Taxes on Earnings

The provision for income taxes on earnings consists of the following:



	2012		2011			2010
Income taxes:
Currently Payable
Federal	$	213	$	215		253
State	29		27			46
Non-U.S.	55		78			45
	297		320			344

Deferred
Federal	37		47			38
State	2		(2		)	1
Non-U.S.	6		1			15
	45		46			54
	$	342	$	366		$	398

Earnings before income taxes:
United States	$	922	$	944		$	1,051
Non-U.S.	184		224			191
	$	1,106	$	1,168		$	1,242

The following is a reconciliation of the effective income tax rate to the U.S. federal statutory income tax rate:



	2012		2011		2010
Federal statutory income tax rate	35.0	%	35.0	%	35.0	%
State income taxes (net of federal tax benefit)	1.9		1.4		2.5
Tax effect of international items	(3.8	)	(2.1	)	(2.5	)
Settlement of tax contingencies	(0.1	)	(0.5	)	(0.7	)
Federal manufacturing deduction	(1.8	)	(1.8	)	(1.3	)
Other	(0.3	)	(0.7	)	(1.0	)
Effective income tax rate	30.9	%	31.3	%	32.0	%

In 2011, the company recorded a tax benefit of $8 following the finalization of tax audits.

In the third quarter of 2010, the company recorded deferred tax expense of $10 due to the enactment of U.S. health care legislation in March 2010. The law changed the tax treatment of subsidies to companies that provide prescription drug benefits to retirees. Accordingly, the company recorded the non-cash charge to reduce the value of the deferred tax asset associated with the subsidy.

In 2010, the company recorded a tax benefit of $9 following the finalization of tax audits. The company recorded an additional tax benefit of $2 during the year related to the resolution of other tax contingencies.

Deferred tax liabilities and assets are comprised of the following:



	2012			2011
Depreciation	$	279		$	253
Amortization	474			474
Other	20			14
Deferred tax liabilities	773			741
Benefits and compensation	311			307
Pension benefits	194			93
Tax loss carryforwards	69			84
Capital loss carryforwards	117			122
Other	79			83
Gross deferred tax assets	770			689
Deferred tax asset valuation allowance	(142		)	(156		)
Net deferred tax assets	628			533
Net deferred tax liability	$	145		$	208

At July 29, 2012, U.S. and non-U.S. subsidiaries of the company have tax loss carryforwards of approximately $317. Of these carryforwards, $106 expire between 2013 and 2028, and $211 may be carried forward indefinitely. The current statutory tax rates in these countries range from 15% to 35%. At July 29, 2012, deferred tax asset valuation allowances have been established to offset $83 of these tax loss carryforwards. Additionally, at July 29, 2012, non-U.S. subsidiaries of the company had capital loss carryforwards of approximately $388, which were fully offset by valuation allowances. U.S. subsidiaries of the company had a capital loss carryforward of $2 which expires in 2017 for which no valuation allowance had been established.

The net change in the deferred tax asset valuation allowance in 2012 was a decrease of $14. The decrease was primarily due to the discontinuation of the company's Russian operations as well as the impact of currency and the recognition of additional valuation allowances on foreign loss carryforwards. The net change in the valuation allowance in 2011 was an increase of $33. The increase was primarily due to the impact of currency and recognition of additional valuation allowances on foreign loss carryforwards. The net change in the valuation allowance in 2010 was an increase of $15. The increase was primarily due to the impact of currency and the recognition of additional valuation allowances on foreign loss carryforwards that are not expected to be utilized prior to the expiration date.

As of July 29, 2012, Other deferred tax assets include $3 of foreign tax credit carryforwards that expire in 2022, and $3 of state tax credit carryforwards related to various states that expire between 2014 and 2021. No valuation allowances have been established related to these deferred tax assets.

As of July 29, 2012, U.S. income taxes have not been provided on approximately $561 of undistributed earnings of non-U.S. subsidiaries, which are deemed to be permanently reinvested. It is not practical to estimate the tax liability that might be incurred if such earnings were remitted to the U.S.

A reconciliation of the activity related to unrecognized tax benefits follows:



	2012			2011			2010
Balance at beginning of year	$	43		$	36		$	42
Increases related to prior-year tax positions	2			6			14
Decreases related to prior-year tax positions	(1		)	(4		)	(11		)
Increases related to current-year tax positions	9			9			4
Settlements	—			—			(11		)
Lapse of statute	(5		)	(4		)	(2		)
Balance at end of year	$	48		$	43		$	36

As of July 29, 2012, July 31, 2011, and August 1, 2010, there were $18, $17, and $22, respectively, of unrecognized tax benefits that if recognized would affect the annual effective tax rate. The total amount of unrecognized tax benefits can change due to audit settlements, tax examination activities, statute expirations and the recognition and measurement criteria under accounting for uncertainty in income taxes. The company believes it is reasonably possible that settlement may be reached in the next 12 months on certain state matters resulting in a reduction of unrecognized tax benefits of approximately $17.

The company’s accounting policy with respect to interest and penalties attributable to income taxes is to reflect any expense or benefit as a component of its income tax provision. The total amount of interest and penalties recognized in the Consolidated Statements of Earnings was not material in 2012, 2011 and 2010. The total amount of interest and penalties recognized in the Consolidated Balance Sheets was $8 as of July 29, 2012, and July 31, 2011.

Approximately $6 of unrecognized tax benefit liabilities, including interest and penalties, was reported as accrued taxes payable in the Consolidated Balance Sheets as of July 29, 2012. Approximately $50 and $51 of unrecognized tax benefit liabilities, including interest and penalties, were reported as other non-current liabilities in the Consolidated Balance Sheets as of July 29, 2012 and July 31, 2011, respectively.

The company does business internationally and, as a result, files income tax returns in the U.S. federal jurisdiction and various state and non-U.S. jurisdictions. In the normal course of business, the company is subject to examination by taxing authorities throughout the world, including such major jurisdictions as the U.S., Australia, Canada, Belgium, France and Germany. The 2012 tax year is currently under audit by the IRS. The 2008 and 2009 tax years are currently under audit by Canada. In addition, several state income tax examinations are in progress for fiscal years 2001 to 2011.

With limited exceptions, the company has been audited for income tax purposes in Canada and Germany through fiscal year 2007, in France through fiscal year 2008, and in Belgium and Australia through fiscal year 2009.