Income Taxes

The total income tax provision for the years ended December 31 is comprised of the following components:



	2014			2013			2012
				(in millions)
Current
Federal	$	977		$	1,010		$	524
State and local	47			33			24
Foreign	528			456			390
	1,552			1,499			938
Deferred
Federal	(81		)	(100		)	248
State and local	(3		)	(4		)	7
Foreign	(6		)	(11		)	(19		)
	(90		)	(115		)	236
Income tax expense	$	1,462		$	1,384		$	1,174

The domestic and foreign components of income before income taxes for the years ended December 31 are as follows:



	2014		2013		2012
			(in millions)
United States	$	3,378	$	2,741	$	2,508
Foreign	1,701		1,759		1,425
Income before income taxes	$	5,079	$	4,500	$	3,933

MasterCard has not provided for U.S. federal income and foreign withholding taxes on approximately $3.3 billion of undistributed earnings from non-U.S. subsidiaries as of December 31, 2014 because such earnings are intended to be reinvested indefinitely outside of the United States. If these earnings were distributed, foreign tax credits may become available under current law to reduce the resulting U.S. income tax liability. However, it is not practicable to determine the amount of the tax and credits.

The provision for income taxes differs from the amount of income tax determined by applying the U.S. federal statutory income tax rate of 35% to pretax income for the years ended December 31, as a result of the following:



	2014					2013					2012
	Amount			Percent		Amount			Percent		Amount			Percent
	(in millions, except percentages)
Income before income taxes	$	5,079				$	4,500				$	3,933

Federal statutory tax	1,778			35.0	%	1,575			35.0	%	1,376			35.0	%
State tax effect, net of federal benefit	29			0.6	%	19			0.4	%	23			0.6	%
Foreign tax effect	(108		)	(2.1	)%	(208		)	(4.6	)%	(175		)	(4.4	)%
Foreign repatriation	(177		)	(3.5	)%	(14		)	(0.3	)%	(27		)	(0.7	)%
Other, net	(60		)	(1.2	)%	12			0.3	%	(23		)	(0.6	)%
Income tax expense	$	1,462		28.8	%	$	1,384		30.8	%	$	1,174		29.9	%

Effective Income Tax Rate

The effective income tax rates for the years ended December 31, 2014, 2013 and 2012 were 28.8%, 30.8% and 29.9%, respectively. The effective tax rate for 2014 was lower than the effective tax rate for 2013 primarily due to the recognition of a larger repatriation benefit and an increase in the Company’s domestic production activity deduction in the U.S. related to the Company’s authorization revenue, partially offset by an unfavorable mix of taxable earnings in 2014. The effective tax rate for 2013 was higher than the effective tax rate for 2012 primarily due to the recognition of a discrete benefit relating to additional export incentives in 2012 and a lower benefit related to foreign repatriations in 2013, which was partially offset by a more favorable mix of taxable earnings in 2013.

During the fourth quarter of 2014, the Company implemented an initiative to better align its legal entity and tax structure with its operational footprint outside of the U.S. This initiative resulted in a one-time taxable gain in Belgium relating to the transfer of intellectual property to a related foreign entity in the United Kingdom. Management believes this improved alignment will result in greater flexibility and efficiency with regard to the global deployment of cash, as well as ongoing benefits in the Company’s effective income tax rate. The Company recorded a deferred charge related to the income tax expense on intercompany profits that resulted from the transfer. The tax associated with the transfer is deferred and amortized utilizing a 25-year life. This deferred charge is included in other current assets and other assets on our consolidated balance sheet at December 31, 2014 in the amounts of $18 million and $407 million, respectively.

