Income Taxes

The provision for income taxes from continuing operations for the years ended September 30 consisted of:



(Millions of dollars)	2015			2014			2013
Current:
Federal	$	50		$	225		$	177
State and local, including Puerto Rico	15			(11		)	(4		)
Foreign	252			217			179
	$	318		$	431		$	352
Deferred:
Domestic	$	(238	)	$	(59	)	$	(119	)
Foreign	(37		)	(35		)	3
	(274		)	(94		)	(116		)
	$	44		$	337		$	236

The components of Income From Continuing Operations Before Income Taxes for the years ended September 30 consisted of:



(Millions of dollars)	2015			2014		2013
Domestic, including Puerto Rico	$	(408	)	$	532	$	288
Foreign	1,147			990		877
	$	739		$	1,522	$	1,165

Deferred tax assets and liabilities are netted on the balance sheet by separate tax jurisdictions. At September 30, 2015 and 2014, net current deferred tax assets of $387 million and $355 million, respectively, were included in Prepaid expenses, deferred taxes and other. Net non-current deferred tax assets of $142 million and $100 million, respectively, were included in Other Assets. Net current deferred tax liabilities of $5 million and $10 million, respectively, were included in Current Liabilities — Income taxes. Net non-current deferred tax liabilities of $1.951 billion and $130 million, respectively, were included in Deferred Income Taxes and Other. Deferred taxes are not provided on undistributed earnings of foreign subsidiaries that are indefinitely reinvested. At September 30, 2015, the cumulative amount of such undistributed earnings indefinitely reinvested outside the United States was $7.5 billion. Determining the tax liability that would arise if these earnings were remitted is not practicable. Deferred taxes are provided for earnings outside the United States when those earnings are not considered indefinitely reinvested.

The table below summarizes the gross amounts of unrecognized tax benefits without regard to reduction in tax liabilities or additions to deferred tax assets and liabilities if such unrecognized tax benefits were settled. The Company expects no significant increases or decreases in the amount of the unrecognized tax benefits to occur within the next twelve months.



(Millions of dollars)	2015			2014			2013
Balance at October 1	$	197		$	146		$	134
Increase due to acquisitions	314			—			—
Increase due to current year tax positions	58			51			80
Increase due to prior year tax positions	17			9			25
Decreases due to prior year tax positions	—			—			—
Decrease due to settlements and lapse of statute of limitations	(11		)	(9		)	(93		)
Balance at September 30	$	575		$	197		$	146

With the acquisition of CareFusion on March 17, 2015, the Company is now a party to a tax matters agreement with Cardinal Health resulting from Cardinal Health's spin-off of CareFusion in fiscal year 2010. Under the tax matters agreement, the Company is obligated to indemnify Cardinal Health for certain tax exposures and transaction taxes prior to CareFusion’s spin-off from Cardinal Health. The indemnification payable is approximately $217 million at September 30, 2015 and is included in Deferred Income Taxes and Other on the Consolidated Balance Sheet.

The total amount of unrecognized tax benefits, if recognized, would favorably impact the effective tax rate. Accrued interest and penalties of $84 million, $10 million and $8 million at September 30, 2015, 2014 and 2013, respectively, are not included in the table above. During the fiscal years ended September 30, 2015, 2014 and 2013, the Company reported interest and penalties associated with unrecognized tax benefits of $8 million, $2 million and $2 million on the Consolidated Statements of Income as a component of Income tax provision.

The Company conducts business and files tax returns in numerous countries and currently has tax audits in progress in a number of tax jurisdictions. The IRS has completed its audit for the tax years through 2011. For the Company’s other major tax jurisdictions where it conducts business, the Company’s tax years are generally open after 2009.

Deferred income taxes at September 30 consisted of:



	2015					2014 (A)
(Millions of dollars)	Assets			Liabilities		Assets			Liabilities
Compensation and benefits	$	647		$	—	$	546		$	—
Property and equipment	—			156		—			196
Intangibles	—			2,033		—			266
Loss and credit carryforwards	538			—		274			—
Other	634			606		398			195
	1,819			2,795		1,218			656
Valuation allowance	(452		)	—		(247		)	—
	$	1,367		$	2,795	$	971		$	656

(A)Certain amounts in the prior-year presentation have been reclassified to conform to the current-year presentation.

Generally, deferred tax assets have been established as a result of net operating losses and credit carryforwards with expiration dates from 2016 to an unlimited expiration date. Valuation allowances have been established as a result of an evaluation of the uncertainty associated with the realization of certain deferred tax assets on these losses and credit carryforwards. The valuation allowance for 2015 is primarily the result of foreign losses due to the Company’s global re-organization of its foreign entities and these generally have no expiration date. Valuation allowances are also maintained with respect to deferred tax assets for certain federal and state carryforwards that may not be realized and that principally expire between 2016 and 2019.

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



	2015		2014		2013
Federal statutory tax rate	35.0	%	35.0	%	35.0	%
State and local income taxes, net of federal tax benefit	(3.6	)	(0.5	)	(1.2	)
Effect of foreign and Puerto Rico earnings and foreign tax credits	(24.5	)	(11.2	)	(9.7	)
Effect of Research Credits and Domestic Production Activities,	(1.6	)	(1.1	)	(3.8	)
Other, net	0.6		(0.1	)	(0.1	)
	5.9	%	22.1	%	20.2	%

The approximate amounts of tax reductions related to tax holidays in various countries in which the Company does business were $102 million, $108 million and $95 million, in 2015, 2014 and 2013, respectively. The tax holidays expire at various dates through 2026.

The Company made income tax payments, net of refunds, of $240 million in 2015, $330 million in 2014 and $454 million in 2013.