NOTE 13

INCOME TAXES

Components of the Company’s provision for income taxes are as follows:


	Year Ended December 31,

	2012			2011			2010
Current:
Federal	$	168.1		$	133.6		$	106.6
State and Local		33.7			28.1			22.1
Non-U.S.		86.4			89.8			82.9

Total current		288.2			251.5			211.6

Deferred:
Federal		35.7			9.3			(14.7	)
State and Local		4.5			7.0			10.6
Non-U.S.		(4.1	)		(6.0	)		(6.5	)

Total deferred		36.1			10.3			(10.6	)

Total provision for income taxes	$	324.3		$	261.8		$	201.0

A reconciliation of the U.S. federal statutory tax rate to the Company’s effective tax rate on income before provision for income taxes is as follows:


	Year Ended December 31,

	2012			2011			2010
U.S. statutory tax rate		35.0	%		35.0	%		35.0	%
State and local taxes, net of federal tax benefit		2.4			2.7			2.9
Benefit of foreign operations		(6.1	)		(6.3	)		(9.7	)
Legacy tax items		(0.4	)		(0.2	)		(0.4	)
Other		0.8			—			0.3

Effective tax rate		31.7	%		31.2	%		28.1	%

Income tax paid	$	293.3	*	$	191.4		$	247.9

*	Includes approximately $92 million in payments for tax audit settlements in the first quarter of 2012.

The source of income before provision for income taxes is as follows:


	Year Ended December 31,

	2012		2011		2010
United States	$	694.2	$	469.1	$	390.6
International		329.8		370.7		323.8

Income before provision for income taxes	$	1,024.0	$	839.8	$	714.4

The components of deferred tax assets and liabilities are as follows:


	Year Ended December 31,

	2012			2011
Deferred tax assets:
Current:
Account receivable allowances	$	8.2		$	8.0
Accrued compensation and benefits		13.3			12.3
Deferred revenue		6.1			5.8
Legal and professional fees		8.4			9.8
Restructuring		1.5			1.4
Uncertain tax positions		—			43.6
Other		3.1			3.4

Total current		40.6			84.3

Non-current:
Accumulated depreciation and amortization		0.4			1.3
Stock-based compensation		86.9			89.6
Benefit plans		96.6			82.7
Deferred rent and construction allowance		31.3			30.5
Deferred revenue		34.3			36.4
Foreign net operating loss ⁽¹⁾		13.0			9.7
Uncertain tax positions		25.9			21.2
Self-insured related reserves		33.8			23.0
Other		4.5			7.2

Total non-current		326.7			301.6

Total deferred tax assets		367.3			385.9

Deferred tax liabilities:
Current:
Other		(0.2	)		—

Total Current		(0.2	)		—

Non-current:
Accumulated depreciation and amortization of intangible assets and capitalized software		(154.7	)		(161.3	)
Foreign earnings to be repatriated		(4.7	)		(2.6	)
Self-insured related income		(39.7	)		(26.8	)
Other liabilities		(3.9	)		(2.4	)

Total non-current		(203.0	)		(193.1	)

Total deferred tax liabilities		(203.2	)		(193.1	)

Net deferred tax asset		164.1			192.8

Valuation allowance		(15.2	)		(13.9	)

Total net deferred tax assets	$	148.9		$	178.9

(1)	Amounts are primarily set to expire beginning in 2017, if unused.

As of December 31, 2012, the Company had approximately $1,225.2 million of undistributed earnings of foreign subsidiaries that it intends to indefinitely reinvest in foreign operations. The Company has not provided deferred income taxes on these indefinitely reinvested earnings. It is not practicable to determine the amount of deferred taxes that might be required to be provided if such earnings were distributed in the future, due to complexities in the tax laws and in the hypothetical calculations that would have to be made.

The Company had valuation allowances of $15.2 million and $13.9 million at December 31, 2012 and 2011, respectively, related to foreign net operating losses for which realization is uncertain. The change in the valuation allowances for 2012 and 2011 results primarily from the increase in valuation allowances in certain jurisdictions based on the Company’s evaluation of the expected realization of these future benefits.

As of December 31, 2012 the Company had $156.6 million of UTPs of which $105.8 million represents the amount that, if recognized, would impact the effective tax rate in future periods.

A reconciliation of the beginning and ending amount of UTPs is as follows:


	Year Ended December 31,

	2012			2011			2010
Balance as of January 1	$	205.4		$	180.8		$	164.2
Additions for tax positions related to the current year		49.1			48.9			31.1
Additions for tax positions of prior years		18.9			15.3			16.2
Reductions for tax positions of prior years		(20.6	)		(27.3	)		(9.9	)
Settlements with taxing authorities		(91.5	)		(2.1	)		—
Lapse of statute of limitations		(4.7	)		(10.2	)		(20.8	)

Balance as of December 31	$	156.6		$	205.4		$	180.8

The Company classifies interest related to UTPs in interest expense in its consolidated statements of operations. Penalties, if incurred, would be recognized in other non-operating expenses. During 2012, the Company realized a net interest benefit of $1.6 million related to UTPs. As of December 31, 2012 and 2011, the amount of accrued interest recorded in the Company’s consolidated balance sheets related to UTPs was $10.6 million and $41.5 million, respectively.

Moody’s Corporation and subsidiaries are subject to U.S. federal income tax as well as income tax in various state, local and foreign jurisdictions. The Company’s U.S. federal income tax returns for the years 2008 through 2010 are under examination and its 2011 return remains open to examination. The Company’s New York State and New York City income tax returns for 2011 remain open to examination. Tax filings in the U.K. remain open to examination for tax years 2007 through 2011.

For current ongoing audits related to open tax years, the Company estimates that it is possible that the balance of UTPs could decrease in the next twelve months as a result of the effective settlement of these audits, which might involve the payment of additional taxes, the adjustment of certain deferred taxes and/or the recognition of tax benefits. It is also possible that new issues might be raised by tax authorities which might necessitate increases to the balance of UTPs. As the Company is unable to predict the timing of conclusion of these audits, the Company is unable to estimate the amount of changes to the balance of UTPs at this time.