Income Taxes

The domestic and foreign components of our income before income taxes and noncontrolling interests are as follows:



	Year Ended December 31,
	2013		2012		2011
	(Millions)
U.S. income before income taxes	$	150	$	166	$	55
Foreign income before income taxes	194		157		216
Income before income taxes and noncontrolling interests	$	344	$	323	$	271

Following is a comparative analysis of the components of income tax expense:



	Year Ended December 31,
	2013			2012			2011
	(Millions)
Current —
U.S. federal	$	25		$	—		$	—
State and local	4			4			2
Foreign	81			89			91
	110			93			93
Deferred —
U.S. federal	(4		)	(25		)	—
State and local	2			(20		)	—
Foreign	14			(29		)	(5		)
	12			(74		)	(5		)
Income tax expense	$	122		$	19		$	88

Following is a reconciliation of income taxes computed at the statutory U.S. federal income tax rate (35 percent for all years presented) to the income tax expense reflected in the statements of income:



	Year Ended December 31,
	2013			2012			2011
	(Millions)
Income tax expense computed at the statutory U.S. federal income tax rate	$	120		$	113		$	95
Increases (reductions) in income tax expense resulting from:
Foreign income taxed at different rates	(21		)	(21		)	(14		)
Taxes on repatriation of dividends	9			8			6
Remeasurement of estimated tax on unremitted earnings	(17		)	—			—
State and local taxes on income, net of U.S. federal income tax benefit	6			4			2
Changes in valuation allowance for tax loss carryforwards and credits	27			(91		)	(11		)
Foreign tax holidays	(5		)	(5		)	(4		)
Investment and R&D tax credits	(8		)	(1		)	(4		)
Foreign earnings subject to U.S. federal income tax	5			23			6
Adjustment of prior years taxes	(1		)	(5		)	—
Impact of tax law changes	(3		)	(1		)	—
Tax contingencies	6			(6		)	3
Goodwill impairment	—			—			3
Other	4			1			6
Income tax expense	$	122		$	19		$	88

The components of our net deferred tax assets were as follows:



	Year Ended December 31,
	2013			2012
	(Millions)
Deferred tax assets —
Tax loss carryforwards:
U.S. federal	$	—		$	—
State	23			23
Foreign	78			63
Tax credit benefits	88			51
Postretirement benefits other than pensions	43			50
Pensions	36			87
Bad debts	1			1
Sales allowances	6			6
Payroll and other accruals	132			119
Valuation allowance	(135		)	(118		)
Total deferred tax assets	272			282
Deferred tax liabilities —
Tax over book depreciation	56			57
Other	51			70
Total deferred tax liabilities	107			127
Net deferred tax assets	$	165		$	155

U.S. and state tax loss carryforwards have been presented net of uncertain tax positions that if realized, would reduce tax loss carryforwards in 2013 and 2012 by $4 million and $47 million, respectively.

Following is a reconciliation of deferred taxes to the deferred taxes shown in the balance sheet:



	Year Ended December 31,
	2013			2012
	(Millions)
Balance Sheet:
Current portion — deferred tax asset	$	71		$	72
Non-current portion — deferred tax asset	125			116
Current portion — deferred tax liability shown in other current liabilities	(3		)	(6		)
Non-current portion — deferred tax liability	(28		)	(27		)
Net deferred tax assets	$	165		$	155

As a result of the valuation allowances recorded for $135 million and $118 million at December 31, 2013 and 2012, respectively, we have potential tax assets that were not recognized on our balance sheet. These unrecognized tax assets resulted primarily from foreign tax loss carryforwards, foreign investment tax credits and U.S. state net operating losses that are available to reduce future tax liabilities.

We reported income tax expense of $122 million, $19 million and $88 million in the years ended 2013, 2012 and 2011, respectively. The tax expense recorded in 2013 differs from the expense that would be recorded using a U.S. Federal statutory rate of 35 percent primarily due to the impact of recording a valuation allowance against a tax benefit for restructuring activities in Spain and Belgium and U.S. taxes on repatriation of dividends, partially offset by tax adjustments related to recognizing a U.S. tax benefit for foreign taxes and a favorable mix of income generated in low tax rate jurisdictions.

We evaluate our deferred income taxes quarterly to determine if valuation allowances are required or should be adjusted. U.S. GAAP requires that companies assess whether valuation allowances should be established against their deferred tax assets based on consideration of all available evidence, both positive and negative, using a “more likely than not” standard. This assessment considers, among other matters, the nature, frequency and amount of recent losses, the duration of statutory carryforward periods, and tax planning strategies. In making such judgments, significant weight is given to evidence that can be objectively verified.

