Income Taxes
The components of income before income taxes are as follows:
|
| | | | | | | | | | | | |
| | 2013 | | 2012 | | 2011 |
U.S. | | $ | 3,078 |
| | $ | 3,234 |
| | $ | 3,964 |
|
Foreign | | 5,813 |
| | 5,070 |
| | 4,870 |
|
| | $ | 8,891 |
| | $ | 8,304 |
| | $ | 8,834 |
|
|
The provision for income taxes consisted of the following: |
|
| 2013 | | 2012 | | 2011 |
Current: | U.S. Federal | $ | 1,092 |
| | $ | 911 |
| | $ | 611 |
|
| Foreign | 807 |
| | 940 |
| | 882 |
|
| State | 124 |
| | 153 |
| | 124 |
|
| | 2,023 |
| | 2,004 |
| | 1,617 |
|
Deferred: | U.S. Federal | 87 |
| | 154 |
| | 789 |
|
| Foreign | 11 |
| | (95 | ) | | (88 | ) |
| State | (17 | ) | | 27 |
| | 54 |
|
| | 81 |
| | 86 |
| | 755 |
|
| | $ | 2,104 |
| | $ | 2,090 |
| | $ | 2,372 |
|
|
A reconciliation of the U.S. Federal statutory tax rate to our annual tax rate is as follows: |
|
| 2013 | | 2012 | | 2011 |
U.S. Federal statutory tax rate | 35.0 | % | | 35.0 | % | | 35.0 | % |
State income tax, net of U.S. Federal tax benefit | 1.2 |
| | 1.4 |
| | 1.3 |
|
Lower taxes on foreign results | (8.8 | ) | | (6.9 | ) | | (8.7 | ) |
Tax benefits | (2.4 | ) | | (2.6 | ) | | — |
|
Other, net | (1.3 | ) | | (1.7 | ) | | (0.8 | ) |
Annual tax rate | 23.7 | % | | 25.2 | % | | 26.8 | % |
Deferred tax liabilities and assets are comprised of the following: |
| | | | | | | |
Deferred tax liabilities | 2013 | | 2012 |
Pension benefits | $ | 84 |
| | $ | — |
|
Debt guarantee of wholly owned subsidiary | 828 |
| | 828 |
|
Property, plant and equipment | 2,327 |
| | 2,424 |
|
Intangible assets other than nondeductible goodwill | 4,348 |
| | 4,388 |
|
Other | 361 |
| | 308 |
|
Gross deferred tax liabilities | 7,948 |
| | 7,948 |
|
Deferred tax assets | | | |
Net carryforwards | 1,485 |
| | 1,378 |
|
Stock-based compensation | 303 |
| | 378 |
|
Retiree medical benefits | 384 |
| | 411 |
|
Other employee-related benefits | 627 |
| | 672 |
|
Pension benefits | — |
| | 647 |
|
Deductible state tax and interest benefits | 155 |
| | 345 |
|
Long-term debt obligations acquired | 125 |
| | 164 |
|
Other | 959 |
| | 863 |
|
Gross deferred tax assets | 4,038 |
| | 4,858 |
|
Valuation allowances | (1,360 | ) | | (1,233 | ) |
Deferred tax assets, net | 2,678 |
| | 3,625 |
|
Net deferred tax liabilities | $ | 5,270 |
| | $ | 4,323 |
|
Deferred taxes are included within the following balance sheet accounts:
|
| | | | | | | |
| 2013 |
| | 2012 |
|
Assets: | | | |
Prepaid expenses and other current assets | $ | 716 |
| | $ | 740 |
|
Liabilities: | | | |
Deferred income taxes | $ | 5,986 |
| | $ | 5,063 |
|
A summary of our valuation allowance activity is as follows: |
| | | | | | | | | | | |
| 2013 |
| | 2012 |
| | 2011 |
|
Balance, beginning of year | $ | 1,233 |
| | $ | 1,264 |
| | $ | 875 |
|
Provision | 111 |
| | 68 |
| | 464 |
|
Other additions/(deductions) | 16 |
| | (99 | ) | | (75 | ) |
Balance, end of year | $ | 1,360 |
| | $ | 1,233 |
| | $ | 1,264 |
|
In the second quarter of 2010, the Patient Protection and Affordable Care Act (PPACA) was signed into law. The PPACA changes the tax treatment related to an existing retiree drug subsidy (RDS) available to sponsors of retiree health benefit plans that provide a benefit that is at least actuarially equivalent to the benefits under Medicare Part D. As a result of the PPACA, RDS payments became taxable in tax years beginning in 2013, by requiring the amount of the subsidy received to be offset against our deduction for health care expenses. The provisions of the PPACA required us to record the effect of this tax law change beginning in our second quarter of 2010, and consequently we recorded a one-time related tax charge of $41 million in the second quarter of 2010. In the first quarter of 2012, we began pre-paying funds within our 401(h) accounts intended to fully cover prescription drug benefit liabilities for Medicare eligible retirees. As a result, the receipt of future Medicare subsidy payments for prescription drugs will not be taxable and consequently we recorded a $55 million tax benefit reflecting this change in the first quarter of 2012.
