Income and Other Taxes

Income before income taxes (pre-tax income) was as follows:



	Year Ended December 31,
	2013		2012		2011
Domestic income	$	948	$	876	$	914
Foreign income	364		456		621
Income Before Income Taxes	$	1,312	$	1,332	$	1,535

Provisions (benefits) for income taxes were as follows:



	Year Ended December 31,
	2013		2012		2011
Federal Income Taxes
Current	$	27	$	23	$	51
Deferred	72		84		134
Foreign Income Taxes
Current	89		119		95
Deferred	35		—		38
State Income Taxes
Current	38		34		28
Deferred	15		12		31
Total Provision	$	276	$	272	$	377

A reconciliation of the U.S. federal statutory income tax rate to the consolidated effective income tax rate was as follows:



	Year Ended December 31,
	2013		2012		2011
U.S. federal statutory income tax rate	35.0	%	35.0	%	35.0	%
Nondeductible expenses	1.4	%	2.6	%	2.0	%
Effect of tax law changes	(0.6	)%	0.7	%	0.2	%
Change in valuation allowance for deferred tax assets	0.2	%	(0.7	)%	(0.3	)%
State taxes, net of federal benefit	2.6	%	2.1	%	2.4	%
Audit and other tax return adjustments	(2.4	)%	(4.8	)%	(1.0	)%
Tax-exempt income, credits and incentives	(3.8	)%	(2.6	)%	(3.2	)%
Foreign rate differential adjusted for U.S. taxation of foreign profits⁽¹⁾	(11.9	)%	(12.0	)%	(10.6	)%
Other	0.5	%	0.1	%	0.1	%
Effective Income Tax Rate	21.0	%	20.4	%	24.6	%

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(1)	The “U.S. taxation of foreign profits” represents the U.S. tax, net of foreign tax credits, associated with actual and deemed repatriations of earnings from our non-U.S. subsidiaries.

On a consolidated basis, we paid a total of $155, $137 and $94 in income taxes to federal, foreign and state jurisdictions during the three years ended December 31, 2013, respectively.

Total income tax expense (benefit) was allocated as follows:



	Year Ended December 31,
	2013			2012			2011
Pre-tax income	$	276		$	272		$	377
Discontinued operations	4			5			9
Common shareholders' equity:
Changes in defined benefit plans	318			(233		)	(277		)
Stock option and incentive plans, net	(13		)	(5		)	1
Cash flow hedges	—			(24		)	3
Translation adjustments	(9		)	(9		)	2
Total Income Tax Expense (Benefit)	$	576		$	6		$	115

Unrecognized Tax Benefits and Audit Resolutions

We recognize tax liabilities when, despite our belief that our tax return positions are supportable, we believe that certain positions may not be fully sustained upon review by tax authorities. Each period we assess uncertain tax positions for recognition, measurement and effective settlement. Benefits from uncertain tax positions are measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon settlement - the more likely than not recognition threshold. Where we have determined that our tax return filing position does not satisfy the more likely than not recognition threshold, we have recorded no tax benefits.

We are also subject to ongoing tax examinations in numerous jurisdictions due to the extensive geographical scope of our operations. Our ongoing assessments of the more-likely-than-not outcomes of the examinations and related tax positions require judgment and can increase or decrease our effective tax rate, as well as impact our operating results. The specific timing of when the resolution of each tax position will be reached is uncertain. As of December 31, 2013, we do not believe that there are any positions for which it is reasonably possible that the total amount of unrecognized tax benefits will significantly increase or decrease within the next 12 months.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:



	2013			2012			2011
Balance at January 1	$	201		$	225		$	186
Additions related to current year	60			28			43
Additions related to prior years positions	39			5			38
Reductions related to prior years positions	(19		)	(36		)	(17		)
Settlements with taxing authorities⁽¹⁾	—			(13		)	(14		)
Reductions related to lapse of statute of limitations	(14		)	(8		)	(8		)
Currency	—			—			(3		)
Balance at December 31	$	267		$	201		$	225

____________________________


(1)	Majority of settlements did not result in the utilization of cash.