In 2012, we reversed the tax valuation allowance that we recorded in 2008 against our net deferred tax assets in the U.S. based on operating improvements we had made, the outlook for light and commercial vehicle production in the U.S. and the positive impact this should have on our U.S. operations. The net income impact of the tax valuation allowance release in the U.S was a tax benefit of approximately $81 million. We now have a federal net operating loss ("NOL") at December 31, 2013 of $37 million, which expires in 2030. The state NOLs expire in various tax years through 2032.

Valuation allowances have been established in certain foreign jurisdictions for deferred tax assets based on a “more likely than not” threshold. The ability to realize deferred tax assets depends on our ability to generate sufficient taxable income within the carryforward periods provided for in the tax law for each tax jurisdiction. We have considered the following possible sources of taxable income when assessing the realization of our deferred tax assets:


•	Future reversals of existing taxable temporary differences;


•	Taxable income or loss, based on recent results, exclusive of reversing temporary differences and carryforwards;


•	Tax-planning strategies; and


•	Taxable income in prior carryback years if carryback is permitted under the relevant tax law.

In 2012, after considering all available evidence and all possible sources of taxable income, we recorded a $19 million tax valuation allowance in Spain for tax credits that may not be utilized due to tax losses in Spain.

The valuation allowances recorded against deferred tax assets generated by taxable losses in Spain and certain other foreign jurisdictions will impact our provision for income taxes until the valuation allowances are released. Our provision for income taxes will include no tax benefit for losses incurred and no tax expense with respect to income generated in these jurisdictions until the respective valuation allowance is eliminated.

We do not provide for U.S. income taxes on unremitted earnings of foreign subsidiaries, except for the earnings of certain of our China operations, as our present intention is to reinvest the unremitted earnings in our foreign operations. Unremitted earnings of foreign subsidiaries were approximately $858 million at December 31, 2013. We estimated that the amount of U.S. and foreign income taxes that would be accrued or paid upon remittance of the assets that represent those unremitted earnings was $159 million. The estimated U.S. and foreign income taxes on unremitted earnings may be impacted in the future if we are unable to claim a U.S. foreign tax credit.

We have tax sharing agreements with our former affiliates that allocate tax liabilities for periods prior to year 2000 and establish indemnity rights on certain tax issues.

U.S. GAAP provides that a tax benefit from an uncertain tax position may be recognized when it is “more likely than not” that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits.

A reconciliation of our uncertain tax positions is as follows:



	2013			2012			2011
	(Millions)
Uncertain tax positions —
Balance January 1	$	107		$	119		$	111
Gross increases in tax positions in current period	15			13			19
Gross increases in tax positions in prior period	—			1			3
Gross decreases in tax positions in prior period	(1		)	(12		)	(10		)
Gross decreases — settlements	—			(5		)	—
Gross decreases — statute of limitations expired	(6		)	(9		)	(4		)
Balance December 31	$	115		$	107		$	119

Included in the balance of uncertain tax positions were $107 million in 2013, $101 million in 2012, $36 million at December 31, 2011, of tax benefits, that if recognized, would affect the effective tax rate. We recognize accrued interest and penalties related to unrecognized tax benefits as income tax expense. Penalties of less than $1 million were accrued in 2013, 2012 and 2011. Additionally, we accrued interest related to uncertain tax positions of less than $2 million in 2013, less than $1 million in 2012, and $2 million in 2011. Our liability for penalties was $2 million at 2013, $3 million at December 31, 2012 and $2 million at December 31, 2011, respectively, and our liability for interest was $7 million, $5 million, and $7 million at December 31, 2013, 2012 and 2011, respectively.

Our uncertain tax position at December 31, 2013 and 2012 included exposures relating to the disallowance of deductions, global transfer pricing and various other issues. We believe it is reasonably possible that a decrease of up to $4 million in unrecognized tax benefits related to the expiration of foreign statute of limitations and the conclusion of income tax examinations may occur within the coming year.

We are subject to taxation in the U.S. and various state and foreign jurisdictions. As of December 31, 2013, our tax years open to examination in primary jurisdictions are as follows:



	Open To Tax Year
United States	2000
China	2003
Spain	2003
Canada	2007
Brazil	2008
Mexico	2008
Belgium	2011
Germany	2011
United Kingdom	2012