NOTE 18—Income Taxes:

Income before income taxes and equity in net income of unconsolidated investments and current and deferred income tax expense (benefit) are composed of the following (in thousands):


	Year Ended December 31,
	2012			2011			2010
Income before income taxes and equity in net income of unconsolidated investments:
Domestic	$	316,856		$	209,714		$	221,086
Foreign		57,737			270,863			158,112

Total	$	374,593		$	480,577		$	379,198


Current income tax expense:
Federal^(a)	$	71,930		$	82,379		$	14,620
State		6,478			4,774			5,224
Foreign		18,712			28,179			25,776

Total	$	97,120		$	115,332		$	45,620


Deferred income tax expense (benefit):
Federal	$	(2,632	)	$	(23,060	)	$	52,246
State		477			(417	)		(994	)
Foreign		(12,432	)		12,279			(9,116	)

Total	$	(14,587	)	$	(11,198	)	$	42,136

Total income tax expense	$	82,533		$	104,134		$	87,756

(a)	Current income tax expense—Federal for the year ended December 31, 2010 is net of a tax benefit from an NOL carryforward of $9.6 million.

The significant differences between the U.S. federal statutory rate and the effective income tax rate are as follows:


	% of Income Before Income Taxes
	2012			2011			2010
Federal statutory rate		35.0	%		35.0	%		35.0	%
State taxes, net of federal tax benefit		1.4			0.6			1.2
Change in valuation allowance^(a)		3.4			(0.3	)		(0.4	)
Impact of foreign earnings, net⁽^b⁾		(6.1	)		(10.9	)		(10.0	)
Depletion		(1.3	)		(0.9	)		(1.0	)
Revaluation of unrecognized tax benefits/reserve requirements^(c)		(1.7	)		(0.1	)		0.1
Manufacturer tax deduction^(d)		(3.8	)		(1.2	)		(1.6	)
Undistributed earnings of foreign subsidiaries^(b)		(4.9	)		(0.4	)		0.2
Other items, net		—			(0.1	)		(0.4	)

Effective income tax rate		22.0	%		21.7	%		23.1	%

(a)	During 2012, a valuation allowance was established for $15.9 million as a result of the planned shut-down of our Avonmouth, United Kingdom site in connection with our exit of the phosphorus flame retardants business. See Note 19, “Special Items.”

(b)

In prior years, we designated the undistributed earnings of substantially all of our foreign subsidiaries as permanently reinvested. The benefit of the lower tax rates in the jurisdictions for which we made this designation have been reflected in our effective income tax rate. During 2012, 2011 and 2010, we received distributions of $56.9 million, $33.8 million and $68.7 million, respectively, from various foreign subsidiaries and joint ventures and realized a (benefit) expense, net of foreign tax credits, of $(1.8) million, $5.4 million and $2.7 million, respectively, related to the repatriation of these high taxed earnings. We have asserted for all periods being reported, permanent reinvestment of our share of the income of JBC, a Free Zones company under the laws of the Hashemite Kingdom of Jordan. The applicable provisions of the Jordanian law, and applicable regulations thereunder, do not have a termination provision and the exemption is permanent. As a Free Zones company, JBC is not subject to income taxes on the profits of products exported from Jordan, and currently, substantially all of the profits are from exports. Undistributed foreign subsidiary earnings were primarily impacted by a $17.4 million change related to the planned shut-down of our Avonmouth, United Kingdom site in connection with our exit of the phosphorus flame retardants business.

(c)	During 2012, we released various tax reserves primarily related to the expiration of the applicable U.S. federal statute of limitations for 2008 which provided a net benefit of $5.2 million.

(d)	During 2012, we amended the calculation of the manufacturer tax deduction for the year 2010 and filed the 2011 tax return. As a result, in 2012 we recognized tax benefits of $1.5 million and $3.0 million related to the 2010 and 2011 tax years, respectively.

The deferred income tax assets and liabilities recorded on the consolidated balance sheets as of December 31, 2012 and 2011 consist of the following (in thousands):


	December 31,
	2012			2011
Deferred tax assets:
Postretirement benefits other than pensions	$	14,900		$	15,705
Accrued employee benefits		26,603			37,861
Operating loss carryovers		74,934			72,570
Pensions		74,521			45,213
Tax credit carryovers		37,684			49,999
Undistributed earnings of foreign subsidiaries		15,583			—
Other		23,280			16,097

Gross deferred tax assets		267,505			237,445
Valuation allowance		(49,562	)		(36,419	)

Deferred tax assets		217,943			201,026


Deferred tax liabilities:
Depreciation		(193,021	)		(193,814	)
Foreign currency translation adjustments		(4,933	)		(6,979	)
Undistributed earnings of foreign subsidiaries		—			(2,604	)
Other		(20,348	)		(17,197	)

Deferred tax liabilities		(218,302	)		(220,594	)

Net deferred tax liabilities	$	(359	)	$	(19,568	)


