INCOME TAXES

Earnings (loss) before income taxes and the provision for income taxes are presented in the following table.



	Year Ended December 31, 2012									Year Ended December 31, 2011									Year Ended December 31, 2010
(millions of dollars)	U.S.			Non-U.S.			Total			U.S.			Non-U.S.			Total			U.S.			Non-U.S.			Total
Earnings (loss) before income taxes	$	132.3		$	628.7		$	761.0		$	119.2		$	646.7		$	765.9		$	(26.7	)	$	504.6		$	477.9
Provision for income taxes:
Current:
Federal/foreign	$	59.8		$	186.1		$	245.9		$	31.8		$	162.9		$	194.7		$	14.0		$	117.7		$	131.7
State	3.4			—			3.4			1.7			—			1.7			2.2			—			2.2
Total current	63.2			186.1			249.3			33.5			162.9			196.4			16.2			117.7			133.9
Deferred	19.5			(30.2		)	(10.7		)	17.4			(18.5		)	(1.1		)	(48.9		)	(3.3		)	(52.2		)
Total provision for income taxes	$	82.7		$	155.9		$	238.6		$	50.9		$	144.4		$	195.3		$	(32.7	)	$	114.4		$	81.7
Effective tax rate	62.5		%	24.8		%	31.4		%	42.7		%	22.3		%	25.5		%	(122.5		)%	22.7		%	17.1		%

The provision for income taxes resulted in an effective tax rate of 31.4%, 25.5% and 17.1% for the years ended December 31, 2012, 2011 and 2010, respectively. An analysis of the differences between the effective tax rate and the U.S. statutory rate for the years ended December 31, 2012, 2011 and 2010 is presented below.



	Year Ended December 31,
(millions of dollars)	2012			2011			2010
Income taxes at U.S. statutory rate of 35%	$	266.4		$	268.1		$	167.3
Increases (decreases) resulting from:
Income from non-U.S. sources, including withholding taxes	(58.3		)	(74.8		)	(55.8		)
Affiliates' earnings	(15.0		)	(13.4		)	(13.8		)
State taxes, net of federal benefit	2.2			1.1			1.4
Business and foreign tax credits	8.8			11.5			0.2
Accrual adjustment and settlement of prior year tax matters	9.3			(1.0		)	0.4
Medicare Part D	—			0.1			2.9
Capital loss carryforward valuation allowance	9.7			—			—
Reversal of foreign tax credit valuation allowance	—			—			(21.2		)
Unremitted foreign earnings	13.4			—			—
Non-temporary differences and other	2.1			3.7			0.3
Provision for income taxes, as reported	$	238.6		$	195.3		$	81.7

The Company's provision for income taxes for the year ended December 31, 2012 includes a net tax benefit of $2.0 million associated with the loss from disposal activities and restructuring expense. The $2.0 million net benefit is comprised of a tax benefit of $7.7 million associated with restructuring expense, partially offset by tax expense of $5.7 million resulting from the sale of the spark plug business. The provision also includes additional tax expense of $19.8 million resulting from other tax adjustments. These other tax adjustments include $5.9 million of tax expense primarily resulting from the settlement of certain tax audits, $7.5 million of tax expense associated with the Company's second quarter 2012 decision to change its cash repatriation assertion for some of its foreign subsidiaries, $4.7 million of tax benefit related to certain countries enacting changes to their respective statutory income tax rates and $11.1 million of U.S. tax expense to correct the income taxes payable balance. The Company concluded this item was not material to the current or prior period financial statements.

The Company's provision for income taxes for the year ended December 31, 2011 includes $11.0 million of tax expense associated with the Company's patent infringement settlement, $2.7 million of tax expense associated with the loss from disposal activities and a tax benefit of $6.2 million resulting from other tax adjustments. These other tax adjustments related to a change in state corporate income tax legislation as well as an adjustment of the Company's tax accounts as a result of the closure of certain tax audits. During 2011, several countries enacted changes to their respective statutory income tax rates. None of these changes had a material impact on the Company's effective tax rate.

The Company's provision for income taxes for the year ended December 31, 2010 includes a favorable impact of $21.2 million related to the reversal of the Company's valuation allowance on U.S. based foreign tax credit carryforwards, the impact of the change in tax legislation related to Medicare Part D subsidies of $2.9 million, additional tax expense of $2.3 million associated with the BERU - Eichenauer equity investment gain and the tax benefit of $9.8 million associated with the Company's environmental litigation settlement.

A roll forward of the Company's total gross unrecognized tax benefits for the years ended December 31, 2012 and 2011, respectively, is presented below. Of the total $25.8 million of unrecognized tax benefits as of December 31, 2012, approximately $23.4 million of the total represents the amount, if recognized, would affect the Company's effective income tax rate in future periods. This amount differs from the gross unrecognized tax benefits presented in the table due to the decrease in the U.S. federal income taxes which would occur upon recognition of the state tax benefits included therein.



(millions of dollars)	2012			2011
Balance, January 1	$	26.2		$	27.6
Additions based on tax positions related to current year	2.0			0.5
Additions for tax positions of prior years	13.4			3.9
Reductions for closure of tax audits and settlements	(14.6		)	(4.3		)
Reductions for lapse in statute of limitations	(1.7		)	(0.8		)
Translation adjustment	0.5			(0.7		)
Balance, December 31	$	25.8		$	26.2

The Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense. The amount recognized in income tax expense for 2012 and 2011 is $0.5 million and $1.7 million, respectively. The Company has an accrual of approximately $8.3 million and $7.8 million for the payment of interest and penalties at December 31, 2012 and 2011, respectively. Included in the $25.8 million of unrecognized tax benefits is $18.5 million for the settlement of audits and resulting amended returns in certain foreign jurisdictions, most of which the Company expects to pay in the first quarter of 2013. Possible changes within the next 12 months related to other examinations cannot be reasonably estimated at this time.

