Income Taxes

We file a consolidated U.S. income tax return and tax returns in various state and local jurisdictions. Our subsidiaries also file tax returns in various foreign jurisdictions. Our principal foreign jurisdictions include the United Kingdom, France and Germany. The Internal Revenue Service (“IRS”) has completed its examination of our federal tax returns through 2007 and has commenced an examination of our federal tax returns from 2008 through 2010. In addition, our subsidiaries’ tax returns in the United Kingdom, France and Germany have been examined through 2002, 2005 and 2004, respectively.

Income before income taxes for the three years ended December 31, 2011 was (in millions):



	2011		2010		2009

Domestic	$	581.0	$	573.2	$	598.8
International	968.0		777.2		675.4


	$	1,549.0	$	1,350.4	$	1,274.2

Income tax expense for the three years ended December 31, 2011 was (in millions):



	2011		2010		2009
Current:
Federal	$	158.6	$	107.2	$	58.2
State and local	14.4		11.7		11.8
International	239.5		233.1		198.5


	412.5		352.0		268.5

Deferred:
Federal	83.6		98.9		146.9
State and local	4.9		3.6		14.2
International	4.8		5.7		4.0


	93.3		108.2		165.1


	$	505.8	$	460.2	$	433.6

A reconciliation from the statutory U.S. federal income tax rate to our effective tax rate is:



	2011		2010		2009

Statutory U.S. federal income tax rate	35.0	%	35.0	%	35.0	%
State and local income taxes, net of federal income tax benefit	0.8		0.7		1.3
Remeasurement gain Clemenger Group, tax rate differential	(2.6	)	—		—
International tax rate differentials	(1.4	)	(2.1	)	(2.7	)
Other	0.9		0.5		0.4


Effective rate	32.7	%	34.1	%	34.0	%

Income tax expense for 2011 reflects a number of items that were recorded in the first quarter of 2011. These items include a $39.5 million tax benefit related to charges incurred in connection with our repositioning actions, a provision of $2.8 million related to the remeasurement gain and a provision of $9.0 million for agreed upon adjustments to income tax returns that were under examination in the first quarter of 2011.

The tax benefit on the repositioning actions was calculated based on the jurisdictions where the charges were incurred and reflects the likelihood that we will be unable to obtain a tax benefit for all charges incurred. The remeasurement gain resulting from the acquisition of the controlling interest in Clemenger created a difference between the book basis and tax basis of our investment. Because this basis difference is not expected to reverse, no deferred taxes were provided and the tax provision recorded represents the incremental U.S. tax on acquired historical unremitted earnings. The $9.0 million charge resulted from adjustments to U.S. income tax returns for calendar years 2005, 2006 and 2007, that were agreed upon and recorded in the first quarter of 2011.

Included in income tax expense in 2011, 2010 and 2009 was $2.8 million, $3.9 million and $3.8 million, respectively, of interest, net of tax benefit, and penalties related to tax positions taken on our tax returns. At December 31, 2011 and 2010, the accrued interest and penalties were $10.7 million and $13.0 million, respectively.

The components of deferred tax assets and liabilities at December 31, 2011 and 2010 were (in millions):



	2011			2010
Deferred tax assets:
Compensation and severance	$	291.5		$	257.6
Tax loss and credit carryforwards	156.3			112.6
Basis differences from acquisitions	37.2			23.8
Basis differences from short-term assets and liabilities	33.6			27.7
Other	19.8			9.8


Deferred tax assets	538.4			431.5
Valuation allowance	(24.9		)	(24.6		)


Net deferred tax assets	$	513.5		$	406.9


Deferred tax liabilities:
Basis differences from investments	$	11.1		$	6.7
Unremitted foreign earnings	143.2			85.0
Financial instruments	480.3			458.2
Goodwill and intangible assets	577.4			449.2


Deferred tax liabilities	$	1,212.0		$	999.1


Net deferred tax assets (liabilities)	$	(698.5	)	$	(592.2	)

Substantially all of the deferred tax liability for financial instruments at December 31, 2011 and 2010, relates to our convertible notes and is recorded in long-term deferred tax liabilities in our balance sheet.

