6. Income Taxes

Income before income taxes follows (in millions):


	Years ended December 31,
	2012		2011		2010

U.S. companies	$	498	$	972	$	975
Non-U.S. companies		1,619		2,241		2,870
Income before income taxes	$	2,117	$	3,213	$	3,845

The current and deferred amounts of the provision (benefit) for income taxes follow (in millions):


	Years ended December 31,
	2012		2011		2010
Current:
Federal	$	(4)	$	(2)
State and municipal		3		6	$	1
Foreign		322		289		218
Deferred:
Federal		185		167		(7)
State and municipal		(8)		14		22
Foreign		(109)		(66)		53
Provision (benefit) for income taxes	$	389	$	408	$	287

Amounts are reflected in the preceding tables based on the location of the taxing authorities.

Reconciliation of the U.S. statutory income tax rate to our effective tax rate for continuing operations follows:


	Years ended December 31,
	2012		2011		2010
Statutory U.S. income tax rate	35.0%		35.0%		35.0%
State income tax (benefit), net of federal effect	0.2		0.1		0.1
Tax holidays (1)	(1.6)		(2.0)		(3.1)
Investment and other tax credits (2)	(1.0)		(0.7)		(0.9)
Rate difference on foreign earnings	(2.3)	(6)	(4.2)		(2.1)
Equity earnings impact (3)	(12.7)		(14.9)		(16.6)
Dividend repatriation	0.4		(0.8)	(7)	(6.7)	(5)
Deferred tax adjustment (4)					1.5
Valuation allowances	(0.1)		0.5		0.1
Other items, net	0.5		(0.3)		0.2
Effective income tax (benefit) rate	18.4%		12.7%		7.5%

(1)

Primarily related to a subsidiary in Taiwan operating under tax holiday arrangements. The nature and extent of such arrangements vary, and the benefits of existing arrangements phase out in future years (through 2015). The impact of tax holidays on net income per share on a diluted basis was $0.02 in 2012, $0.04 in 2011, and $0.08 in 2010.

(2)	Primarily related to investment tax credits in Taiwan, employment credits in Mexico and prior year research and development credits in U.S.

(3)	Equity in earnings of nonconsolidated affiliates reported in the financials net of tax.

(4)	In 2010, we recorded a $56 million charge to write-off deferred tax associated with OPEB subsidy due to a law change.

(5)	In 2010, we recorded a $265 million tax benefit for excess foreign tax credits that resulted from the repatriation of current year earnings of certain foreign subsidiaries.

(6)	$37 million tax expense recorded in 2012 will be reversed in the first quarter of 2013 as a result of the retroactive application of the American Taxpayer Relief Act enacted on January 3, 2013.

(7)	Includes benefit of amending 2006 U.S. Federal return to claim foreign tax credits.

The following table details the tax benefit recognized in other comprehensive income:


	Years ended December 31,
(In millions)	2012		2011		2010

Net unrealized gains (losses) on investments:
Unrealized holding gain (loss) arising during the period	$	(1)			$	6
Less: reclassification adjustment for amounts included in net income		3				(1)
Equity investee's unrealized gain on investments		1

Unamortized losses and prior service costs for postretirement benefit plans:
Adjustments arising during the period		(100)	$	(30)		(58)
Less: amortization of losses and prior service costs included in net income		33		35		26
Equity investee's defined benefit plan adjustments		2		(9)		(1)

Net unrealized gains (losses) on designated hedges:
Unrealized holding gain (loss) arising during the period		20		18		(6)
Less: reclassification adjustment for amounts included in net income		7		(21)		(9)

Income tax benefit related to items of other comprehensive income	$	(35)	$	(7)	$	(43)

The tax effects of temporary differences and carryforwards that gave rise to significant portions of the deferred tax assets and liabilities follows (in millions):


