INCOME TAXES
Federal and foreign income tax expense consisted of the following:
|
| | | | | | | | | | | | |
| | Year Ended December 31 |
$ in millions | | 2013 | | 2012 | | 2011 |
Income Taxes on Continuing Operations | | | | | | |
Currently payable | | | | | | |
Federal income taxes | |
| $803 |
| |
| $912 |
| |
| $592 |
|
Foreign income taxes | | 28 |
| | 15 |
| | 18 |
|
Total federal and foreign income taxes currently payable | | 831 |
| | 927 |
| | 610 |
|
Deferred federal and foreign income taxes | | 80 |
| | 60 |
| | 387 |
|
Total federal and foreign income taxes | |
| $911 |
| |
| $987 |
| |
| $997 |
|
Earnings from foreign continuing operations before income taxes are not material for all periods presented.
Income tax expense differs from the amount computed by multiplying the statutory federal income tax rate times the earnings from continuing operations before income taxes due to the following:
|
| | | | | | | | | | | | |
| | Year Ended December 31 |
$ in millions | | 2013 | | 2012 | | 2011 |
Income tax expense on continuing operations at statutory rate | |
| $1,002 |
| |
| $1,038 |
| |
| $1,079 |
|
Manufacturing deduction | | (63 | ) | | (42 | ) | | (32 | ) |
Research tax credit | | (37 | ) | | — |
| | (17 | ) |
Other, net | | 9 |
| | (9 | ) | | (33 | ) |
Total federal and foreign income taxes | |
| $ 911 |
| |
| $ 987 |
| |
| $ 997 |
|
The company’s effective tax rate on earnings from continuing operations for the year ended December 31, 2013, was 31.8 percent, as compared with 33.3 percent and 32.3 percent for the years ended December 31, 2012 and 2011, respectively. The American Taxpayer Relief Act, enacted in January 2013, reinstated research tax credits for tax years 2012 and 2013, which the company recognized in 2013.
Uncertain Tax Positions
The company files income tax returns in the U.S. federal jurisdiction and in various state and foreign jurisdictions. The IRS is currently conducting an examination of the company's tax returns for the years 2007 through 2011. With respect to the tax years 2007 through 2009, the company has reached a tentative resolution with the IRS subject to final review by the U.S. Congressional Joint Committee on Taxation, which has returned one issue to the IRS examination team for further development. It is reasonably possible that during the next twelve months, we will record a reduction in our unrecognized tax benefits up to $80 million and a reduction of our income tax expense up to $50 million. Open tax years related to state and foreign jurisdictions remain subject to examination, but are not considered material.
Although the company believes that it has adequately provided for all of its tax positions, amounts asserted by taxing authorities in future years could be greater than the company’s accrued positions. Accordingly, additional provisions on income tax related matters could be recorded in the future due to revised estimates, settlement or other resolution of the underlying tax matters.
The change in unrecognized tax benefits during 2013, 2012 and 2011, excluding interest, is as follows:
|
| | | | | | | | | | | | |
| | December 31 |
$ in millions | | 2013 | | 2012 | | 2011 |
Unrecognized tax benefits at beginning of the year | |
| $156 |
| |
| $118 |
| |
| $126 |
|
Additions based on tax positions related to the current year | | 56 |
| | 12 |
| | 11 |
|
Additions for tax positions of prior years | | 44 |
| | 28 |
| | 31 |
|
Other, net | | (15 | ) | | (2 | ) | | (50 | ) |
Net change in unrecognized tax benefits | | 85 |
| | 38 |
| | (8 | ) |
Unrecognized tax benefits at end of the year | |
| $241 |
| |
| $156 |
| |
| $118 |
|
These liabilities, along with $31 million of accrued interest and penalties, are included in other non-current liabilities in the consolidated statements of financial position. If the income tax benefits from these tax positions are ultimately realized, $190 million of federal and foreign benefits would reduce the company’s effective tax rate.
Net interest expense within the company's federal, foreign and state income tax provisions were not material for the years ended December 31, 2013, 2012 and 2011.
Deferred Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and tax purposes. Such amounts are classified in the consolidated statements of financial position as current or non-current assets or liabilities, based upon the classification of the related assets and liabilities.
The tax effects of significant temporary differences and carryforwards that gave rise to year-end deferred federal, state and foreign tax balances, as presented in the consolidated statements of financial position, are as follows:
|
| | | | | | | | |
| | December 31 |
$ in millions | | 2013 | | 2012 |
Deferred Tax Assets | | | | |
Retirement benefits | |
| $1,308 |
| |
| $2,710 |
|
Provisions for accrued liabilities | | 646 |
| | 675 |
|
Stock-based compensation | | 109 |
| | 146 |
|
Other | | 144 |
| | 151 |
|
Gross deferred tax assets | | 2,207 |
| | 3,682 |
|
Less valuation allowance | | (55 | ) | | (52 | ) |
Net deferred tax assets | | 2,152 |
| | 3,630 |
|
Deferred Tax Liabilities | | | | |
Goodwill | | 806 |
| | 804 |
|
Property, plant, and equipment, net | | 348 |
| | 376 |
|
Contract accounting differences | | 134 |
| | 199 |
|
Other | | 50 |
| | 135 |
|
Gross deferred tax liabilities | | 1,338 |
| | 1,514 |
|
Total net deferred tax assets | |
| $ 814 |
| |
| $2,116 |
|
Realization of deferred tax assets is primarily dependent on generating sufficient taxable income in future periods. The company believes it is more-likely-than-not all deferred tax assets will be realized, net of any valuation allowances currently established.
At December 31, 2013, the company has available unused net operating losses of $189 million that may be applied against future taxable income, primarily in the United Kingdom that may be used indefinitely. A valuation allowance of $55 million has been recorded against certain deferred tax assets due to the uncertainty of the realization of these net operating losses and other deferred tax assets, principally in foreign jurisdictions.
Undistributed Foreign Earnings
As of December 31, 2013, the company has accumulated undistributed earnings generated by its foreign subsidiaries. No deferred tax liability has been recorded on these earnings since the company intends to permanently reinvest these earnings. Should these earnings be distributed in the form of dividends or otherwise, the distributions would be subject to U.S. federal income tax at the statutory rate of 35 percent, less foreign tax credits available to offset such distributions, if any. In addition, such distributions may be subject to withholding taxes in the various tax jurisdictions.
