INCOME TAXES

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



	Year Ended December 31,
(millions of dollars)	2013			2012			2011
Earnings before income taxes:
U.S.	$	136.2		$	132.3		$	119.2
Non-U.S.	733.1			628.7			646.7
Total	$	869.3		$	761.0		$	765.9
Provision for income taxes:
Current:
Federal	$	27.7		$	59.8		$	31.8
State	2.6			3.4			1.7
Foreign	211.1			186.1			162.9
Total current	241.4			249.3			196.4
Deferred:
Federal	(2.3		)	19.6			17.3
State	(7.3		)	(0.1		)	0.1
Foreign	(13.5		)	(30.2		)	(18.5		)
Total deferred	(23.1		)	(10.7		)	(1.1		)
Total provision for income taxes	$	218.3		$	238.6		$	195.3

The provision for income taxes resulted in an effective tax rate of 25.1%, 31.4% and 25.5% for the years ended December 31, 2013, 2012 and 2011, respectively. An analysis of the differences between the effective tax rate and the U.S. statutory rate for the years ended December 31, 2013, 2012 and 2011 is presented below.



	Year Ended December 31,
(millions of dollars)	2013			2012			2011
Income taxes at U.S. statutory rate of 35%	$	304.3		$	266.4		$	268.1
Increases (decreases) resulting from:
State taxes, net of federal benefit	2.3			2.2			1.1
U.S. tax on non-U.S. earnings	(2.8		)	22.3			9.4
Affiliates' earnings	(15.6		)	(15.0		)	(13.4		)
Foreign rate differential	(73.4		)	(57.9		)	(60.0		)
Tax holidays	(15.6		)	(27.0		)	(21.3		)
Withholding taxes	15.4			12.3			10.9
Impairments and write-offs	5.2			15.9			6.4
Tax credits	(6.9		)	(2.3		)	(4.0		)
Reserve adjustments, settlements and claims	0.5			12.9			(1.0		)
Valuation allowance adjustments	(1.4		)	9.7			(5.3		)
Other	6.3			(0.9		)	4.4
Provision for income taxes, as reported	$	218.3		$	238.6		$	195.3

The Company's provision for income taxes for the year ended December 31, 2013, includes tax benefits of $7.1 million, $3.8 million and $2.1 million related to restructuring expense, program termination agreement and retirement related obligations discussed in Note 3. This rate also includes a net tax benefit of $11.7 million, which is comprised of tax benefits of $6.7 million related to the extension of the federal research and development credit and other international tax provisions resulting from the retroactive impact of U.S. legislation enacted in January 2013, $2.2 million related to 2012 provision to return and other tax adjustments and $8.0 million related to the reversal of certain state deferred tax asset valuation allowances, partially offset by a $5.2 million tax expense related to comprehensive income and other tax adjustments.

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.

A roll forward of the Company's total gross unrecognized tax benefits for the years ended December 31, 2013 and 2012, respectively, is presented below. Of the total $22.9 million of unrecognized tax benefits as of December 31, 2013, approximately $15.7 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)	2013			2012
Balance, January 1	$	25.8		$	26.2
Additions based on tax positions related to current year	1.7			2.0
Additions for tax positions of prior years	12.5			13.4
Reductions for closure of tax audits and settlements	(17.7		)	(14.6		)
Reductions for lapse in statute of limitations	(0.2		)	(1.7		)
Translation adjustment	0.8			0.5
Balance, December 31	$	22.9		$	25.8

The Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense. The amount recognized in income tax expense for 2013 and 2012 is $1.0 million and $0.5 million, respectively. The Company has an accrual of approximately $8.4 million and $8.3 million for the payment of interest and penalties at December 31, 2013 and 2012, respectively. During the year ended December 31, 2013 the Company paid $14.9 million for the settlement of audits and resulting amended returns in certain foreign jurisdictions. 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	2007 and prior
Germany	2007 and prior	Sweden	2007 and prior

The gross components of deferred tax assets and liabilities as of December 31, 2013 and 2012 consist of the following:



	December 31,
(millions of dollars)	2013			2012
Deferred tax assets:
Foreign tax credits	$	145.9		$	146.0
Employee compensation	40.6			53.1
Other comprehensive income	79.3			113.7
Research and development capitalization	132.4			102.5
Net operating loss and capital loss carryforwards	46.4			44.3
Pension and other postretirement benefits	36.5			37.7
Other	75.8			44.1
Total deferred tax assets	$	556.9		$	541.4
Valuation allowance	(34.2		)	(35.0		)
Net deferred tax asset	$	522.7		$	506.4
Deferred tax liabilities:
Goodwill and intangible assets	(139.5		)	(130.9		)
Fixed assets	(105.4		)	(101.9		)
Other	(36.7		)	(25.6		)
Total deferred tax liabilities	$	(281.6	)	$	(258.4	)
Net deferred taxes	$	241.1		$	248.0

At December 31, 2013, certain non-U.S. subsidiaries have net operating loss carryforwards totaling $58.0 million available to offset future taxable income. Of the total $58.0 million, $48.4 million expire at various dates from 2014 through 2033 and the remaining $9.6 million have no expiration date. The Company has a valuation allowance of $1.5 million recorded on $4.9 million of non-U.S. net operating loss carryforwards. Certain U.S. subsidiaries have state net operating loss carryforwards totaling $501.4 million which are partially offset by a valuation allowance of $300.8 million. Certain non-U.S. subsidiaries located in China, Korea and Poland had tax exemptions or tax holidays, which reduced tax expense approximately $15.6 million and $26.7 million in 2013 and 2012, respectively. The tax holiday in Poland expired at the end of 2013. The U.S. has foreign tax credit carryforwards of $145.9 million, which expire at various dates from 2017 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. 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, 2013, the Company's deferred tax liability associated with unremitted foreign earnings was $18.7 million.

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 $2.3 billion in 2013, 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.