CORNING INC /NY | 2013 | FY | 3

6.      Income Taxes

Income before income taxes follows (in millions):

 
Years ended December 31,
 
2013
 
2012
 
2011
                 
U.S. companies
$
1,274
 
$
382
 
$
988
Non-U.S. companies
 
1,199
   
1,593
   
2,243
Income before income taxes
$
2,473
 
$
1,975
 
$
3,231

The current and deferred amounts of the provision (benefit) for income taxes follow (in millions):

 
Years ended December 31,
 
2013
 
2012
 
2011
Current:
               
Federal
$
3
 
$
(4)
 
$
(2)
State and municipal
 
12
   
3 
   
6 
Foreign
 
308
   
321 
   
289 
Deferred:
               
Federal
 
112
   
143 
   
173
State and municipal
 
50
   
(8)
   
14 
Foreign
 
27
   
(116)
   
(66)
Provision for income taxes
$
512
 
$
339 
 
$
414 

Amounts are reflected in the preceding tables based on the location of the taxing authorities.

Reconciliation of the U.S. statutory income tax rate to our effective tax rate for continuing operations follows:

 
Years ended December 31,
 
2013
 
2012
 
2011
Statutory U.S. income tax rate
35.0%
   
35.0%
 
35.0%
 
State income tax (benefit), net of federal effect
0.6     
   
0.2   
 
0.1   
 
Tax holidays (1)
(1.2)    
   
(1.7)  
 
(2.0)  
 
Investment and other tax credits (2)
(2.0)    
   
(1.1)  
 
(0.7)  
 
Rate difference on foreign earnings
(8.1)    
(4)
 
(2.4)  
 
(4.5)  
 
Equity earnings impact (3)
(6.6)    
   
(13.6)  
 
(14.9)  
 
Dividend repatriation
0.2     
   
0.4   
 
(0.4)  
(5)
Valuation allowances
3.1     
(6)
 
(0.1)  
 
0.4   
 
Other items, net
(0.3)   
   
0.5   
 
(0.2)  
 
Effective income tax (benefit) rate*
20.7%
   
17.2%
 
12.8%
 

*Includes impact of defined benefit pension plan methodology change implemented in the first quarter of 2013 and retrospectively applied to prior periods.

(1)
Primarily related to a subsidiary in Taiwan operating under tax holiday arrangements.  The nature and extent of such arrangements vary, and the benefits of existing arrangements phase out in future years (through 2018).  The impact of tax holidays on net income per share on a diluted basis was $0.02 in 2013, $0.02 in 2012 and $0.04 in 2011.

(2)
Primarily related to research and development credits in U.S.

(3)
Equity in earnings of nonconsolidated affiliates reported in the financials net of tax.  The decrease from 2012 – 2013 was driven by significantly lower earnings from Samsung Corning Precision Materials.

(4)
$74 million of tax benefit increase was due to $37 million expense recorded in 2012 that was reversed in the first quarter of 2013 as a result of the retroactive application of the American Taxpayer Relief Act enacted on January 3, 2013.  Additional increase in the benefit was attributable to excess foreign tax credits realized in U.S.

(5)
Includes benefit of amending 2006 U.S. Federal return to claim foreign tax credits.

(6)
Primarily related to change in judgment on the realizability of Australia and certain state deferred tax assets.

The tax effects of temporary differences and carryforwards that gave rise to significant portions of the deferred tax assets and liabilities follows (in millions):

 
December 31,
 
2013
 
2012
           
Loss and tax credit carryforwards
$
1,788 
 
$
1,923 
Other Assets
 
63 
   
72 
Asset impairments and restructuring reserves
 
172 
   
168 
Postretirement medical and life benefits
 
290 
   
357 
Fixed assets
 
85 
   
89 
Other accrued liabilities
 
320 
   
268 
Other employee benefits
 
387 
   
486 
Gross deferred tax assets
 
3,105 
   
3,363 
Valuation allowance
 
(286)
   
(210)
Total deferred tax assets
 
2,819 
   
3,153 
Intangible and other assets
 
(321)
   
(246)
Total deferred tax liabilities
 
(321)
   
(246)
Net deferred tax assets
$
2,498 
 
$
2,907 

The net deferred tax assets are classified in our consolidated balance sheets as follows (in millions):

 
December 31,
 
2013
 
2012
Current deferred tax assets
$
278 
 
$
579 
Non-current deferred tax assets
 
2,234 
   
2,343 
Current deferred tax liabilities
 
(1)
   
(4)
Non-current deferred tax liabilities
 
(13)
   
