Income Taxes

The income tax provision consists of the following for the year ended December 31:



	2012		2011		2010
Current
Federal	$	101	$	83	$	55
State	17		6		10
Foreign	49		74		43
	167		163		108
Deferred
Federal	48		57		77
State	7		2		1
Foreign	7		11		(2		)
	62		70		76
Provision for income taxes	$	229	$	233	$	184

Pre-tax income for domestic and foreign operations consisted of the following for the year ended December 31:



	2012		2011		2010
Domestic	$	481	$	425	$	443
Foreign	147		225		120
Pre-tax income	$	628	$	650	$	563

Current and non-current deferred income tax assets and liabilities, as of December 31, are comprised of the following:



	2012			2011
Current deferred income tax assets:
Accrued liabilities and deferred income	$	60		$	69
Provision for doubtful accounts and loan loss reserves for vacation ownership contract receivables	187			193
Foreign tax credit carry forward	26			—
Alternative minimum tax credit carryforward	46			38
Valuation allowance ^(*)	(24		)	(18		)
Other	6			7
Current deferred income tax assets	301			289
Current deferred income tax liabilities:
Installment sales of vacation ownership interests	93			83
Other	51			53
Current deferred income tax liabilities	144			136
Current net deferred income tax asset	$	157		$	153
Non-current deferred income tax assets:
Net operating loss carryforward	$	50		$	51
Foreign tax credit carryforward	57			73
Alternative minimum tax credit carryforward	2			36
Tax basis differences in assets of foreign subsidiaries	57			63
Accrued liabilities and deferred income	40			31
Other comprehensive income	17			26
Other	89			41
Valuation allowance ^(*)	(25		)	(32		)
Non-current deferred income tax assets	287			289
Non-current deferred income tax liabilities:
Depreciation and amortization	643			616
Installment sales of vacation ownership interests	755			724
Other	30			14
Non-current deferred income tax liabilities	1,428			1,354
Non-current net deferred income tax liabilities	$	1,141		$	1,065


^(*)	Primarily relates to foreign tax credits and net operating loss carryforwards. The valuation allowance will be reduced when and if the Company determines that the deferred income tax assets are more likely than not to be realized.

As of December 31, 2012, the Company’s net operating loss carryforwards primarily relate to state net operating losses which are due to expire at various dates, but no later than 2032. No provision has been made for U.S. federal deferred income taxes on $569 million of accumulated and undistributed earnings of certain foreign subsidiaries as of December 31, 2012 since it is the present intention of management to reinvest the undistributed earnings indefinitely in those foreign operations. The determination of the amount of unrecognized U.S. federal deferred income tax liability for unremitted earnings is not practicable.

The Company’s effective income tax rate differs from the U.S. federal statutory rate as follows for the year ended December 31:



	2012	2011	2010
Federal statutory rate	35.0%	35.0%	35.0%
State and local income taxes, net of federal tax benefits	2.8	—	1.4
Taxes on foreign operations at rates different than U.S. federal statutory rates	(0.7)	(1.2)	(1.4)
Taxes on foreign income, net of tax credits	(1.3)	0.9	1.0
Foreign tax credits	—	—	(3.1)
Valuation allowance	(0.5)	(1.0)	(0.2)
IRS examination settlement	—	—	(1.8)
Other	1.2	2.1	1.8
	36.5%	35.8%	32.7%

The Company’s effective tax rate increased from 35.8% in 2011 to 36.5% in 2012 primarily due to higher state taxes offset by lower taxes on foreign income.

The following table summarizes the activity related to the Company’s unrecognized tax benefits:



	Amount
Balance as of December 31, 2009	$	25
Increases related to tax positions taken during a prior period	2
Increases related to tax positions taken during the current period	5
Decreases as a result of a lapse of the applicable statute of limitations	(9		)
Decreases related to tax positions taken during a prior period	(1		)

Balance as of December 31, 2010	22
Increases related to tax positions taken during a prior period	6
Increases related to tax positions taken during the current period	3
Decreases as a result of a lapse of the applicable statute of limitations	(2		)

Balance as of December 31, 2011	29
Increases related to tax positions taken during a prior period	8
Increases related to tax positions taken during the current period	3
Decreases as a result of a lapse of the applicable statute of limitations	(2		)
Decreases related to tax positions taken during a prior period	(1		)
Balance as of December 31, 2012	$	37

The gross amount of the unrecognized tax benefits as of December 31, 2012, 2011 and 2010 that, if recognized, would affect the Company’s effective tax rate was $36 million, $29 million and $22 million, respectively. The Company recorded both accrued interest and penalties related to unrecognized tax benefits as a component of provision for income taxes on the Consolidated Statements of Income. The Company also accrued potential penalties and interest of $2 million, $1 million and $1 million related to these unrecognized tax benefits during 2012, 2011 and 2010, respectively. As of December 31, 2012, 2011 and 2010, the Company had recorded a liability for potential penalties of $3 million, $2 million and $2 million, respectively, and interest of $4 million, $3 million and $4 million, respectively, as a component of accrued expenses and other current liabilities and other non-current liabilities on the Consolidated Balance Sheets. The Company does not expect the unrecognized tax benefits to change significantly over the next 12 months.

The Company files U.S., state and foreign income tax returns in jurisdictions with varying statutes of limitations. The 2008 through 2012 tax years generally remain subject to examination by federal tax authorities. The 2007 through 2012 tax years generally remain subject to examination by many state tax authorities. In significant foreign jurisdictions, the 2004 through 2012 tax years generally remain subject to examination by their respective tax authorities. The statute of limitations is scheduled to expire within 12 months of the reporting date in certain taxing jurisdictions and the Company believes that it is reasonably possible that the total amount of its unrecognized tax benefits could decrease by $7 to $10 million.

The Company made cash income tax payments, net of refunds, of $134 million, $139 million and $103 million during 2012, 2011 and 2010, respectively. Such payments exclude income tax related payments made to or refunded by former Parent.

As of December 31, 2012, the Company had $83 million of foreign tax credits with a valuation allowance of $27 million. The foreign tax credits primarily expire between 2016 and 2017, and the valuation allowance on these credits will be reduced when and if the Company determines that these credits are more likely than not to be realized.

During the third quarter of 2010, the Company reached a settlement agreement, along with Cendant, with the IRS that resolved and paid Cendant’s outstanding contingent tax liabilities relating to the examination of the federal income tax returns for Cendant’s taxable years 2003 through 2006, during which the Company was included in Cendant’s tax return. The Company received $10 million in payment from Cendant’s former real estate services business (“Realogy”), who was responsible for 62.5% of the liability as per the Separation Agreement, and paid $155 million for all such tax liabilities including the final interest payable to Cendant, who is the taxpayer (see Note 23 — Separation Adjustments and Transactions with Former Parent and Subsidiaries for more detailed information).