	December 31,
	2012		2011

Loss and tax credit carryforwards	$	1,923	$	2,039
Capitalized research and development		33		47
Asset impairments and restructuring reserves		168		162
Postretirement medical and life benefits		357		347
Inventory		23		44
Fixed assets		89		78
Other accrued liabilities		268		241
Other employee benefits		486		398
Gross deferred tax assets		3,347		3,356
Valuation allowance		(210)		(219)
Total deferred tax assets		3,137		3,137
Intangible and other assets		(230)		(97)
Total deferred tax liabilities		(230)		(97)
Net deferred tax assets	$	2,907	$	3,040

The net deferred tax assets are classified in our consolidated balance sheets, as follows (in millions):


	December 31,
	2012		2011
Current deferred tax assets	$	579	$	448
Non-current deferred tax assets		2,343		2,652
Current deferred tax liabilities		(4)
Non-current deferred tax liabilities		(11)		(60)
Net deferred tax assets	$	2,907	$	3,040

Details on deferred tax assets for loss and tax credit carryforwards at December 31, 2012 follow (in millions):


			Expiration
	Amount		2013-2017		2018-2022		2023-2032		Indefinite
Net operating losses	$	825	$	97	$	163	$	360	$	205
Capital losses		10		10
Tax credits		1,088		150		778		114		46
Totals as of December 31, 2012	$	1,923	$	257	$	941	$	474	$	251

The recognition of windfall tax benefits from stock-based compensation deducted on the tax return is prohibited until realized through a reduction of income tax payable. Cumulative tax benefits totaling $300 million will be recorded in additional paid-in-capital when the net operating loss and credit carry forwards are utilized and the windfall tax benefit can be realized.

Deferred tax assets are to be reduced by a valuation allowance if, based on the weight of available positive and negative evidence, it is more likely than not (a likelihood of greater than 50 percent) that some portion or all of the deferred tax assets will not be realized. Corning has valuation allowances on certain shorter-lived deferred tax assets such as those represented by capital loss carry forwards and state tax net operating loss carry forwards, as well as other foreign net operating loss carryforwards and federal and state tax credits, because we cannot conclude that it is more likely than not that we will earn income of the character required to utilize these assets before they expire. U.S. profits of approximately $7.1 billion will be required to fully realize the deferred tax assets as of December 31, 2012. Of that amount, $3.8 billion of U.S. profits will be required over the next 13 years to fully realize the deferred tax assets associated with federal net operating loss carry forwards. The remaining deferred tax assets will be realized as the underlying temporary differences reverse over an extended period. The amount of U.S. and foreign deferred tax assets that have remaining valuation allowances at December 31, 2012 and 2011 was $210 million and $219 million, respectively.

The following is a tabular reconciliation of the total amount of unrecognized tax benefits (in millions):


	2012		2011
Balance at January 1	$	21	$	23
Additions based on tax positions related to the current year		1		2
Additions for tax positions of prior years		2		1
Reductions for tax positions of prior years				(1)
Settlements and lapse of statute of limitations		(8)		(4)
Balance at December 31	$	16	$	21

Included in the balance at December 31, 2012 and 2011 are $11 million and $15 million, respectively, of unrecognized tax benefits that would impact our effective tax rate if recognized.

We recognize accrued interest and penalties associated with uncertain tax positions as part of tax expense. For the years ended December 31, 2012, 2011 and 2010, the amounts recognized in interest expense and income were immaterial. The amounts accrued at December 31, 2012 and 2011 for the payment of interest and penalties were not significant.

While we expect the amount of unrecognized tax benefits to change in the next 12 months, we do not expect the change to have a significant impact on the results of operations or our financial position.

Corning Incorporated, as the common parent company, and all 80%-or-more-owned of its U.S. subsidiaries join in the filing of consolidated U.S. federal income tax returns. All such returns for periods ended through December 31, 2004, have been audited by and settled with the Internal Revenue Service (IRS). The statute of limitations to audit the 2006, 2007, and 2008 U.S. federal income tax expired in 2010, 2011 and 2012, respectively. The statute for the 2005 tax return has closed except to the extent the loss generated in 2005 is utilized in future years.