(11)
Net deferred tax assets
$
2,498 
 
$
2,907 

Details on deferred tax assets for loss and tax credit carryforwards at December 31, 2013 follow (in millions):

     
Expiration
 
Amount
 
2014-2018
 
2019-2023
 
2024-2033
 
Indefinite
Net operating losses
$
429
 
$
86
 
$
124
       
$
219
Capital losses
 
7
   
7
                 
Tax credits
 
1,352
   
169
   
999
 
$
143
   
41
Totals as of December 31, 2013
$
1,788
 
$
262
 
$
1,123
 
$
143
 
$
260

The recognition of windfall tax benefits from stock-based compensation deducted on the tax return is prohibited until realized through a reduction of income tax payable.  Cumulative tax benefits totaling $313 million will be recorded in additional paid-in-capital when the net operating loss and credit carry forwards are utilized and the windfall tax benefit can be realized.

Deferred tax assets are to be reduced by a valuation allowance if, based on the weight of available positive and negative evidence, it is more likely than not (a likelihood of greater than 50 percent) that some portion or all of the deferred tax assets will not be realized.  Corning has valuation allowances on certain shorter-lived deferred tax assets such as those represented by capital loss carry forwards and state tax net operating loss carry forwards, as well as other foreign net operating loss carryforwards and federal and state tax credits, because we cannot conclude that it is more likely than not that we will earn income of the character required to utilize these assets before they expire.  The amount of U.S. and foreign deferred tax assets that have remaining valuation allowances at December 31, 2013 and 2012 was $286 million and $210 million, respectively.

The following is a tabular reconciliation of the total amount of unrecognized tax benefits (in millions):

 
2013
 
2012
Balance at January 1
$
16 
 
$
21 
Additions based on tax positions related to the current year
 
1 
   
1 
Additions for tax positions of prior years
       
2 
Reductions for tax positions of prior years
         
Settlements and lapse of statute of limitations
 
(2)
   
(8)
Balance at December 31
$
15 
 
$
16 

Included in the balance at December 31, 2013 and 2012 are $7 million and $11 million, respectively, of unrecognized tax benefits that would impact our effective tax rate if recognized.

We recognize accrued interest and penalties associated with uncertain tax positions as part of tax expense.  For the years ended December 31, 2013, 2012 and 2011, the amounts recognized in interest expense and income were immaterial.  The amounts accrued at December 31, 2013 and 2012 for the payment of interest and penalties were not significant.

While we expect the amount of unrecognized tax benefits to change in the next 12 months, we do not expect the change to have a significant impact on the results of operations or our financial position.

Corning Incorporated, as the common parent company, and all 80%-or-more-owned of its U.S. subsidiaries join in the filing of consolidated U.S. federal income tax returns.  All such returns for periods ended through December 31, 2004, have been audited by and settled with the Internal Revenue Service (IRS).  The statute of limitations to audit the 2007, 2008 and 2009 U.S. federal income tax expired in 2011, 2012 and 2013, respectively.  The statute for the 2005 tax return has closed except to the extent the loss generated in 2005 is utilized in future years.  The statute for U.S. foreign tax and research and experimentation credit carryforwards generated through 2009 will remain open until the credits are utilized in future years.

Corning Incorporated and its U.S. subsidiaries file income tax returns on a combined, unitary or stand-alone basis in multiple state and local jurisdictions, which generally have statutes of limitations ranging from 3 to 5 years.  Various state income tax returns are currently in the process of examination or administrative appeal.

Our foreign subsidiaries file income tax returns in the countries in which they have operations.  Generally, these countries have statutes of limitations ranging from 3 to 7 years.  Years still open to examination by foreign tax authorities in major jurisdictions include Japan (2008 onward) and Taiwan (2012 onward).

Corning continues to indefinitely reinvest substantially all of its foreign earnings, with the exception of approximately $12 million of earnings that have very low or no tax cost associated with their repatriation.  Our current analysis indicates that we have sufficient U.S. liquidity, including borrowing capacity, to fund foreseeable U.S. cash needs without requiring the repatriation of foreign cash.  One time or unusual items that may impact our ability or intent to keep our foreign earnings and cash indefinitely reinvested include significant U.S. acquisitions, stock repurchases, shareholder dividends, changes in tax laws and/or a change in our circumstances or economic conditions that negatively impact our ability to borrow or otherwise fund U.S. needs from existing U.S. sources.  As of December 31, 2013, taxes have not been provided on approximately $12.4 billion of accumulated foreign unremitted earnings that are expected to remain invested indefinitely.  While it remains impracticable to calculate the tax cost of repatriating our total unremitted foreign earnings, such cost could be material to the results of operations of Corning in a particular period.

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