INCOME TAXES

The income tax provisions were calculated based upon the following components of income (loss) before income taxes (in millions):



	2014		2013			2012
U.S. income (loss)	$	204	$	(59	)	$	23
Foreign income	111		110			114
Total	$	315	$	51		$	137

The components of the benefit (provision) for income taxes are summarized as follows (in millions):



	2014			2013			2012
Current tax benefit (expense):
U.S.	$	(1	)	$	(11	)	$	4
Foreign	(32		)	(59		)	(47		)
State and local	—			2			(1		)
Total current tax expense	(33		)	(68		)	(44		)
Deferred tax benefit (expense):
U.S.	(1		)	(6		)	(7		)
Foreign	3			13			(5		)
State and local	—			(3		)	(1		)
Total deferred tax benefit (expense)	2			4			(13		)
Income tax expense	$	(31	)	$	(64	)	$	(57	)

The deferred tax expense or benefit represents tax effects of current year deductions or items of income that will be recognized in future periods for tax purposes. The foreign current tax expense in fiscal year 2013 includes the tax effect of the Suspensys JV sale. The foreign deferred tax benefit in fiscal year 2013 primarily relates to the benefit received from the Canadian pension settlement charge.

Net current and non-current deferred income tax assets (liabilities) included in the consolidated balance sheet consist of the tax effects of temporary differences related to the following (in millions):



	September 30,
	2014			2013
Accrued compensation and benefits	$	18		$	18
Accrued product warranties	18			22
Inventory costs	19			17
Receivables	13			12
Accrued retiree healthcare benefits	190			209
Retirement pension plans	102			131
Property	4			1
Loss and credit carryforwards	678			733
Other	64			90
Sub-total	1,106			1,233
Less: Valuation allowances	(1,030		)	(1,166		)
Deferred income taxes - asset	$	76		$	67
Taxes on undistributed income	$	(46	)	$	(32	)
Intangible assets	(88		)	(89		)
Debt basis difference	(12		)	(16		)
Deferred income taxes - liability	$	(146	)	$	(137	)
Net deferred income tax liabilities	$	(70	)	$	(70	)

Net current and non-current deferred income tax assets (liabilities) are included in the consolidated balance sheet as follows (in millions):



	September 30,
	2014			2013
Other current assets (see Note 9)	$	21		$	23
Other current liabilities	(3		)	(6		)
Net current deferred income taxes — asset	18			17

Other assets (see Note 11)	15			13
Other liabilities (see Note 14)	(103		)	(100		)
Net non-current deferred income taxes — liability	$	(88	)	$	(87	)

In prior years, the company established valuation allowances against its U.S. net deferred tax assets and the net deferred tax assets of its 100%-owned subsidiaries in France, Germany, Italy, Sweden, U.K. and certain other countries. The company evaluates deferred income taxes quarterly to determine if valuation allowances are required. The company is required to assess whether valuation allowances should be established against its deferred tax assets based on the consideration of all available evidence using a “more-likely-than-not” standard. As of September 30, 2014 and 2013, the company continues to maintain valuation allowances in these jurisdictions.

The expiration periods for $678 million of deferred tax assets related to net operating losses and tax credit carryforwards are as follows: $26 million between fiscal years 2015 and 2019; $326 million between fiscal years 2020 and 2029; $28 million between fiscal years 2030 and 2034; and $298 million can be carried forward indefinitely. The company has provided valuation allowances on these deferred tax assets of approximately $22 million, $323 million, $24 million and $298 million, respectively. Realization of deferred tax assets representing net operating loss carryforwards for which a valuation allowance has not been provided is dependent on generating sufficient taxable income prior to expiration of the loss carryforwards. Although realization is not assured, management believes it is more likely than not that all of such deferred tax assets will be realized. The amount of the deferred tax assets considered realizable, however, could be reduced in the near term if the company is unable to generate sufficient future taxable income during the carryforward period.

For fiscal years 2014 and 2013, no provision has been made for U.S., state or additional foreign income taxes related to approximately $666 million and $661 million of undistributed earnings of foreign subsidiaries that have been or are intended to be permanently reinvested. Quantification of the deferred tax liability, if any, associated with permanently reinvested earnings is not practicable.

