Income Taxes

Accounting for Uncertainty in Income Taxes

As of March 31, 2012, 2011 and 2010, the Company’s unrecognized tax benefits totaled $11,804, $9,019 and $9,004, respectively, all of which would impact the Company’s effective tax rate if recognized. The following table presents the changes to unrecognized tax benefits during the years ended March 31, 2012, 2011and 2010:



	2012			2011			2010
Balance at April 1	$	9,019		$	9,004		$	20,129
Increase for current year tax positions	58			3,500			2,292
Increases (reductions) for prior year tax positions	3,030			5,539			(1,698		)
Impact of changes in exchange rates	(303		)	(63		)	3,664
Reduction for settlements	—			(8,961		)	(15,383		)
Balance at March 31	$	11,804		$	9,019		$	9,004

The Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense. During the years ended March 31, 2012 and 2011, the Company accrued an additional $1,176 and $2,446, respectively, of interest, penalties and related exchange losses related to unrecognized tax benefits. As of March 31, 2012, accrued interest and penalties totaled $8,690 and $1,190, respectively. During the year ending March 31, 2012, the Company reduced its accrued interest and penalties for $307 related to settlements and for $203 related to the expiration of statute of limitations. As of March 31, 2011, accrued interest and penalties totaled $7,780 and $1,434, respectively.

During the fiscal year ending March 31, 2012, the Company’s total liability for unrecognized tax benefits, including the related interest and penalties, increased from $18,2330to $21,683. The increase relates to settlements of approximately $307, expiration of statute of limitations of approximately $355, and increases related to current period activity of approximately $4,112.

The Company expects to continue accruing interest expenses related to the remaining unrecognized tax benefits. Additionally, the Company may be subject to fluctuations in the unrecognized tax liability due to currency exchange rate movements.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Alliance One International, Inc. and Subsidiaries

(in thousands)

Note 12 - Income Taxes (continued)

Accounting for Uncertainty in Income Taxes (continued)

Other than the expiration of an assessment period under local guidance and administrative practice pertaining to an international unrecognized tax benefit for the amount of $1,359, interest of $7,789 and penalties $343, the Company does not foresee any reasonably possible changes in the unrecognized tax benefits in the next twelve months but must acknowledge circumstances can change due to unexpected developments in the law. In certain jurisdictions, tax authorities have challenged positions that the Company has taken that resulted in recognizing benefits that are material to its financial statements. The Company believes it is more likely than not that it will prevail in these situations and accordingly have not recorded liabilities for these positions. The Company expects the challenged positions to be settled at a time greater than twelve months from its balance sheet date.

The Company and its subsidiaries file a U.S. federal consolidated income tax return as well as returns in several U.S. states and a number of foreign jurisdictions. As of March 31, 2012, the Company’s earliest open tax year for U.S. federal income tax purposes was its fiscal year ended March 31, 2009. Open tax years in state and foreign jurisdictions generally range from three to six years.

Income Tax Provision

The components of income before income taxes, equity in net income of investee companies and minority interests consisted of the following:



	Years Ended March 31,
	2012			2011			2010
U.S.	$	(21,923	)	$	(51,092	)	$	(43,645	)
Non-U.S.	76,081			83,941			117,837
Total.	$	54,158		$	32,849		$	74,192

The details of the amount shown for income taxes in the Statements of Consolidated Operations and Comprehensive Income (Loss) follow:



	Years Ended March 31,
	2012			2011		2010
Current
Federal	$	—		$	472	$	—
State	—			—		(7,509		)
Non-U.S.	31,798			7,346		6,173
	$	31,798		$	7,818	$	(1,336	)
Deferred
Federal	$	—		$	97,311	$	(9,271	)
State	—			631		(631		)
Non-U.S.	(6,759		)	1,700		7,447
	$	(6,759	)	$	99,642	$	(2,455	)
Total	$	25,039		$	107,460	$	(3,791	)

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Alliance One International, Inc. and Subsidiaries

(in thousands)

Note 12 - Income Taxes (continued)

Income Tax Provision (continued)

The reasons for the difference between income tax expense based on income before income taxes, equity in net income of investee companies and minority interests and the amount computed by applying the U.S. statutory federal income tax rate to such income are as follows:



