Note 9. Taxes

Income from Continuing Operations

The components of income from continuing operations before income taxes are as follows:



	Fiscal Years Ended January 31,
(Amounts in millions)	2014		2013		2012
U.S.	$	19,412	$	19,352	$	18,685
Non-U.S.	5,244		6,310		5,647
Total income from continuing operations before income taxes	$	24,656	$	25,662	$	24,332

A summary of the provision for income taxes is as follows:



	Fiscal Years Ended January 31,
(Amounts in millions)	2014			2013			2012
Current:
U.S. federal	$	6,377		$	5,611		$	4,596
U.S. state and local	719			622			743
International	1,523			1,743			1,383
Total current tax provision	8,619			7,976			6,722
Deferred:
U.S. federal	(72		)	38			1,444
U.S. state and local	37			(8		)	57
International	(479		)	(48		)	(299		)
Total deferred tax expense (benefit)	(514		)	(18		)	1,202
Total provision for income taxes	$	8,105		$	7,958		$	7,924

Effective Income Tax Rate Reconciliation

The Company's effective income tax rate is typically lower than the U.S. statutory tax rate primarily because of benefits from lower-taxed global operations, including the use of global funding structures and certain U.S. tax credits as further discussed in the "Cash and Cash Equivalents" section of the Company's significant accounting policies in Note 1. The Company's non-U.S. income is generally subject to local country tax rates that are below the 35% U.S. statutory tax rate. Certain non-U.S. earnings have been indefinitely reinvested outside the U.S. and are not subject to current U.S. income tax. A reconciliation of the significant differences between the U.S. statutory tax rate and the effective income tax rate on pretax income from continuing operations is as follows:



	Fiscal Years Ended January 31,
	2014		2013		2012
U.S. statutory tax rate	35.0	%	35.0	%	35.0	%
U.S. state income taxes, net of federal income tax benefit	2.0	%	1.7	%	2.0	%
Income taxed outside the U.S.	(2.8	)%	(2.6	)%	(2.8	)%
Net impact of repatriated international earnings	(1.4	)%	(2.5	)%	(0.3	)%
Other, net	0.1	%	(0.6	)%	(1.3	)%
Effective income tax rate	32.9	%	31.0	%	32.6	%

Deferred Taxes

The significant components of the Company's deferred tax account balances are as follows:



	January 31,
(Amounts in millions)	2014			2013
Deferred tax assets:
Loss and tax credit carryforwards	$	3,566		$	3,525
Accrued liabilities	2,986			2,683
Share-based compensation	126			204
Other	1,573			1,500
Total deferred tax assets	8,251			7,912
Valuation allowances	(1,801		)	(2,225		)
Deferred tax assets, net of valuation allowance	6,450			5,687
Deferred tax liabilities:
Property and equipment	6,295			5,830
Inventories	1,641			1,912
Other	1,827			1,157
Total deferred tax liabilities	9,763			8,899
Net deferred tax liabilities	$	3,313		$	3,212

The deferred taxes are classified as follows in the Company's Consolidated Balance Sheets:



	January 31,
(Amounts in millions)	2014		2013
Balance Sheet classification:
Assets:
Prepaid expenses and other	$	822	$	520
Other assets and deferred charges	1,151		757
Asset subtotals	1,973		1,277
Liabilities:
Accrued liabilities	176		116
Deferred income taxes and other	5,110		4,373
Liability subtotals	5,286		4,489
Net deferred tax liabilities	$	3,313	$	3,212

Unremitted Earnings

United States income taxes have not been provided on accumulated but undistributed earnings of the Company's international subsidiaries of approximately $21.4 billion and $19.2 billion as of January 31, 2014 and 2013, respectively, as the Company intends to permanently reinvest these amounts outside of the United States. However, if any portion were to be distributed, the related U.S. tax liability may be reduced by foreign income taxes paid on those earnings. Determination of the unrecognized deferred tax liability related to these undistributed earnings is not practicable because of the complexities with its hypothetical calculation. The Company provides deferred or current income taxes on earnings of international subsidiaries in the period that the Company determines it will remit those earnings.