The company’s provision for income taxes was different from the provision for income taxes calculated at the U.S. statutory rate for the reasons set forth below (in millions):



	2014			2013			2012
Expense for income taxes at statutory tax rate of 35%	$	(110	)	$	(18	)	$	(48	)
State and local income taxes	—			1			(2		)
Foreign income taxed at rates other than 35%	13			3			7
Joint venture equity income	5			6			13
Tax effect of Suspensys JV sale	—			(16		)	—
Refunds of prior year taxes	—			—			5
Goodwill	(1		)	(8		)	(6		)
Medicare Part D subsidy	—			1			4
U.S. tax impact on distributions from subsidiaries and joint ventures	(18		)	19			(90		)
Nondeductible expenses	(10		)	(9		)	(11		)
Valuation allowances	89			(44		)	68
Other	1			1			3
Income tax expense	$	(31	)	$	(64	)	$	(57	)

In fiscal year 2014, the company recorded $210 million of earnings related to the antitrust lawsuit settlement with Eaton Corporation. The earnings did not impact U.S. federal income tax expense, since they were offset by a corresponding release of a valuation allowance in the U.S.

In fiscal year 2013, the company changed its permanently reinvested assertion in certain jurisdictions, which resulted in a non-cash benefit of $42 million. This benefit does not impact income tax expense, since it is offset by a corresponding release of a valuation allowance in the U.S.

In fiscal year 2012, the company recorded a non-cash charge of $90 million primarily related to the impact of foreign distributions as a result of legal entity restructuring actions. This charge does not impact income tax expense, since it is offset by a corresponding release of a valuation allowance in the U.S.

The total amount of gross unrecognized tax benefits the company recorded in accordance with FASB ASC Topic 740 as of September 30, 2014 was $88 million, of which $9 million represents the amount, if recognized, would favorably affect the effective income tax rate in future periods.

A reconciliation of the total amounts of unrecognized tax benefits at the beginning and end of the period is as follows (in millions):



	2014			2013			2012
Balance at beginning of the period	$	94		$	107		$	109
Additions to tax positions recorded during the current year	3			3			11
Additions to tax positions recorded during the prior year	—			—			—
Reduction to tax position recorded in prior years	(2		)	(6		)	(5		)
Reductions to tax positions due to lapse of statutory limits	(7		)	(10		)	(8		)
Translation, other	—			—			—
Balance at end of the period	$	88		$	94		$	107

The company’s continuing practice is to recognize interest and penalties on uncertain tax positions in the provision for income taxes in the consolidated statement of operations. At September 30, 2014 and September 30, 2013, the company recorded $3 million and $2 million, respectively, of interest on uncertain tax positions in the consolidated balance sheet. In addition, penalties of $2 million were recorded at each of September 30, 2014 and September 30, 2013. The company recorded an income tax benefit of $3 million related to interest for the year end September 30, 2013. The amount was immaterial for years ended September 30, 2014 and September 30, 2012. The company recorded an income tax benefit of $2 million related to penalties for year ended September 30, 2013. The amount was immaterial for the years ended September 30, 2014 and 2012.

The company files tax returns in multiple jurisdictions and is subject to examination by taxing authorities throughout the world. The company’s Canadian federal income tax returns for fiscal years 2008 through 2010 are currently under audit. The company’s Brazil subsidiary is currently under audit for calendar year 2008. The company's German subsidiary is currently under audit for fiscal years 2009 through 2013. In addition, the company is under audit in various U.S. state tax jurisdictions for various years. It is reasonably possible that audit settlements, the conclusion of current examinations or the expiration of the statute of limitations in several jurisdictions could change the company’s unrecognized tax benefits during the next twelve months. Due to the expected expiration of the statue of limitations in several jurisdictions, the company estimates that the unrecognized tax benefits could decrease in the next twelve months between $2 million and $4 million.

In addition to the audits listed above, the company has open tax years primarily from 1999-2013 with various significant taxing jurisdictions including the United States, Brazil, Canada, China, France, Mexico and the U.K. These open years contain matters that could be subject to differing interpretations of applicable tax laws and regulations as they relate to the amount, timing or inclusion of revenue and expenses or the sustainability of income tax credits for a given audit cycle. The company has recorded a tax benefit only for those positions that meet the more-likely-than-not standard.