NOTE 7 - Income Taxes

The components of income before income taxes and the provision for income taxes are shown below:

(in millions)	2013			2012			2011
Income before income taxes:
United States	$	138		$	91		$	158
Foreign	409			510			435
Total	$	547		$	601		$	593
Provision for income taxes:
Current tax expense
US federal	$	5		$	3		$	9
State and local	3			1			2
Foreign	106			166			141
Total current	$	114		$	170		$	152
Deferred tax expense (benefit)
US federal	$	11		$	(5	)	$	10
State and local	(2		)	2			3
Foreign	21			—			5
Total deferred	$	30		$	(3	)	$	18
Total provision for income taxes	$	144		$	167		$	170

Deferred income taxes are provided for the tax effects of temporary differences between the financial reporting basis and tax basis of assets and liabilities. Significant temporary differences at December 31, 2013 and 2012 are summarized as follows:

(in millions)	2013			2012
Deferred tax assets attributable to:
Employee benefit accruals	$	23		$	19
Pensions and postretirement plans	24			65
Derivative contracts	20			10
Net operating loss carryforwards	16			23
Foreign tax credit carryforwards	11			24
Other	42			53
Gross deferred tax assets	$	136		$	194
Valuation allowance	(3		)	(9		)
Net deferred tax assets	$	133		$	185
Deferred tax liabilities attributable to:
Property, plant and equipment	$	200		$	202
Identified intangibles	57			59
Gross deferred tax liabilities	$	257		$	261
Net deferred tax liabilities	$	124		$	76

Of the $16 million of tax-effected net operating loss carryforwards at December 31, 2013, approximately $12 million are in Korea, and are scheduled to expire in 2021. The Company anticipates full utilization of the Korean carryforward. The foreign tax credit carryforwards of $11 million at December 31, 2013, are scheduled to expire in 2015 through 2022. The Company anticipates full utilization of the foreign tax credits before any expiration.

Income tax accounting requires that a valuation allowance be established when it is more likely than not that all or a portion of a deferred tax asset will not be realized. In making this assessment, management considers the level of historical taxable income, scheduled reversal of deferred tax liabilities, tax planning strategies, tax carryovers and projected future taxable income. At December 31, 2013, the Company maintains valuation allowances of $2 million for state loss carryforwards and $1 million for foreign net operating losses that management has determined will more likely than not expire prior to realization.

A reconciliation of the US federal statutory tax rate to the Company’s effective tax rate follows:

	2013		2012		2011
Provision for tax at US statutory rate	35.00	%	35.00	%	35.00	%
Tax rate difference on foreign income	(5.28	)	(3.86	)	(3.62	)
State and local taxes — net	0.35		0.79		0.58
Change in valuation allowance — foreign tax credits	—		—		(0.62	)
Reversal of Korea valuation allowance	—		(2.52	)	—
Reversal of Chile valuation allowance	—		(0.06	)	(0.09	)
Non-deductible National Starch acquisition costs	—		0.04		0.04
NAFTA Award	—		—		(3.45	)
Other items — net	(3.74	)	(1.61	)	0.83
Provision at effective tax rate	26.33	%	27.78	%	28.67	%

Provisions are made for estimated US and foreign income taxes, less credits that may be available, on distributions from foreign subsidiaries to the extent dividends are anticipated. No provision has been made for income taxes on approximately $1.931 billion of undistributed earnings of foreign subsidiaries at December 31, 2013, as such amounts are considered permanently reinvested. It is not practicable to estimate the additional income taxes, including applicable withholding taxes and credits, that would be due upon the repatriation of these earnings.

A reconciliation of the beginning and ending amount of unrecognized tax benefits, excluding interest and penalties, for 2013 and 2012 is as follows:

(in millions)	2013			2012
Balance at January 1	$	37		$	35
Additions for tax positions related to prior years	5			3
Reductions for tax positions related to prior years	(6		)	—
Additions based on tax positions related to the current year	1			6
Reductions related to a lapse in the statute of limitations	(3		)	(7		)
Balance at December 31	$	34		$	37

Of the $34 million at December 31, 2013, $19 million represents the amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate in future periods. The remaining $15 million would include an offset of $12 million of foreign tax credit carryforwards that would otherwise be created as part of the Canada and US audit process described below. In addition, $3 million of the unrecognized benefit would be offset by reversing a receivable recorded for indemnity claims that we would expect to collect from Akzo Nobel N.V. as part of the National Starch acquisition.

The Company accounts for interest and penalties related to income tax matters in income tax expense. The Company has accrued $5 million of interest expense (net of $3 million interest income) and $1 million of penalties related to the unrecognized tax benefits as of December 31, 2013. The accrued interest expense was $2 million (net of $4 million interest income) and accrued penalties were $1 million as of December 31, 2012.

The Company is subject to US federal income tax as well as income tax in multiple state and non-US jurisdictions. The US federal tax returns are subject to audit for the years 2010 to 2013. In general, the Company’s foreign subsidiaries remain subject to audit for years 2008 and later.

In 2008 and 2007, the Company made deposits of approximately $13 million and $17 million, respectively, to the Canadian tax authorities relating to an ongoing audit examination. The Company did not make any additional deposits relating to this ongoing audit examination in 2013. The Company has settled $2 million of the claims and is in the process of pursuing relief from double taxation under the US and Canadian tax treaty for the remaining items raised in the audit. As a result, the US and Canadian tax returns are subject to adjustment from 2000 and forward for the specific issues being contested. During 2013, the countries reached a tentative agreement that would settle the issues for the years 2000 through 2003, such that it is reasonably possible that a conclusion could be reached within 12 months of December 31, 2013. The Company believes that it has adequately provided for the most likely outcome of the settlement process.

It is also reasonably possible that the total amount of unrecognized tax benefits will increase or decrease within twelve months of December 31, 2013. The Company has classified $25 million of the unrecognized tax benefits as current because they are expected to be resolved within the next twelve months. Approximately $12 million relates to settling the US and Canada tax treaty matter discussed above, and the remainder relates to the lapsing of the statute of limitations in various jurisdictions.