Classification in the consolidated balance sheets:
Current deferred tax assets	$	4,197		$	9,383
Current deferred tax liabilities		(5,700	)		(2,005	)
Noncurrent deferred tax assets		64,512			50,957
Noncurrent deferred tax liabilities		(63,368	)		(77,903	)

Net deferred tax liabilities	$	(359	)	$	(19,568	)

Changes in the balance of our deferred tax asset valuation allowance are as follows (in thousands):


	Year Ended December 31,
	2012			2011			2010
Balance at January 1	$	(36,419	)	$	(39,802	)	$	(41,355	)
Additions		(20,182	)		(6,155	)		(3,205	)
Deductions		7,039			9,538			4,758

Balance at December 31	$	(49,562	)	$	(36,419	)	$	(39,802	)

At December 31, 2012, we had approximately $38.9 million of domestic credits available to offset future payments of income taxes, expiring in varying amounts between 2016 and 2022. We have established valuation allowances for $2.6 million of those domestic credits since we believe that it is more likely than not that the related deferred tax assets will not be realized. We believe that sufficient taxable income will be generated during the carryover period in order to utilize the other remaining credit carryovers.

At December 31, 2012, we have, on a pre-tax basis, $11.9 million of domestic net operating losses and $212.8 million of foreign net operating loss carryovers. We have established pre-tax valuation allowances for $9.3 million of domestic net operating losses, and $97.8 million of those foreign net operating loss carryovers since we believe that it is more likely than not that the related deferred tax assets will not be realized. For the same reason, we established pre-tax valuation allowances for $54.7 million related to foreign deferred tax assets not related to net operating losses. The realization of the deferred tax assets is dependent on the generation of sufficient taxable income in the appropriate tax jurisdictions. Although realization is not assured, we believe it is more likely than not that the remaining deferred tax assets will be realized. However, the amount considered realizable could be reduced if estimates of future taxable income change. We believe that it is more likely than not that our company will generate sufficient taxable income in the future to fully utilize all other deferred tax assets.

Liabilities related to uncertain tax positions were $29.2 million and $30.7 million at December 31, 2012 and 2011, respectively, inclusive of interest and penalties of $0.8 million and $0.9 million at December 31, 2012 and 2011, respectively, and are reported in Other noncurrent liabilities as provided in Note 13. These liabilities at December 31, 2012 and 2011 were reduced by $25.8 million and $21.8 million, respectively, for offsetting benefits from the corresponding effects of potential transfer pricing adjustments, state income taxes and rate arbitrage related to foreign structure. These offsetting benefits are recorded in Other assets as provided in Note 9. The resulting net liabilities of $2.6 million and $8.0 million at December 31, 2012 and 2011, respectively, if recognized and released, would favorably affect earnings.

The liabilities related to uncertain tax positions, exclusive of interest, were $28.4 million and $29.8 million at December 31, 2012 and 2011, respectively. The following is a reconciliation of our total gross liability related to uncertain tax positions for 2012, 2011 and 2010 (in thousands):


	Year Ended December 31,
	2012			2011			2010
Balance at January 1	$	29,789		$	20,949		$	23,416
Additions for tax positions related to prior years		4,242			—			150
Reductions for tax positions related to prior years		—			(1,639	)		—
Additions for tax positions related to current year		3,639			10,802			463
Lapses in statutes of limitations		(10,057	)		(323	)		(3,080	)
Foreign currency translation adjustment		785			—			—

Balance at December 31	$	28,398		$	29,789		$	20,949

We are subject to income taxes in the U.S. and numerous foreign jurisdictions. We are no longer subject to U.S. federal income tax audits by tax authorities for years prior to 2009 since the IRS has completed a review of our income tax returns through 2007 and our statute of limitations expired for 2008. We also are no longer subject to any U.S. state income tax audits prior to 2004.

With respect to jurisdictions outside the U.S., we are no longer subject to income tax audits for years prior to 2005. During 2012, the German tax authorities have continued an audit of two of our German companies for 2006 through 2009, and the Chinese tax authorities have continued an audit of one of our Chinese subsidiaries for 2006 through 2010. During 2011, we completed tax audits for one of our Belgian companies for 2008 and 2009, our Japanese company for 2006 through 2010, and two of our Chinese companies through 2010. During 2010, we completed a tax audit for one of our Belgian companies for the 2007 tax year. No significant tax was assessed as a result of the completed audits.

While we believe we have adequately provided for all tax positions, amounts asserted by taxing authorities could be greater than our accrued position. Accordingly, additional provisions on federal and foreign tax-related matters could be recorded in the future as revised estimates are made or the underlying matters are settled or otherwise resolved.

Since the timing of resolutions and/or closure of tax audits is uncertain, it is difficult to predict with certainty the range of reasonably possible significant increases or decreases in the liability related to uncertain tax positions that may occur within the next twelve months. Our current view is that it is reasonably possible that we could record a decrease in the liability related to uncertain tax positions, relating to a number of issues, up to approximately $0.9 million as a result of closure of tax statutes.