest and penalties.