Income Taxes

The components of pretax income for the years ended December 31, 2012, 2011 and 2010 are as follows:



	Year Ended December 31,
	2012		2011		2010
	(In millions)
United States	$	605	$	1,746	$	848
International	2,479		2,164		1,250
	$	3,084	$	3,910	$	2,098

U.S. pre-tax income for the years ended December 31, 2011 and 2010 includes approximately $449 million and $400 million, respectively, relating to non-U.S. income recharacterized as U.S. income due to the settlement of multiple uncertain tax positions.

The provision for income taxes is comprised of the following:



	Year Ended December 31,
	2012			2011			2010
	(In millions)
Current:
Federal	$	327		$	518		$	(131	)
State and local	63			24			(13		)
Foreign	120			122			92
	$	510		$	664		$	(52	)
Deferred:
Federal	$	34		$	64		$	398
State and local	(24		)	(3		)	8
Foreign	(45		)	(44		)	(57		)
	(35		)	17			349
	$	475		$	681		$	297

The following is a reconciliation of the difference between the actual provision for income taxes and the provision computed by applying the federal statutory rate of 35% for 2012, 2011 and 2010 to income before income taxes:



	Year Ended December 31,
	2012			2011			2010
	(In millions)
Provision at statutory rate	$	1,080		$	1,369		$	734
Permanent differences:
Foreign income taxed at different rates	(617		)	(1,093		)	(441		)
Gain on sale of Skype	—			321			—
Legal entity restructuring	—			—			(24		)
Change in valuation allowance	3			(1		)	1
Stock-based compensation	(14		)	32			8
State taxes, net of federal benefit	39			21			31
Tax credits	1			(8		)	(49		)
Divested business	(41		)	34			—
Other	24			6			37
	$	475		$	681		$	297

Deferred tax assets and liabilities are recognized for the future tax consequences of differences between the carrying amounts of assets and liabilities and their respective tax bases using enacted tax rates in effect for the year in which the differences are expected to be reversed. Significant deferred tax assets and liabilities consist of the following:



	December 31,
	2012			2011
	(In millions)
Deferred tax assets:
Net operating loss, capital loss and credits	$	235		$	187
Accruals and allowances	355			340
Stock-based compensation	133			114
Discount on note receivable	55			68
Net unrealized losses	5			1
Net deferred tax assets	783			710
Valuation allowance	(169		)	(83		)
	$	614		$	627
Deferred tax liabilities:
Unremitted foreign earnings	$	(220	)	$	(198	)
Acquisition-related intangibles	(357		)	(462		)
Depreciation and amortization	(302		)	(264		)
Available-for-sale securities	(237		)	(234		)
Other	(21		)	(21		)
	(1,137		)	(1,179		)
	$	(523	)	$	(552	)

As of December 31, 2012, our federal, foreign and state net operating loss carryforwards for income tax purposes were approximately $68 million, $207 million and $478 million, respectively. The federal and state net operating loss carryforwards are subject to various limitations under Section 382 of the Internal Revenue Code and applicable state tax laws. If not utilized, the federal net operating loss carryforwards will begin to expire in 2021 and the state net operating loss carryforwards will begin to expire in 2014. As of December 31, 2012, our federal and state tax credit carryforwards for income tax purposes were approximately $4 million and $19 million, respectively. If not utilized, the federal tax credit carryforwards will begin to expire in 2019 and the state tax credit carryforwards will begin to expire in 2016.

As of December 31, 2012 and 2011, our federal capital loss carryover amounted to $344 million and $151 million, respectively, which is subject to a full valuation allowance. The increase in the capital loss carryover and associated valuation allowance is primarily due to the tax loss on sale of Rent.com. If not utilized, the federal capital loss carryover will begin to expire in 2014.

At December 31, 2012 and 2011, we maintained a valuation allowance with respect to certain of our deferred tax assets relating primarily to U.S. capital losses and operating losses in certain non-U.S. jurisdictions that we believe are not likely to be realized.

We have not provided for U.S. federal income and foreign withholding taxes on $11.9 billion of our non-U.S. subsidiaries' undistributed earnings as of December 31, 2012. We intend to indefinitely reinvest the $11.9 billion of our non-U.S. subsidiaries’ undistributed earnings in our international operations. Accordingly, we currently have no plans to repatriate those funds. As such, we do not know the time or manner in which we would repatriate those funds. Because the time or manner of repatriation is uncertain, we cannot determine the impact of local taxes, withholding taxes and foreign tax credits associated with the future repatriation of such earnings and therefore cannot quantify the tax liability. In cases where we intend to repatriate a portion of our foreign subsidiaries’ undistributed earnings, we provide U.S. taxes on such earnings and such taxes are included in our deferred taxes or tax payable liabilities depending upon the planned timing and manner of such repatriation.

On a regular basis, we develop cash forecasts to estimate our cash needs internationally and domestically. We consider projected cash needs for, among other things, investments in our existing businesses, potential acquisitions and capital transactions, including repurchases of our common stock and debt repayments. We estimate the amount of cash available or needed in the jurisdictions where these investments are expected, as well as our ability to generate cash in those jurisdictions and our access to capital markets. Such an analysis enables us to conclude whether or not we will indefinitely reinvest the current period’s foreign earnings. We benefit from tax rulings concluded in several different jurisdictions, most significantly Switzerland, Singapore and Luxembourg. These rulings provide for lower rates of taxation on certain classes of income and require various thresholds of investment and employment in those jurisdictions. These rulings resulted in a tax savings of $439 million and $697 million in 2012 and 2011, respectively, which increased earnings per share (diluted) by approximately $0.33 and $0.53 in 2012 and 2011, respectively. These tax rulings are currently in effect and expire over periods ranging from 2020 to the duration of business operations in the respective jurisdictions.

The following table reflects changes in unrecognized tax benefits since January 1, 2011:



	2012			2011
	(In millions)
Gross amounts of unrecognized tax benefits as of the beginning of the period	$	286		$	428
Increases related to prior period tax positions	60			33
Decreases related to prior period tax positions	(24		)	(139		)
Increases related to current period tax positions	19			41
Settlements	(1		)	(77		)
Gross amounts of unrecognized tax benefits as of the end of the period	$	340		$	286

In the second quarter of 2011, we settled multiple uncertain tax positions, which resulted in an overall decrease in our unrecognized tax benefits. As of December 31, 2012, our liabilities for unrecognized tax benefits were included in deferred and other tax liabilities, net.

We recognize interest and/or penalties related to uncertain tax positions in income tax expense. In 2012, we recognized interest and penalties of $25 million (consisting of $34 million less a tax benefit of $9 million) in income tax expense. The amount of interest and penalties accrued as of December 31, 2012 and 2011 was approximately $117 million and $83 million, respectively.

We are subject to both direct and indirect taxation in the U.S. and various states and foreign jurisdictions. We are under examination by certain tax authorities for the 2003 to 2009 tax years. We believe that adequate amounts have been reserved for any adjustments that may ultimately result from these examinations. The material jurisdictions where we are subject to potential examination by tax authorities for tax years after 2002 include, among others, the U.S. (Federal and California), France, Germany, Italy, Korea, Israel, Switzerland, Singapore and Canada.

Although the timing of the resolution and/or closure of audits is highly uncertain, it is reasonably possible that the balance of gross unrecognized tax benefits could significantly change in the next 12 months. However, given the number of years remaining subject to examination and the number of matters being examined, we are unable to estimate the full range of possible adjustments to the balance of gross unrecognized tax benefits.