In 2010, in connection with the expansion of the Company’s operations in the Asia Pacific, Middle East and Africa region, the Company’s subsidiary in Singapore, MasterCard Asia Pacific Pte. Ltd. (“MAPPL”) received an incentive grant from the Singapore Ministry of Finance. The incentive had provided MAPPL with, among other benefits, a reduced income tax rate for the 10-year period commencing January 1, 2010 on taxable income in excess of a base amount. The Company continued to explore business opportunities in this region, resulting in an expansion of the incentives being granted by the Ministry of Finance, including a further reduction to the income tax rate on taxable income in excess of a revised fixed base amount commencing July 1, 2011 and continuing through December 31, 2025. Without the incentive grant, MAPPL would have been subject to the statutory income tax rate on its earnings. For 2014, 2013 and 2012, the impact of the incentive grant received from the Ministry of Finance resulted in a reduction of MAPPL’s income tax liability of $38 million, or $0.03 per diluted share, $76 million, or $0.06 per diluted share, and $64 million, or $0.05 per diluted share, respectively.

Deferred Taxes

Deferred tax assets and liabilities represent the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities. The components of deferred tax assets and liabilities at December 31 are as follows:



	2014			2013
	(in millions)
Deferred Tax Assets
Accrued liabilities	$	177		$	124
Compensation and benefits	262			201
State taxes and other credits	65			99
Net operating losses	56			39
Other items	38			46
Less: Valuation allowance	(41		)	(28		)
Total Deferred Tax Assets	557			481

Deferred Tax Liabilities
Prepaid expenses and other accruals	58			50
Intangible assets	92			97
Property, plant and equipment	115			116
Other items	18			37
Total Deferred Tax Liabilities	283			300

Net Deferred Tax Assets ¹	$	274		$	181

¹$7 million and $5 million of current deferred tax liabilities have been included in other current liabilities on the balance sheet at December 31, 2014 and 2013, respectively.

The 2014 and 2013 valuation allowances relate primarily to the Company’s ability to recognize tax benefits associated with certain foreign net operating losses. The recognition of these benefits is dependent upon the future taxable income in such foreign jurisdictions and the ability under tax law in these jurisdictions to utilize net operating losses following a change in control.

A reconciliation of the beginning and ending balance for the Company’s unrecognized tax benefits for the years ended December 31, is as follows:



	2014			2013			2012
				(in millions)
Beginning balance	$	320		$	257		$	214
Additions:
Current year tax positions	61			80			58
Prior year tax positions	19			12			15
Reductions:
Prior year tax positions	(6		)	(8		)	(21		)
Settlements with tax authorities	—			(2		)	(2		)
Expired statute of limitations	(30		)	(19		)	(7		)
Ending balance	$	364		$	320		$	257

The entire unrecognized tax benefits of $364 million, if recognized, would reduce the effective tax rate. The Company is subject to tax in the United States, Belgium, Singapore and various other foreign jurisdictions, as well as state and local jurisdictions. Uncertain tax positions are reviewed on an ongoing basis and are adjusted after considering facts and circumstances, including progress of tax audits, developments in case law and closing of statutes of limitation. Within the next twelve months, the Company believes that the resolution of certain federal, foreign and state and local examinations are reasonably possible and that a change in estimate, reducing unrecognized tax benefits, may occur. While such a change may be significant, it is not possible to provide a range of the potential change until the examinations progress further or the related statutes of limitation expire. The Company has effectively settled its U.S. federal income tax obligations through 2008. With limited exception, the Company is no longer subject to state and local or foreign examinations by tax authorities for years before 2006.

It is the Company’s policy to account for interest expense related to income tax matters as interest expense in its statement of operations, and to include penalties related to income tax matters in the income tax provision. For the years ended December 31, 2014, 2013 and 2012, the Company recorded tax-related interest income of $4 million, $4 million and $1 million, respectively, in its consolidated statement of operations. At December 31, 2014 and 2013, the Company had a net income tax-related interest payable of $15 million and $17 million, respectively, in its consolidated balance sheet. At December 31, 2014 and 2013, the amounts the Company had recognized for penalties payable in its consolidated balance sheet were not significant.