Income Taxes

Selected income tax data from continuing operations (in millions):



	2013		2012		2011
Components of income before income taxes:
United States	$	513.5	$	469.6	$	364.3
Non-United States	467.4		496.3		503.3
Total	$	980.9	$	965.9	$	867.6



Components of the income tax provision:
Current:
United States	$	164.5		$	71.3	$	51.0
Non-United States	51.1			72.3		75.0
State and local	15.5			3.1		(2.0		)
Total current	231.1			146.7		124.0
Deferred:
United States	(1.3		)	76.8		46.6
Non-United States	(2.9		)	0.4		(5.2		)
State and local	(2.3		)	5.0		5.1
Total deferred	(6.5		)	82.2		46.5
Income tax provision	$	224.6		$	228.9	$	170.5

Total income taxes paid	$	203.9		$	167.5	$	118.6

During 2013, we recognized net discrete tax benefits of $22.7 million primarily related to the favorable resolution of tax matters in various global jurisdictions and the retroactive extension of the U.S. federal research and development tax credit.

During 2012, we recognized net discrete tax benefits of $2.1 million primarily related to the favorable resolution of tax matters in various global jurisdictions.

During 2011, we recognized net discrete tax benefits of $25.0 million related to the favorable resolution of tax matters in various global jurisdictions and the retroactive extension of the U.S. federal research and development tax credit.

Effective Tax Rate Reconciliation

The reconciliation between the U.S. federal statutory rate and our effective tax rate was:



	2013		2012		2011
Statutory tax rate	35.0	%	35.0	%	35.0	%
State and local income taxes	0.9		0.8		0.7
Non-United States taxes	(9.6	)	(10.3	)	(12.7	)
Foreign tax credit utilization	0.8		0.4		0.9
Employee stock ownership plan benefit	(0.2	)	(0.3	)	(0.3	)
Change in valuation allowances	(0.4	)	(0.2	)	0.8
Domestic manufacturing deduction	(1.1	)	(1.1	)	(0.8	)
Adjustments for prior period tax matters	(2.0	)	(0.6	)	(2.9	)
Other	(0.5	)	—		(1.0	)
Effective income tax rate	22.9	%	23.7	%	19.7	%

We operate in certain non-U.S. tax jurisdictions under various government sponsored tax incentive programs, which expire during 2016 through 2019 and may be extended if certain additional requirements are met. The tax incentive programs reduced our effective income tax rate by 3.9, 4.3 and 5.0 percentage points in 2013, 2012 and 2011, respectively.

Deferred Taxes

The tax effects of temporary differences that give rise to our net deferred income tax assets and liabilities were (in millions):



	2013			2012
Current deferred income tax assets:
Compensation and benefits	$	26.4		$	28.7
Product warranty costs	13.0			14.3
Inventory	48.0			58.4
Allowance for doubtful accounts	9.8			15.6
Deferred credits	9.3			9.5
Returns, rebates and incentives	49.7			47.5
Self-insurance reserves	2.5			2.7
Restructuring reserves	3.1			2.4
Net operating loss carryforwards	3.7			3.7
State tax credit carryforwards	—			0.9
Other — net	24.0			24.9
Current deferred income tax assets	189.5			208.6
Long-term deferred income tax assets (liabilities):
Retirement benefits	$	177.4		$	369.3
Property	(88.5		)	(90.3		)
Intangible assets	(40.2		)	(34.1		)
Environmental reserves	18.0			13.7
Share-based compensation	33.8			40.1
Self-insurance reserves	7.0			6.2
Deferred gains	2.8			3.3
Net operating loss carryforwards	37.6			38.5
Capital loss carryforwards	14.2			17.2
U.S. federal tax credit carryforwards	2.1			1.5
State tax credit carryforwards	4.7			3.4
Other — net	6.7			14.1
Subtotal	175.6			382.9
Valuation allowance	(28.3		)	(31.8		)
Net long-term deferred income tax assets	147.3			351.1
Total deferred income tax assets	$	336.8		$	559.7

Total deferred tax assets were $493.8 million at September 30, 2013 and $715.9 million at September 30, 2012. Total deferred tax liabilities were $128.7 million at September 30, 2013 and $124.4 million at September 30, 2012.