Corning Incorporated and its U.S. subsidiaries file income tax returns on a combined, unitary or stand-alone basis in multiple state and local jurisdictions, which generally have statutes of limitations ranging from 3 to 5 years. Various state income tax returns are currently in the process of examination or administrative appeal.

Our foreign subsidiaries file income tax returns in the countries in which they have operations. Generally, these countries have statutes of limitations ranging from 3 to 7 years. Years still open to examination by foreign tax authorities in major jurisdictions include Japan (2008 onward) and Taiwan (2011 onward).

Under U.S. GAAP, a deferred tax liability should be recorded for any book basis greater than tax basis in a foreign subsidiary attributable to unremitted book earnings under the presumption that such earnings will ultimately be distributed and that such distribution would be subject to additional tax at the parent company level. However, such presumption is rebuttable and no tax would be accrued to the extent the temporary difference is not expected to reverse in the foreseeable future because the unremitted foreign earnings are expected to be reinvested indefinitely.

As required by U.S. GAAP, Corning completes an annual detailed analysis to determine the extent to which its foreign unremitted earnings are indefinitely reinvested considering various factors including the following:

·	U.S. cash needs and liquidity;

·	International working capital, debt service and capital expansion needs;

·	Local regulatory, statutory or other legally enforceable restrictions on the distribution of foreign subsidiary and affiliate earnings;

·	Foreign joint venture agreement limitations on distributions; and

·	The current and/or future tax costs associated with repatriation, including potential legislative changes that could impact such costs.

Quarterly, Corning updates its analysis for material changes.

In the quarter ended March 31, 2010, Corning included in the computation of its estimated annual effective tax rate a tax benefit of $265 million related to an expected fourth quarter repatriation of $1.1 billion of 2010 foreign earnings. The repatriated earnings represented a portion of the current year earnings of certain foreign subsidiaries and affiliates located in Asia and thus were not previously permanently reinvested.

There were two factors influencing Corning's decision to consider repatriating these 2010 earnings. One was Corning's decision, as announced early in 2010, to pursue acquisitions that were expected to require cash to be available in the U.S. in excess of amounts expected to be generated from domestic sources. The second factor was proposed federal tax legislation which, if enacted, could significantly increase the tax cost of repatriation after 2010. Because there had been no change in our longer term international capital expansion plans as of the first quarter, our intent to indefinitely reinvest foreign earnings accumulated through the year ended December 31, 2009 was not changed by these factors.

As of the year ended December 31, 2010, Corning had $8.9 billion of foreign unremitted earnings that it intended to keep indefinitely reinvested.

Of this amount, nearly 70% consisted of:

·	Non-liquid operating assets or short term liquidity required to meet current international working capital needs; and

·	Samsung Corning Precision Materials or other joint venture unremitted earnings that require a joint determination with our partners to remove any indefinitely reinvested representation.

Additionally, in the third quarter of 2010, Corning announced a significant multi-year investment plan that was expected to result in 2011 capital investment of $2.4 billion to $2.7 billion, the substantial majority of which would be spent internationally and would include over the term of the plan: $800 million for additional LCD capacity in China; capacity expansion for Eagle XG LCD glass and Corning Gorilla Glass in Asia; expansion of automotive substrate facilities in China and Germany; and a new manufacturing and distribution center in China for our Life Sciences businesses. In addition to the $2.4 billion spent in 2011, approximately $900 million of non-U.S. capital spending was invested in 2012. These factors in addition to additional foreign capital spending planned in 2013 and beyond and the fact that Corning has sufficient access to funds in the U.S. to fund currently anticipated domestic needs result in our ability and intent to indefinitely reinvest our foreign unremitted earnings of $8.9 billion, $10.8 billion and $11.9 billion as of December 31, 2010, 2011 and 2012, respectively. It is not practical to calculate the unrecognized deferred tax liability on these earnings with reasonable accuracy.