|12 Months Ended|
Dec. 31, 2014
|Income Tax Disclosure [Abstract]|
NOTE 4. INCOME TAXES
Income tax expense consists of the following:
A reconciliation of the statutory U.S. federal income tax rate to the effective tax rate was as follows:
Our income tax rates are generally less than the 35 percent U.S. statutory income tax rate primarily because of lower taxes on foreign earnings and research tax credits. Our effective tax rate for 2014 was 28.7 percent compared to 25.1 percent for 2013. The 3.6 percent increase in the effective tax rate from 2013 to 2014 is partially due to a 1.2 percent net tax benefit for one-time items in 2013 that did not repeat in 2014. These 2013 one-time items consisted primarily of the 2012 federal research tax credit that was reinstated during 2013. The additional 2.4 percent increase in tax rate from 2013 to 2014 is attributable primarily to the following unfavorable items that occurred in 2014: a tax law change in the United Kingdom (U.K.) resulting in a higher limitation on the deductibility of interest; unfavorable changes in the jurisdictional mix of pretax income; and increases in state valuation allowances.
Retained earnings of our U.K. domiciled subsidiaries and certain Singapore, German, Indian and Mexican subsidiaries are considered to be permanently reinvested. During 2013, we released $12 million of U.S. deferred tax liabilities related to prior years unremitted income of certain Indian and Mexican subsidiaries considered to be permanently reinvested starting in 2013. In addition, earnings of our China operations generated after December 31, 2011, are considered to be permanently reinvested. U.S. deferred tax is not provided on these permanently reinvested earnings. Our permanently reinvested foreign earnings are expected to be used for items such as capital expenditures and to fund joint ventures outside of the U.S. The total permanently reinvested retained earnings and related cumulative translation adjustment balances for these entities were $3.8 billion, $3.1 billion and $2.3 billion for the years ended December 31, 2014, 2013, and 2012, respectively. These amounts were determined primarily based on book retained earnings balances for these subsidiaries translated at historical rates. The determination of the deferred tax liability related to these retained earnings and cumulative translation adjustment balances which are considered to be permanently reinvested outside the U.S. is not practicable.
For our remaining subsidiary companies and joint ventures outside the U.S., we provide for the additional taxes that would be due upon the dividend distribution of the income of those foreign subsidiaries and joint ventures assuming the full utilization of foreign tax credits. Deferred tax liabilities on unremitted earnings of foreign subsidiaries and joint ventures, including those in China generated in years prior to 2012, were $204 million and $201 million at December 31, 2014 and 2013, respectively. We have $661 million of retained earnings and related cumulative translation adjustments in our China operations generated prior to December 31, 2011, for which we have provided a U.S. deferred tax liability of $155 million. We anticipate that these earnings will be distributed to the U.S. within the next five years.
Income before income taxes included equity income of foreign joint ventures of $212 million, $203 million and $192 million for the years ended December 31, 2014, 2013 and 2012, respectively. This equity income is recorded net of foreign taxes. Additional U.S. income taxes of $14 million, $13 million and $9 million for the years ended December 31, 2014, 2013 and 2012, respectively, were provided for the additional U.S. taxes that will ultimately be due upon the distribution of the foreign joint venture equity income.
Carryforward tax benefits and the tax effect of temporary differences between financial and tax reporting that give rise to net deferred tax assets were as follows:
Our 2014 U.S. carryforward benefits include $124 million of state credit and net operating loss carryforward benefits that begin to expire in 2015. Our foreign carryforward benefits include $66 million of net operating loss carryforwards that begin to expire in 2015. A valuation allowance is recorded to reduce the gross deferred tax assets to an amount we believe is more likely than not to be realized. The valuation allowance increased in 2014 by a net $43 million and increased in 2013 by a net $6 million. The valuation allowance is primarily attributable to the uncertainty regarding the realization of a portion of the U.S. state and foreign net operating loss and tax credit carryforward benefits. Prepaid and other current assets include deferred tax assets of $274 million and $232 million for the years ended December 31, 2014 and 2013, respectively. In addition, prepaid and other current assets include refundable income taxes of $170 million and $152 million for the years ended December 31, 2014 and 2013, respectively. Other assets include deferred tax assets of $40 million and $61 million for the years ended December 31, 2014 and 2013, respectively. In addition, other assets include $24 million and $59 million of long-term refundable income taxes for the years ended December 31, 2014 and 2013, respectively. Other liabilities and deferred revenue included deferred tax liabilities of $130 million and $116 million for the years ended December 31, 2014 and 2013, respectively.
A reconciliation of unrecognized tax benefits for the years ended December 31, 2014, 2013 and 2012 was as follows:
Included in the December 31, 2014 and 2013, balances are $114 million and $107 million related to tax positions that, if recognized, would favorably impact the effective tax rate in future periods. Also, we had accrued interest expense related to the unrecognized tax benefits of $7 million, $3 million and $2 million as of December 31, 2014, 2013 and 2012, respectively. We recognize potential accrued interest and penalties related to unrecognized tax benefits in income tax expense. For the years ended December 31, 2014, 2013 and 2012, we recognized $4 million, $1 million and $(3) million in net interest expense, respectively.
Audit outcomes and the timing of audit settlements are subject to significant uncertainty. Although we believe that adequate provision has been made for such issues, there is the possibility that the ultimate resolution of such issues could have an adverse effect on our earnings. Conversely, if these issues are resolved favorably in the future, the related provision would be reduced, thus having a positive impact on earnings.
In January 2015, we resolved tax matters related primarily to certain tax credits that were under examination. We estimate that unrecognized tax benefits will decrease in an amount ranging from $60 million to $70 million in the first quarter of 2015 due to the resolution of these issues. We expect this resolution to result in a tax benefit ranging from $10 million to $20 million in the first quarter of 2015. We do not expect any other significant changes in our unrecognized tax benefits in the next 12 months.
As a result of our global operations, we file income tax returns in various jurisdictions including U.S. federal, state and foreign jurisdictions. We are routinely subject to examination by taxing authorities throughout the world, including Australia, Belgium, Brazil, Canada, China, France, India, Mexico, the U.K. and the U.S. With few exceptions, our U.S. federal, major state and foreign jurisdictions are no longer subject to income tax assessments for years before 2011. The U.S. examinations related to tax years 2011-2012 commenced during 2014.
The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.
Reference 1: http://www.xbrl.org/2003/role/presentationRef