Income Taxes

12 Months Ended

Dec. 31, 2012

Income Taxes

Income Taxes

10. Income Taxes

        The provision for income taxes was calculated based on the following components of earnings (loss) before income taxes:

	2012		2011			2010
Continuing operations
U.S.	$	32	$	23		$	(115	)
Non-U.S.		296		(419	)		541
	$	328	$	(396	)	$	426

	2012			2011			2010
Discontinued operations
U.S.	$	—		$	—		$	—
Non-U.S.		(5	)		(2	)		(296	)
	$	(5	)	$	(2	)	$	(296	)

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

	2012			2011			2010
Current:
U.S.	$	(4	)	$	(12	)	$	—
Non-U.S.		117			139			141
		113			127			141
Deferred:
U.S.		8			11			(10	)
Non-U.S.		(13	)		(53	)		(2	)
		(5	)		(42	)		(12	)
Total:
U.S.		4			(1	)		(10	)
Non-U.S.		104			86			139
Total for continuing operations		108			85			129
Total for discontinued operations		(3	)		(3	)		4
	$	105		$	82		$	133

        A reconciliation of the provision for income taxes based on the statutory U.S. Federal tax rate of 35% to the provision for income taxes is as follows:

	2012			2011			2010
Tax provision on pretax earnings (loss) from continuing operations at statutory U.S. Federal tax rate	$	115		$	(139	)	$	149
Increase (decrease) in provision for income taxes due to:
Differences in income taxes on foreign earnings, losses and remittances					(13	)		(46	)
Goodwill impairment					224
Intraperiod tax allocation—U.S.								(8	)
Changes in valuation allowance		(7	)		15			11
Tax audits and settlements		(1	)		3			21
Other items		1			(5	)		2
Provision for income taxes	$	108		$	85		$	129

        Income tax expense or benefit from continuing operations is generally determined without regard to other categories of earnings, such as other comprehensive income and discontinued operations. An exception is provided when there is aggregate pretax income from other categories and a pretax loss from continuing operations in the current year. In such an instance, the tax benefit allocated to continuing operations is the amount by which the loss from continuing operations reduces the tax expenses recorded with respect to the other categories of earnings, even when a valuation allowance has been established against the deferred tax assets. In instances where a valuation allowance is established against current year losses, income from other sources, including other comprehensive income and discontinued operations, is considered when determining whether sufficient future taxable income exists to realize the deferred tax assets.

        During 2010, certain pretax losses from continuing operations were partially offset by other comprehensive income and discontinued operations as a result of the exception noted above, resulting in a reduction of the valuation allowance and a benefit allocated to income tax expense from continuing operations of $8 million.

        Deferred income taxes reflect: (1) the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes; and (2) carryovers and credits for income tax purposes.

        Significant components of the Company's deferred tax assets and liabilities at December 31, 2012 and 2011 are as follows:

	2012			2011
Deferred tax assets:
Accrued postretirement benefits	$	89		$	90
Asbestos-related liabilities		161			164
Foreign tax credit		354			338
Operating and capital loss carryovers		486			438
Other credit carryovers		46			51
Accrued liabilities		95			118
Pension liability		237			224
Other		97			70
Total deferred tax assets		1,565			1,493
Deferred tax liabilities:
Property, plant and equipment		120			121
Exchangeable notes		19			23
Intangibles		13
Other		83			44
Total deferred tax liabilities		235			188
Valuation allowance		(1,171	)		(1,176	)
Net deferred taxes	$	159		$	129

        Deferred taxes are included in the Consolidated Balance Sheets at December 31, 2012 and 2011 as follows:

	2012			2011
Prepaid expenses	$	62		$	48
Other assets		284			295
U.S. and foreign income taxes		(5	)		(2	)
Deferred taxes		(182	)		(212	)
Net deferred taxes	$	159		$	129

        The Company reviews the likelihood that it will realize the benefit of its deferred tax assets and therefore the need for valuation allowances on a quarterly basis, or whenever events indicate that a review is required. In determining the requirement for a valuation allowance, the historical and projected financial results of the legal entity or consolidated group recording the net deferred tax asset is considered, along with other positive and negative evidence.

        At December 31, 2012, before valuation allowance, the Company had unused foreign tax credits of $354 million expiring in 2017 through 2022, research tax credit of $19 million expiring from 2013 to 2032, and alternative minimum tax credits of $26 million which do not expire and which will be available to offset future U.S. Federal income tax. Approximately $188 million of the deferred tax assets related to operating and capital loss carryforwards can be carried over indefinitely, with the remaining $298 million expiring between 2013 and 2032.

        At December 31, 2012, the Company's equity in the undistributed earnings of foreign subsidiaries for which income taxes had not been provided approximated $2.5 billion. The Company intends to reinvest these earnings indefinitely in the non-U.S. operations and has not distributed any of these earnings to the U.S. in 2012, 2011 or 2010. It is not practicable to estimate the U.S. and foreign tax which would be payable should these earnings be distributed. Deferred taxes are provided for earnings of non-U.S. jurisdictions when the Company plans to remit those earnings.

        The Company has recognized tax benefits as a result of incentives in certain non-U.S. jurisdictions which expire between 2013 and 2016.

        The Company records a liability for unrecognized tax benefits related to uncertain tax positions. The Company accrues interest and penalties associated with unrecognized tax benefits as a component of its income tax expense. The following is a reconciliation of the Company's total gross unrecognized tax benefits for the years ended December 31, 2012, 2011 and 2010:

	2012			2011			2010
Balance at January 1	$	125		$	143		$	120
Additions and reductions for tax positions of prior years		8			(15	)		26
Additions based on tax positions related to the current year		7			30			5
Additions for tax positions of prior years on acquisitions								12
Reductions due to the lapse of the applicable statute of limitations		(21	)		(8	)		(1	)
Reductions due to settlements		(26	)		(18	)		(13	)
Foreign currency translation		4			(7	)		(6	)
Balance at December 31	$	97		$	125		$	143
Unrecognized tax benefits, which if recognized, would impact the Company's effective income tax rate	$	89		$	114		$	125
Accrued interest and penalties at December 31	$	33		$	49		$	36
Interest and penalties included in tax expense for the years ended December 31	$	(6	)	$	18		$	4

        Based upon the outcome of tax examinations, judicial proceedings, or expiration of statute of limitations, it is reasonably possible that the ultimate resolution of these unrecognized tax benefits may result in a payment that is materially different from the current estimate of the tax liabilities. The Company believes that unrecognized tax benefits will not change significantly within the next twelve months.

        The Company is currently under examination in various tax jurisdictions in which it operates, including Czech Republic, Ecuador, Germany, Italy, Poland, Spain and the UK. The years under examination range from 2005 through 2011. The Company believes that there are no jurisdictions in which the outcome of unresolved issues or claims is likely to be material to the Company's results of operations, financial position or cash flows. The Company further believes that adequate provisions for all income tax uncertainties have been made. During 2012, the Company concluded audits in several jurisdictions, including Australia, Hungary, Italy, France, Germany and Switzerland.