At December 31, 2011 and 2010, our net deferred tax assets and (liabilities) were classified as follows (in millions):



	2011			2010

Other current assets - Deferred taxes	$	169.1		$	141.3
Deferred tax assets	—			14.2
Long-term deferred tax liabilities	(867.6		)	(747.7		)


	$	(698.5	)	$	(592.2	)

The American Recovery and Reinvestment Act of 2009 (“ARRA”) provided an election where qualifying cancellation of indebtedness income can be deferred and included in taxable income ratably over the five taxable years beginning in 2014 and ending in 2018. In 2009, we retired $841.2 million of our 2031 Notes and $474.3 million of our 2032 Notes resulting in a tax liability of approximately $328 million. In 2010, we retired an additional $5.7 million of our 2031 Notes and $60.8 million of our 2038 Notes resulting in a tax liability of $12.0 million. These liabilities, which were previously recorded, are included in our balance sheet in deferred tax liabilities. In accordance with ARRA, we expect to pay the liabilities during the deferral period beginning in 2014 and continuing through 2018.

We have concluded that it is more likely than not that we will be able to realize our net deferred tax assets in future periods because results of future operations are expected to generate sufficient taxable income. The valuation allowance of $24.9 million and $24.6 million at December 31, 2011 and 2010, respectively, relates to tax loss and credit carryforwards in the Unites States and international jurisdictions. During 2010, we reduced our deferred tax asset balance by approximately $30.5 million as a result of our utilization of tax loss and credit carryforwards. Additionally, as a result of a change in 2010 in a foreign tax law that eliminated the ability to utilize approximately $39.0 million of tax loss and credit carryforwards, we reduced both our deferred tax asset balance and the corresponding valuation allowance by the same amount. Our tax loss and credit carryforwards are available to us for periods ranging from 5 to 20 years, which is in excess of the forecasted utilization of such carryforwards. To the extent that future tax deductions for share-based compensation are less than the deferred tax assets resulting from recording book share-based compensation expense, we expect to have a sufficient pool of excess tax benefits within additional paid-in-capital (“APIC Pool”) available to offset any potential future shortfalls. The APIC Pool results from the amount by which prior year tax deductions exceeded the cumulative book share-based compensation expense.

We have not provided for U.S. federal income and foreign withholding taxes on approximately $1 billion of cumulative undistributed earnings of certain foreign subsidiaries. We intend to indefinitely reinvest these undistributed earnings in our international operations. Accordingly, we currently have no plans to repatriate these funds. As such, we do not know the time or manner in which we would repatriate these funds. Because the time or manner of repatriation is uncertain, we cannot determine the impact of local taxes, withholding taxes and foreign tax credits associated with the future repatriation of such earnings and therefore cannot quantify the tax liability. We also have cumulative undistributed earnings of certain foreign subsidiaries of approximately $1.5 billion that are not deemed to be indefinitely reinvested. We have provided U.S. taxes of $143.2 million on these undistributed earnings, which are included in deferred tax liabilities. Changes in international tax rules or changes in U.S. tax rules and regulations covering international operations and foreign tax credits may affect our future reported financial results or the way we conduct our business.

A reconciliation of our unrecognized tax benefits is (in millions):



	2011			2010

Balance January 1	$	165.1		$	202.8
Additions:
Current year tax positions	12.2			11.4
Prior year tax positions	12.5			18.3
Reduction of prior year tax positions	(14.8		)	(38.8		)
Settlements	(16.7		)	(24.1		)
Lapse of statute of limitations	—			(2.6		)
Foreign currency translation	(0.5		)	(1.9		)


Balance December 31	$	157.8		$	165.1

The liability for uncertain tax positions is included in long-term liabilities in our balance sheet. Approximately $62.4 million and $72.4 million of the liability for uncertain tax positions at December 31, 2011 and 2010, respectively, would affect our effective tax rate upon resolution of the uncertain tax positions.