For additional unaudited information on our income tax policies, including our reserves for income taxes, see “Our Critical Accounting Policies” in Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Reserves
A number of years may elapse before a particular matter, for which we have established a reserve, is audited and finally resolved. The number of years with open tax audits varies depending on the tax jurisdiction. Our major taxing jurisdictions and the related open tax audits are as follows:
|
| | | | |
Jurisdiction | | Years Open to Audit | | Years Currently Under Audit |
United States | | 2010-2012 | | 2010-2011 |
Mexico | | 2008-2012 | | None |
United Kingdom | | 2012 | | None |
Canada (Domestic) | | 2009-2012 | | 2009-2010 |
Canada (International) | | 2008-2012 | | 2008-2010 |
Russia | | 2009-2012 | | 2009-2012 |
While it is often difficult to predict the final outcome or the timing of resolution of any particular tax matter, we believe that our reserves reflect the probable outcome of known tax contingencies. We adjust these reserves, as well as the related interest, in light of changing facts and circumstances. Settlement of any particular issue would usually require the use of cash. Favorable resolution would be recognized as a reduction to our annual tax rate in the year of resolution. For further unaudited information on the impact of the resolution of open tax issues, see “Other Consolidated Results” in Management’s Discussion and Analysis of Financial Condition and Results of Operations.
In the fourth quarter of 2013, we reached an agreement with the IRS resolving all open matters related to the audits for taxable years 2003 through 2009. As a result, we made U.S. Federal net cash tax payments of $758 million, including interest. The settlement reduced our 2013 net cash provided by operating activities and our reserves for uncertain tax positions for the tax years 2003 through 2012 and resulted in a non-cash tax benefit of $209 million in the fourth quarter of 2013. In addition, payments for other U.S. Federal, state and local tax matters related to open tax years totaling $226 million were made in 2013. In 2012, we received a favorable tax court decision related to the classification of financial instruments resulting in a non-cash tax benefit of $217 million in the fourth quarter of 2012. See additional unaudited information in “Items Affecting Comparability” in Management’s Discussion and Analysis of Financial Condition and Results of Operations.
As of December 28, 2013, the total gross amount of reserves for income taxes, reported in income taxes payable and other liabilities, was $1,268 million. We accrue interest related to reserves for income taxes in our provision for income taxes and any associated penalties are recorded in selling, general and administrative expenses. The gross amount of interest accrued, reported in other liabilities, was $164 million as of December 28, 2013, of which $36 million of expense was recognized in 2013. The gross amount of interest accrued, reported in other liabilities, was $670 million as of December 29, 2012, of which $10 million of benefit was recognized in 2012.
A rollforward of our reserves for all federal, state and foreign tax jurisdictions, is as follows:
|
| | | | | | | |
| 2013 |
| | 2012 |
|
Balance, beginning of year | $ | 2,425 |
| | $ | 2,167 |
|
Additions for tax positions related to the current year | 238 |
| | 275 |
|
Additions for tax positions from prior years | 273 |
| | 161 |
|
Reductions for tax positions from prior years | (327 | ) | | (172 | ) |
Settlement payments | (1,306 | ) | | (17 | ) |
Statutes of limitations expiration | (30 | ) | | (3 | ) |
Translation and other | (5 | ) | | 14 |
|
Balance, end of year | $ | 1,268 |
| | $ | 2,425 |
|
Carryforwards and Allowances
Operating loss carryforwards totaling $11.1 billion at year-end 2013 are being carried forward in a number of foreign and state jurisdictions where we are permitted to use tax operating losses from prior periods to reduce future taxable income. These operating losses will expire as follows: $0.1 billion in 2014, $10.4 billion between 2015 and 2033 and $0.6 billion may be carried forward indefinitely. We establish valuation allowances for our deferred tax assets if, based on the available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized.
Undistributed International Earnings
As of December 28, 2013, we had approximately $34.1 billion of undistributed international earnings. We intend to continue to reinvest earnings outside the U.S. for the foreseeable future and, therefore, have not recognized any U.S. tax expense on these earnings. It is not practicable for us to determine the amount of unrecognized U.S. tax expense on these reinvested international earnings.