Included in the balances at December 31, 2013, 2012 and 2011 are $36, $16 and $36, respectively, of tax positions that are highly certain of realizability but for which there is uncertainty about the timing or that they may be reduced through an indirect benefit from other taxing jurisdictions. Because of the impact of deferred tax accounting, other than for the possible incurrence of interest and penalties, the disallowance of these positions would not affect the annual effective tax rate.

We recognized interest and penalties accrued on unrecognized tax benefits, as well as interest received from favorable settlements within income tax expense. We had $20, $20 and $28 accrued for the payment of interest and penalties associated with unrecognized tax benefits at December 31, 2013, 2012 and 2011, respectively.

In the U.S., with the exception of ACS, we are no longer subject to U.S. federal income tax examinations for years before 2007. ACS is no longer subject to such examinations for years before 2005. With respect to our major foreign jurisdictions, we are no longer subject to tax examinations by tax authorities for years before 2000.

Deferred Income Taxes

We have not provided deferred taxes on approximately $8.0 billion of undistributed earnings of foreign subsidiaries and other foreign investments carried at equity at December 31, 2013, as such undistributed earnings have been determined to be indefinitely reinvested and we currently do not plan to initiate any action that would precipitate a deferred tax impact. We do not believe it is practical to calculate the potential deferred tax impact, as there is a significant amount of uncertainty with respect to determining the amount of foreign tax credits as well as any additional local withholding tax and other indirect tax consequences that may arise from the distribution of these earnings. In addition, because such earnings have been indefinitely reinvested in our foreign operations, repatriation would require liquidation of those investments or a recapitalization of our foreign subsidiaries, the impacts and effects of which are not readily determinable.

The tax effects of temporary differences that give rise to significant portions of the deferred taxes were as follows:



	December 31,
	2013			2012
Deferred Tax Assets
Research and development	$	647		$	793
Post-retirement medical benefits	310			359
Anticipated foreign repatriations	—			264
Net operating losses	597			630
Operating reserves and accruals	374			403
Tax credit carryforwards	694			177
Deferred compensation	268			312
Pension	431			696
Other	87			195
Subtotal	3,408			3,829
Valuation allowance	(614		)	(654		)
Total	$	2,794		$	3,175

Deferred Tax Liabilities
Unearned income and installment sales	$	959		$	947
Intangibles and goodwill	1,253			1,252
Anticipated foreign repatriations	55			—
Other	53			48
Total	$	2,320		$	2,247

Total Deferred Taxes, Net	$	474		$	928

The above amounts are classified as current or long-term in the Consolidated Balance Sheets in accordance with the asset or liability to which they relate or, when applicable, based on the expected timing of the reversal. Current deferred tax assets at December 31, 2013 and 2012 amounted to $209 and $273, respectively.

The deferred tax assets for the respective periods were assessed for recoverability and, where applicable, a valuation allowance was recorded to reduce the total deferred tax asset to an amount that will, more-likely-than-not, be realized in the future. The net change in the total valuation allowance for the years ended December 31, 2013 and 2012 was a decrease of $40 and $23, respectively. The valuation allowance relates primarily to certain net operating loss carryforwards, tax credit carryforwards and deductible temporary differences for which we have concluded it is more-likely-than-not that these items will not be realized in the ordinary course of operations.

Although realization is not assured, we have concluded that it is more-likely-than-not that the deferred tax assets, for which a valuation allowance was determined to be unnecessary, will be realized in the ordinary course of operations based on the available positive and negative evidence, including scheduling of deferred tax liabilities and projected income from operating activities. The amount of the net deferred tax assets considered realizable, however, could be reduced in the near term if actual future income or income tax rates are lower than estimated, or if there are differences in the timing or amount of future reversals of existing taxable or deductible temporary differences.

At December 31, 2013, we had tax credit carryforwards of $694 available to offset future income taxes, of which $94 are available to carryforward indefinitely while the remaining $600 will expire 2014 through 2033 if not utilized. We also had net operating loss carryforwards for income tax purposes of $1.1 billion that will expire 2014 through 2033, if not utilized, and $2.4 billion available to offset future taxable income indefinitely.