	Years Ended March 31,
	2012			2011			2010
Tax expense at U.S. statutory rate	$	18,955		$	11,497		$	25,967
Effect of non-U.S. income taxes	(4,712		)	(7,322		)	(16,309		)
Goodwill amortization	—			(4,640		)	(8,374		)
Change in valuation allowance	1,617			111,679			(3,345		)
Increase (decrease) in reserves for uncertain tax positions	3,452			4,489			(8,060		)
Exchange effects and currency translation	3,958			(7,120		)	5,680
Permanent items	1,769			(1,123		)	650
Actual tax expense (benefit)	$	25,039		$	107,460		$	(3,791	)

The deferred tax liabilities (assets) are comprised of the following:



	March 31, 2012			March 31, 2011
Deferred tax liabilities:
Intangible assets	$	8,404		$	9,044
Fixed assets	10,662			9,135
Total deferred tax liabilities	$	19,066		$	18,179
Deferred tax assets:
Reserves and accruals	$	(58,786	)	$	(77,746	)
Tax credits	(48,897		)	(48,659		)
Tax loss carryforwards	(64,624		)	(63,228		)
Derivative transactions	(10,775		)	(12,760		)
Postretirement and other benefits	(32,361		)	(29,786		)
Unrealized exchange loss	(14,530		)	—
Other	(14,713		)	(752		)
Gross deferred tax assets	(244,686		)	(232,931		)
Valuation allowance	143,345			138,787
Total deferred tax assets	$	(101,341	)	$	(94,144	)
Net deferred tax asset	$	(82,275	)	$	(75,965	)

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Alliance One International, Inc. and Subsidiaries

(in thousands)

Note 12 - Income Taxes (continued)

Income Tax Provision (continued)

The following table presents the breakdown between current and non-current (assets) liabilities:



	March 31, 2012			March 31, 2011
Current asset	$	(23,855	)	$	(3,955	)
Current liability	5,464			6,881
Non-current asset	(73,378		)	(82,707		)
Non-current liability	9,494			3,816
Net deferred tax asset	$	(82,275	)	$	(75,965	)

The current portion of deferred tax liability is included in income taxes.

During the year ended March 31, 2012, the net deferred tax asset balance decreased by $449 for certain adjustments not included in the deferred tax expense (benefit), primarily for deferred tax assets related to pension accruals recorded in equity as part of Other Comprehensive Income (Loss) and currency translation adjustments.

For the year ended March 31, 2012, the valuation allowance increased by $4,558. The valuation allowance increased primarily due to U.S. federal, U.S state and non-U.S. tax losses. The valuation allowance is based on the Company's assessment that it is more likely than not that certain deferred tax assets, primarily foreign tax credits and net operating loss carryovers, will not be realized in the foreseeable future. Recent years' cumulative losses incurred in the United States as of March 31, 2012, combined with the effects of certain changes in the market, provide significant objective negative evidence in the evaluation of whether the U.S. entity will generate sufficient taxable income to realize the tax benefits of the deferred tax assets. This negative evidence carries greater weight than the more subjective positive evidence of favorable future projected income in the assessment of whether realization of the tax benefits of the deferred tax assets is more likely than not. Therefore, based on the weight of presently objectively verifiable positive and negative evidence, it is management's judgment that realization of the tax benefits of the deferred tax assets is less than more likely than not.

At March 31, 2012, the Company has U.S federal tax loss carryovers of $105,186, non-U.S. tax loss carryovers of $66,662, and U.S. state tax loss carryovers of $250,381. Of the non-U.S. tax loss carryovers, $35,267 will expire within the next five years, $18,994 will expire in later years, and $12,401 can be carried forward indefinitely. Of the U.S. state tax loss carryovers, $41,336 will expire within the next five years and $209,045 will expire thereafter. At March 31, 2012, the Company has foreign tax credit carryovers in the United States of $45,085 that will substantially expire in 2016.

Realization of deferred tax assets is dependent on generating sufficient taxable income prior to expiration of the loss carryovers. Although realization is not assured, management believes it is more likely than not that all of the deferred tax assets, net of applicable valuation allowances, will be realized. The amount of the deferred tax assets considered realizable could be reduced or increased if estimates of future taxable income change during the carryover period.

No provision has been made for U.S. or foreign taxes that may result from future remittances of approximately $316,046 at March 31, 2012 and $226,971 at March 31, 2011 of undistributed earnings of foreign subsidiaries because management expects that such earnings will be reinvested overseas indefinitely. Determination of the amount of any unrecognized deferred income tax liability on these unremitted earnings is not practicable.