Income Taxes
The current income tax provision reflects the tax consequences of revenues and expenses currently taxable or deductible on various income tax returns for the year reported. The deferred income tax provision or benefit generally reflects the net change in deferred income tax assets and liabilities during the year, excluding any deferred income tax assets and liabilities of acquired businesses. The components of the provision for income taxes for the years ended December 31 are as follows:
|
| | | | | | | | | | | | |
(in millions) | | 2013 | | 2012 | | 2011 |
Current Provision: | | | | | | |
Federal | | $ | 3,004 |
| | $ | 2,638 |
| | $ | 2,608 |
|
State and local | | 237 |
| | 150 |
| | 150 |
|
Total current provision | | 3,241 |
| | 2,788 |
| | 2,758 |
|
Deferred provision | | 1 |
| | 308 |
| | 59 |
|
Total provision for income taxes | | $ | 3,242 |
| | $ | 3,096 |
| | $ | 2,817 |
|
The reconciliation of the tax provision at the U.S. federal statutory rate to the provision for income taxes and the effective tax rate for the years ended December 31 is as follows:
|
| | | | | | | | | | | | | | | | | | | | | |
(in millions, except percentages) | | 2013 | | 2012 | | 2011 |
Tax provision at the U.S. federal statutory rate | | $ | 3,120 |
| | 35.0 | % | | $ | 3,018 |
| | 35.0 | % | | $ | 2,785 |
| | 35.0 | % |
State income taxes, net of federal benefit | | 126 |
| | 1.4 |
| | 143 |
| | 1.7 |
| | 136 |
| | 1.7 |
|
Settlement of state exams, net of federal benefit | | 1 |
| | — |
| | 2 |
| | — |
| | (29 | ) | | (0.4 | ) |
Tax-exempt investment income | | (53 | ) | | (0.6 | ) | | (59 | ) | | (0.7 | ) | | (63 | ) | | (0.8 | ) |
Non-deductible compensation | | 39 |
| | 0.5 |
| | 22 |
| | 0.2 |
| | 10 |
| | 0.1 |
|
Other, net | | 9 |
| | 0.1 |
| | (30 | ) | | (0.3 | ) | | (22 | ) | | (0.2 | ) |
Provision for income taxes | | $ | 3,242 |
| | 36.4 | % | | $ | 3,096 |
| | 35.9 | % | | $ | 2,817 |
| | 35.4 | % |
The higher effective income tax rate for 2013 as compared to 2012 primarily resulted from the favorable resolution of various one-time tax matters in 2012.
Deferred income tax assets and liabilities are recognized for the differences between the financial and income tax reporting
bases of assets and liabilities based on enacted tax rates and laws. The components of deferred income tax assets and liabilities as of December 31 are as follows:
|
| | | | | | | | |
(in millions) | | 2013 | | 2012 |
Deferred income tax assets: | | | | |
Accrued expenses and allowances | | $ | 284 |
| | $ | 306 |
|
U.S. federal and state net operating loss carryforwards | | 257 |
| | 276 |
|
Share-based compensation | | 200 |
| | 238 |
|
Long-term liabilities | | 170 |
| | 160 |
|
Medical costs payable and other policy liabilities | | 155 |
| | 149 |
|
Non-U.S. tax loss carryforwards | | 110 |
| | 126 |
|
Unearned revenues | | 65 |
| | 64 |
|
Unrecognized tax benefits | | 38 |
| | 25 |
|
Other-domestic | | 57 |
| | 93 |
|
Other-non-U.S. | | 89 |
| | 142 |
|
Subtotal | | 1,425 |
| | 1,579 |
|
Less: valuation allowances | | (207 | ) | | (271 | ) |
Total deferred income tax assets | | 1,218 |
| | 1,308 |
|
Deferred income tax liabilities: | | | | |
U.S. federal and state intangible assets | | (1,207 | ) | | (1,335 | ) |
Non-U.S. goodwill and intangible assets | | (453 | ) | | (640 | ) |
Capitalized software | | (481 | ) | | (482 | ) |
Net unrealized gains on investments | | (31 | ) | | (296 | ) |
Depreciation and amortization | | (268 | ) | | (249 | ) |
Prepaid expenses | | (137 | ) | | (113 | ) |
Other-non-U.S. | | (7 | ) | | (179 | ) |
Total deferred income tax liabilities | | (2,584 | ) | | (3,294 | ) |
Net deferred income tax liabilities | | $ | (1,366 | ) | | $ | (1,986 | ) |
Valuation allowances are provided when it is considered more likely than not that deferred tax assets will not be realized. The valuation allowances primarily relate to future tax benefits on certain federal, state and non-U.S. net operating loss carryforwards. Federal net operating loss carryforwards of $111 million expire beginning in 2021 through 2033, state net operating loss carryforwards expire beginning in 2014 through 2033. Substantially all of the non-U.S. tax loss carryforwards have indefinite carryforward periods.
As of December 31, 2013, the Company had $359 million of undistributed earnings from non-U.S. subsidiaries that are intended to be reinvested in non-U.S. operations. Because these earnings are considered permanently reinvested, no U.S. tax provision has been accrued related to the repatriation of these earnings. It is not practicable to estimate the amount of U.S. tax that might be payable on the eventual remittance of such earnings.
A reconciliation of the beginning and ending amount of unrecognized tax benefits as of December 31 is as follows: |
| | | | | | | | | | | | |
(in millions) | | 2013 | | 2012 | | 2011 |
Gross unrecognized tax benefits, beginning of period | | $ | 81 |
| | $ | 129 |
| | $ | 220 |
|
Gross increases: | | |
| | |
| | |
Current year tax positions | | 8 |
| | 6 |
| | 11 |
|
Prior year tax positions | | 5 |
| | 18 |
| | 10 |
|
Gross decreases: | | |
| | |
| | |
Prior year tax positions | | — |
| | (48 | ) | | (34 | ) |
Settlements | | — |
| | (10 | ) | | (25 | ) |
Statute of limitations lapses | | (5 | ) | | (14 | ) | | (53 | ) |
Gross unrecognized tax benefits, end of period | | $ | 89 |
| | $ | 81 |
| | $ | 129 |
|
The Company classifies interest and penalties associated with uncertain income tax positions as income taxes within its Consolidated Financial Statements. During 2013, the Company recognized $4 million of interest expense. The Company recognized tax benefits from the net reduction of interest and penalties accrued of $20 million and $12 million during the years ended December 31, 2012 and 2011, respectively. The Company had $27 million and $23 million of accrued interest and penalties for uncertain tax positions as of December 31, 2013 and 2012, respectively. These amounts are not included in the reconciliation above. As of December 31, 2013, the total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate, was $89 million.
The Company currently files income tax returns in the United States, various states and non-U.S. jurisdictions. The U.S. Internal Revenue Service (IRS) has completed exams on the consolidated income tax returns for fiscal years 2012 and prior. The Company’s 2013 tax year is under advance review by the IRS under its Compliance Assurance Program. With the exception of a few states, the Company is no longer subject to income tax examinations prior to 2008. The Brazilian federal revenue service - Secretaria da Receita Federal (SRF) may audit the Company’s Brazilian subsidiaries for a period of five years from the date on which corporate income taxes should have been paid and/or the date when the tax return was filed. Estimated taxes are paid monthly in Brazil with an annual return due on June 30 following the end of the taxable year.
The Company believes it is reasonably possible that its liability for unrecognized tax benefits will decrease in the next twelve months by $33 million as a result of audit settlements and the expiration of statutes of limitations in certain major jurisdictions.