The Company and/or one of its subsidiaries files income tax returns in the U.S. federal, various state jurisdictions and various foreign jurisdictions. In certain tax jurisdictions, the Company may have more than one taxpayer. The Company is no longer subject to income tax examinations by tax authorities in its major tax jurisdictions as follows:



Tax jurisdiction	Years no longer subject to audit	Tax jurisdiction	Years no longer subject to audit
U.S. Federal	2010 and prior	Hungary	2008 and prior
China	2007 and prior	Japan	2011 and prior
France	2007 and prior	South Korea	2006 and prior
Germany	2007 and prior	Sweden	2006 and prior

The gross components of deferred tax assets and liabilities as of December 31, 2012 and 2011 consist of the following:



	December 31,
(millions of dollars)	2012			2011
Current deferred tax assets:
Foreign tax credits	$	29.0		$	—
Employee related	25.7			28.0
Research and development capitalization	13.4			—
Inventory	8.4			14.5
Warranties	5.3			4.5
Customer claims	3.6			2.2
Other	13.1			11.5
Total current deferred tax assets	$	98.5		$	60.7
Current deferred tax liabilities:
Unremitted foreign earnings	$	(1.1	)	$	—
Other	(2.6		)	(3.7		)
Total current deferred tax liabilities	$	(3.7	)	$	(3.7	)
Non-current deferred tax assets:
Foreign tax credits	$	117.0		$	158.2
Other comprehensive income	113.7			116.7
Research and development capitalization	89.1			76.7
Net operating loss and capital loss carryforwards*	44.3			35.1
Pension and other postretirement benefits	37.7			33.9
Employee related	27.4			22.9
Research and development credits	4.9			3.0
Warranties	4.5			4.7
Litigation and environmental	1.2			2.0
Other	3.1			5.1
Total non-current deferred tax assets	$	442.9		$	458.3
Non-current deferred tax liabilities:
Goodwill & intangibles	$	(130.9	)	$	(155.5	)
Fixed assets	(101.9		)	(79.7		)
Unremitted foreign earnings	(12.3		)	(1.3		)
Other comprehensive income	(3.0		)	(2.9		)
Other	(6.6		)	(6.6		)
Total non-current deferred tax liabilities	$	(254.7	)	$	(246.0	)

Total deferred tax items	$	283.0		$	269.3
Valuation allowances*	(35.0		)	(23.6		)
Net deferred tax asset	$	248.0		$	245.7

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*Net operating loss and capital loss carryforwards are shown gross with the corresponding valuation allowances located at the end of the table.

The deferred tax assets and liabilities recognized in the Company’s Consolidated Balance Sheets are as follows:



	December 31,
(millions of dollars)	2012			2011
Deferred income taxes — current assets*	$	94.7		$	58.5
Deferred income taxes — current liabilities*	(1.4		)	(6.5		)
Other non-current assets*	244.1			313.9
Other non-current liabilities*	(89.4		)	(120.2		)
Net deferred tax asset (current and non-current)	$	248.0		$	245.7

________________

*Current and non-current assets and liabilities have been netted within their respective taxing jurisdictions.

Deferred income taxes - current assets are primarily comprised of amounts from the U.S., China, France, Italy, Japan, Mexico and South Korea. Deferred income taxes - current liabilities are primarily comprised of amounts from the U.K. Other non-current assets are primarily comprised of amounts from the U.S., China and Japan. Other non-current liabilities are primarily comprised of amounts from Germany, Sweden and the U.K.

At December 31, 2012, certain non-U.S. subsidiaries have net operating loss carryforwards totaling $42.4 million available to offset future taxable income. Of the total $42.4 million, $35.4 million expire at various dates from 2013 through 2032 and the remaining $7.0 million have no expiration date. The Company has a valuation allowance of $0.7 million recorded on $2.5 million of non-U.S net operating loss carryforwards. Certain U.S. subsidiaries have state net operating loss carryforwards totaling $490.7 million which are completely offset by a valuation allowance due to risk of realization. Certain non-U.S. subsidiaries located in China, Korea and Poland have tax exemptions or tax holidays, which reduced tax expense approximately $26.7 million and $21.8 million in 2012 and 2011, respectively. Most existing tax holidays remain in effect during 2013. The U.S. has foreign tax credit carryforwards of $146.1 million, which expire at various dates from 2015 through 2020.

The Company is not required to provide U.S. federal or state income taxes on cumulative undistributed earnings of foreign subsidiaries when such earnings are considered permanently reinvested. At December 31, 2011, the Company considered most of its foreign unremitted earnings to be permanently reinvested. The Company's policy is to evaluate this assertion on a quarterly basis. During the second quarter of 2012, the Company changed the assertion for some of its foreign subsidiaries to provide management additional financial flexibility.

At December 31, 2012, the Company's deferred tax liability associated with unremitted foreign earnings was $13.4 million, which includes the $7.5 million of tax expense associated with the second quarter 2012 decision to change its cash repatriation assertion for some of its foreign subsidiaries and $5.9 million of tax expense associated with unremitted foreign earnings during the current year.

The Company has not recorded deferred income taxes on the difference between the book and tax basis of investments in foreign subsidiaries or foreign equity affiliates totaling approximately $2.1 billion in 2012, as these amounts are essentially permanent in nature. The difference will become taxable upon repatriation of assets, sale or liquidation of the investment. Due to fluctuation in tax laws around the world and fluctuations in foreign exchange rates, it is not practicable to determine the unrecognized deferred tax liability on this difference because the actual tax liability, if any, is dependent on circumstances existing when the repatriation occurs.