Income Taxes

We file a consolidated U.S. income tax return and tax returns in various state and local jurisdictions. Our subsidiaries file tax returns in various foreign jurisdictions. Our principal foreign jurisdictions include the United Kingdom, France and Germany. The Internal Revenue Service 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 2010, 2005 and 2004, respectively.

Income before income taxes for the three years ended December 31, 2012 was (in millions):



	2012		2011		2010

Domestic	$	683.5	$	581.0	$	573.2
International	976.1		968.0		777.2


	$	1,659.6	$	1,549.0	$	1,350.4

Income tax expense (benefit) for the three years ended December 31, 2012 was (in millions):



	2012			2011		2010
Current:
Federal	$	163.3		$	158.6	$	107.2
State and local	40.1			14.4		11.7
International	298.3			239.5		233.1


	501.7			412.5		352.0

Deferred:
Federal	41.7			83.6		98.9
State and local	4.7			4.9		3.6
International	(21.0		)	4.8		5.7


	25.4			93.3		108.2


	$	527.1		$	505.8	$	460.2

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



	2012		2011		2010

Statutory U.S. federal income tax rate	35.0	%	35.0	%	35.0	%
State and local income taxes, net of federal income tax benefit	1.7		0.8		0.7
Reduction of tax on unremitted foreign earnings due to legal reorganization	(1.3	)	—		—
Remeasurement gain Clemenger Group, tax rate differential	—		(2.6	)	—
International tax rate differentials	(3.3	)	(1.4	)	(2.1	)
Other	(0.3	)	0.9		0.5


Effective tax rate	31.8	%	32.7	%	34.1	%

Our effective tax rate for 2012 decreased to 31.8%, compared to 32.7% for 2011. In the fourth quarter of 2012, income tax expense was reduced by $53 million, primarily resulting from a reduction in the deferred tax liabilities for unremitted foreign earnings of certain of our operating companies located in the Asia Pacific region, as well as lower statutory tax rates in other foreign jurisdictions. In an effort to support our continued expansion and pursue operational efficiencies in the Asia Pacific region, we completed a legal reorganization in certain countries within the region. As a result of the reorganization, our unremitted foreign earnings in the affected countries are subject to lower effective tax rates as compared to the U.S. statutory tax rate. Therefore we recorded a reduction in our deferred tax liabilities to reflect the lower tax rate that these earnings are subject to. The reduction in income tax expense was partially offset by a charge of approximately $16 million resulting from U.S. state and local tax accruals recorded for uncertain tax positions, net of U.S. federal income tax benefit.

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 was $2.5 million, $2.8 million and $3.9 million in 2012, 2011 and 2010, respectively, of interest, net of tax benefit, and penalties related to tax positions taken on our tax returns. At December 31, 2012 and 2011, the accrued interest and penalties were $18.8 million and $10.7 million, respectively.

The components of deferred tax assets and liabilities at December 31, 2012 and 2011 were (in millions):



	2012			2011
Deferred tax assets:
Compensation and severance	$	283.0		$	291.5
Tax loss and credit carryforwards	176.1			156.3
Basis differences from acquisitions	20.7			37.2
Basis differences from short-term assets and liabilities	31.8			33.6
Other	44.2			19.8


Deferred tax assets	555.8			538.4
Valuation allowance	(47.8		)	(24.9		)


Net deferred tax assets	$	508.0		$	513.5


Deferred tax liabilities:
Goodwill and intangible assets	$	635.2		$	577.4
Financial instruments	508.7			480.3
Unremitted foreign earnings	124.7			143.2
Basis differences from investments	12.2			11.1


Deferred tax liabilities	$	1,280.8		$	1,212.0


Net deferred tax assets (liabilities)	$	(772.8	)	$	(698.5	)

Substantially all the deferred tax liability for financial instruments at December 31, 2012 and 2011, relates to our Convertible Debt.

Our net deferred tax assets and (liabilities) at December 31, 2012 and 2011, were classified as follows (in millions):



	2012			2011

Other current assets - Deferred taxes	$	160.2		$	169.1
Long-term deferred tax liabilities	(933.0		)	(867.6		)


	$	(772.8	)	$	(698.5	)

The American Recovery and Reinvestment Act of 2009 (“ARRA”) provided an election where qualifying cancellation of indebtedness income for debt reacquired in 2009 and 2010 can be deferred and included in taxable income ratably over the five taxable years beginning in 2014 and ending in 2018. In 2009 and 2010, we reacquired and retired $1,382.0 million of our Convertible Debt resulting in a tax liability of approximately $340 million that is included in the deferred tax liability for financial instruments. Under the ARRA, we expect to pay this liability 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 $47.8 million and $24.9 million at December 31, 2012 and 2011, respectively, relates to tax loss and credit carryforwards in the Unites States and international jurisdictions. 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 the APIC Pool available to offset any potential future shortfalls.

We have not provided for U.S. federal income and foreign withholding taxes on approximately $1.4 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 have provided $124.7 million of U.S. taxes, which are included in deferred tax liabilities, on cumulative undistributed earnings of certain foreign subsidiaries of approximately $1.8 billion that are not indefinitely reinvested. 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 at December 31, 2012 and 2011 is (in millions):



	2012			2011

Balance January 1	$	157.8		$	165.1
Additions:
Current year tax positions	17.1			12.2
Prior year tax positions	27.3			12.5
Reduction of prior year tax positions	(7.9		)	(14.8		)
Settlements	(0.2		)	(16.7		)
Lapse of statute of limitations	(6.0		)	—
Foreign currency translation	0.5			(0.5		)


Balance December 31	$	188.6		$	157.8

The majority of the liability for uncertain tax positions is included in long-term liabilities in our balance sheet. Approximately $69.7 million and $62.4 million of the liability for uncertain tax positions at December 31, 2012 and 2011, respectively, would affect our effective tax rate upon resolution of the uncertain tax positions.