We have not provided U.S. deferred taxes for $2,427.0 million of undistributed earnings of the Company’s subsidiaries, since these earnings have been, and under current plans will continue to be, permanently reinvested outside the U.S. It is not practicable to estimate the amount of additional taxes that may be payable upon distribution.

We believe it is more likely than not that we will realize current and long-term deferred tax assets through the reduction of future taxable income, other than for the deferred tax assets reflected below. Significant factors we considered in determining the probability of the realization of the deferred tax assets include our historical operating results and expected future earnings.

Tax attributes and related valuation allowances at September 30, 2013 are (in millions):



	Tax Benefit		Valuation		Carryforward Period
Tax Attribute to be Carried Forward	Amount		Allowance		Ends
Non-United States net operating loss carryforward	$	8.5	$	6.8	2014	-	2023
Non-United States net operating loss carryforward	11.8		5.8		Indefinite
Non-United States capital loss carryforward	14.2		14.2		Indefinite
United States net operating loss carryforward	5.5		—		2019	-	2027
United States tax credit carryforward	2.1		—		2018	-	2027
State and local net operating loss carryforward	15.5		—		2014	-	2033
State tax credit carryforward	4.7		—		2025	-	2028
Subtotal — tax carryforwards	62.3		26.8
Other deferred tax assets	1.5		1.5		Indefinite
Total	$	63.8	$	28.3

There was no material change in the valuation allowance in 2013 and 2012.

Unrecognized Tax Benefits

We operate in numerous taxing jurisdictions and are subject to regular examinations by various U.S. federal, state and non-U.S. taxing authorities for various tax periods. Additionally, we have retained tax liabilities and the rights to tax refunds in connection with various divestitures of businesses in prior years. Our income tax positions are based on research and interpretations of the income tax laws and rulings in each of the jurisdictions in which we do business. Due to the subjectivity of interpretations of laws and rulings in each jurisdiction, the differences and interplay in tax laws between those jurisdictions as well as the inherent uncertainty in estimating the final resolution of complex tax audit matters, our estimates of income tax liabilities may differ from actual payments or assessments.

A reconciliation of our gross unrecognized tax benefits, excluding interest and penalties, is as follows (in millions):



	2013			2012			2011
Gross unrecognized tax benefits balance at beginning of year	$	70.3		$	75.1		$	66.3
Additions based on tax positions related to the current year	1.1			—			22.3
Additions based on tax positions related to prior years	8.8			3.3			9.3
Reductions based on tax positions related to prior years	—			—			(0.6		)
Reductions related to settlements with taxing authorities	(36.2		)	(6.3		)	(18.5		)
Reductions related to lapses of statute of limitations	(1.2		)	(2.4		)	(3.0		)
Effect of foreign currency translation	(2.0		)	0.6			(0.7		)
Gross unrecognized tax benefits balance at end of year	$	40.8		$	70.3		$	75.1

The amount of gross unrecognized tax benefits that would reduce our effective tax rate if recognized was $40.8 million, $70.3 million, and $75.1 million at September 30, 2013, 2012 and 2011, respectively.

Accrued interest and penalties related to unrecognized tax benefits were $12.4 million and $20.1 million at September 30, 2013 and 2012, respectively. We recognize interest and penalties related to unrecognized tax benefits in the income tax provision. Benefits (expense) recognized were $6.7 million, $(3.1) million and $9.7 million in 2013, 2012 and 2011, respectively.

If the unrecognized tax benefits were recognized, the net impact on our income tax provision, including the recognition of interest and penalties and offsetting tax assets, would be $27.1 million as of September 30, 2013.

We believe it is reasonably possible that the amount of gross unrecognized tax benefits could be reduced by up to $16.4 million in the next 12 months as a result of the resolution of tax matters in various global jurisdictions and the lapses of statutes of limitations.

We conduct business globally and are routinely audited by the various tax jurisdictions in which we operate. We are no longer subject to U.S. federal income tax examinations for years before 2010 and are no longer subject to state, local and non-U.S. income tax examinations for years before 2003.