Net Operating Losses, Tax Credit Carryforwards and Valuation Allowances

At January 31, 2014, the Company had net operating loss and capital loss carryforwards totaling approximately $6.1 billion. Of these carryforwards, approximately $3.6 billion will expire, if not utilized, in various years through 2024. The remaining carryforwards have no expiration. At January 31, 2014, the Company had foreign tax credit carryforwards of $1.8 billion, which will expire in various years through 2024, if not utilized.

The recoverability of these future tax deductions and credits is evaluated by assessing the adequacy of future expected taxable income from all sources, including taxable income in prior carryback years, reversal of taxable temporary differences, forecasted operating earnings and available tax planning strategies. To the extent management does not consider it more likely than not that a deferred tax asset will be realized, a valuation allowance is established. If a valuation allowance has been established and management subsequently determines that it is more likely than not that the deferred tax assets will be realized, the valuation allowance is released.

As of January 31, 2014 and 2013, the Company had valuation allowances recorded of approximately $1.8 billion and $2.2 billion, respectively, on deferred tax assets associated primarily with net operating loss carryforwards for which management has determined it is more likely than not that the deferred tax asset will not be realized. The $0.4 billion net decrease in the valuation allowance during fiscal 2014 related to releases arising from the use of deferred tax assets, changes in judgment regarding the future realization of deferred tax assets, increases from certain net operating losses and deductible temporary differences arising in fiscal 2014, decreases due to operating and capital loss expirations and fluctuations in currency exchange rates. Management believes that it is more likely than not that the remaining net deferred tax assets will be fully realized.

Uncertain Tax Positions

The benefits of uncertain tax positions are recorded in the Company's Consolidated Financial Statements only after determining a more likely than not probability that the uncertain tax positions will withstand challenge, if any, from taxing authorities.

As of January 31, 2014 and 2013, the amount of unrecognized tax benefits related to continuing operations was $763 million and $818 million, respectively. The amount of unrecognized tax benefits that would affect the Company's effective income tax rate was $698 million and $741 million for January 31, 2014 and 2013, respectively.

A reconciliation of unrecognized tax benefits from continuing operations was as follows:



	Fiscal Years Ended January 31,
(Amounts in millions)	2014			2013			2012
Unrecognized tax benefits, beginning of year	$	818		$	611		$	795
Increases related to prior year tax positions	41			88			87
Decreases related to prior year tax positions	(112		)	(232		)	(162		)
Increases related to current year tax positions	133			431			56
Settlements during the period	(117		)	(80		)	(161		)
Lapse in statutes of limitations	—			—			(4		)
Unrecognized tax benefits, end of year	$	763		$	818		$	611

The Company classifies interest and penalties related to uncertain tax benefits as interest expense and as operating, selling, general and administrative expenses, respectively. During fiscal 2014, 2013 and 2012, the Company recognized interest and penalty expense (benefit) related to uncertain tax positions of $(7) million, $2 million and $(19) million, respectively. As of January 31, 2014 and 2013, accrued interest related to uncertain tax positions of $40 million and $139 million, respectively, was recorded in the Company's Consolidated Balance Sheets. The Company did not have any accrued penalties recorded for income taxes as of January 31, 2014 or 2013.

During the next twelve months, it is reasonably possible that tax audit resolutions could reduce unrecognized tax benefits by between $50 million and $250 million, either because the tax positions are sustained on audit or because the Company agrees to their disallowance. The Company is focused on resolving tax audits as expeditiously as possible. As a result of these efforts, unrecognized tax benefits could potentially be reduced beyond the provided range during the next twelve months. The Company does not expect any change to have a significant impact to its Consolidated Financial Statements.

The Company remains subject to income tax examinations for its U.S. federal income taxes generally for fiscal 2012 through 2014. The Company also remains subject to income tax examinations for international income taxes for fiscal 2006 through 2014, and for U.S. state and local income taxes generally for the fiscal years ended 2009 through 2014.

Other Taxes

The Company is subject to tax examinations for payroll, value added, sales-based and other non-income taxes. A number of these examinations are ongoing in various jurisdictions, including Brazil. In certain cases, the Company has received assessments from the taxing authorities in connection with these examinations. Where a probable loss has occurred, the Company has made accruals, which are reflected in the Company's Consolidated Financial Statements. While the possible losses or range of possible losses associated with these matters are individually immaterial, a group of related matters, if decided adversely to the Company, could result in a liability material to the Company's Consolidated Financial Statements.