NOTE 5: INCOME TAXES

C.H. Robinson Worldwide, Inc. and its 80 percent (or more) owned U.S. subsidiaries file a consolidated federal income tax return. We file unitary or separate state returns based on state filing requirements. With few exceptions, we are no longer subject to audits of U.S. federal, state and local, or non-U.S. income tax returns before 2006.

A reconciliation of the beginning and ending amount of unrecognized tax benefits, excluding interest and penalties, is as follows (in thousands):



	2012			2011			2010
Unrecognized tax benefits, beginning of period	$	7,668		$	7,595		$	7,776
Additions based on tax positions related to the current year	4,172			1,476			1,891
Additions for tax positions of prior years	6,911			290			1,565
Reductions for tax positions of prior years	(1,061		)	(1,005		)	(1,544		)
Lapse in statute of limitations	(286		)	(688		)	(2,093		)
Settlements	(616		)	—			—
Unrecognized tax benefits, end of the period	$	16,788		$	7,668		$	7,595

As of December 31, 2012, we had $20.6 million of unrecognized tax benefits and related interest and penalties, all of which would affect our effective tax rate if recognized. We are not aware of any tax positions for which it is reasonably possible that the total amount of unrecognized tax benefit will significantly increase or decrease in the next twelve months.

Income tax expense considers amounts which may be needed to cover exposures for open tax years. We do not expect any material impact related to open tax years; however, actual settlements may differ from amounts accrued.

We recognize interest and penalties related to uncertain tax positions in the provision for income taxes. During the years ended December 31, 2012, 2011, and 2010, we recognized approximately $0.8 million, and $0.8 million, and $1.5 million in interest and penalties. We had approximately $3.8 million and $2.8 million for the payment of interest and penalties accrued within noncurrent taxes payable as of December 31, 2012 and 2011. These amounts are not included in the reconciliation above.

The components of the provision for income taxes consist of the following for the years ended December 31 (in thousands):



	2012			2011		2010
Tax provision:
Federal	$	326,708		$	219,124	$	195,843
State	38,931			28,260		25,492
Foreign	13,461			9,958		8,167
	379,100			257,342		229,502
Deferred provision (benefit):
Federal	(11,674		)	4,781		4,397
State	(1,334		)	546		503
Foreign	(1,434		)	423		2,674
	(14,442		)	5,750		7,574
Total provision	$	364,658		$	263,092	$	237,076

A reconciliation of the provision for income taxes using the statutory federal income tax rate to our effective income tax rate for the years ended December 31 is as follows:



	2012		2011		2010
Federal statutory rate	35.0	%	35.0	%	35.0	%
State income taxes, net of federal benefit	2.7		2.7		2.7
Other	0.3		0.2		0.3
	38.0	%	37.9	%	38.0	%

Deferred tax assets (liabilities) are comprised of the following at December 31 (in thousands):



	2012			2011
Deferred tax assets:
Compensation	$	96,660		$	80,577
Receivables	11,836			10,375
Other	9,443			7,992
Deferred tax liabilities:
Intangible assets	(109,334		)	(59,122		)
Prepaid assets	(7,825		)	(8,476		)
Long-lived assets	(21,171		)	(18,463		)
Undistributed earnings of foreign subsidiaries	(12,857		)	(5,324		)
Other	(85		)	(7		)
Net deferred tax (liabilities) assets	$	(33,333	)	$	7,552

We have foreign net operating loss carryforwards with a tax effect of $5.1 million. A full valuation allowance has been established for these net operating loss carryforwards due to the uncertainty of the use of the tax benefit in future periods.