INCOME TAXES

12 Months Ended

Oct. 31, 2012

INCOME TAXES

INCOME TAXES

8. INCOME TAXES

The provision for income taxes by taxing jurisdiction and by significant component consisted of the following in millions of dollars:

	2012			2011			2010
Current:
U.S.:
Federal	$	1,277		$	928		$	574
State	119			144			50
Foreign	355			520			363
Total current	1,751			1,592			987
Deferred:
U.S.:
Federal	(76		)	(135		)	156
State	(7		)	(28		)	11
Foreign	(9		)	(5		)	8
Total deferred	(92		)	(168		)	175
Provision for income taxes	$	1,659		$	1,424		$	1,162

Based upon the location of the company’s operations, the consolidated income before income taxes in the U.S. in 2012, 2011 and 2010 was $3,582 million, $2,618 million and $2,048 million, respectively, and in foreign countries was $1,152 million, $1,605 million and $977 million, respectively. Certain foreign operations are branches of Deere & Company and are, therefore, subject to U.S. as well as foreign income tax regulations. The pretax income by location and the preceding analysis of the income tax provision by taxing jurisdiction are, therefore, not directly related.

A comparison of the statutory and effective income tax provision and reasons for related differences in millions of dollars follow:

	2012			2011			2010
U. S. federal income tax provision at a statutory rate of 35 percent	$	1,657		$	1,478		$	1,059
Increase (decrease) resulting from:
Valuation allowance on foreign deferred taxes	200			18			5
State and local income taxes, net of federal income tax benefit	73			75			40
Nondeductible health care claims*							123
Nondeductible goodwill impairment charge	6						7
Nontaxable foreign partnership earnings	(172		)
Tax rates on foreign earnings	(69		)	(70		)	(59		)
Research and development tax credits	(10		)	(38		)	(5		)
Wind energy production tax credits							(30		)
Other-net	(26		)	(39		)	22
Provision for income taxes	$	1,659		$	1,424		$	1,162

* Cumulative adjustment from change in law. Effect included in state taxes was $7 million.

At October 31, 2012, accumulated earnings in certain subsidiaries outside the U.S. totaled $3,209 million for which no provision for U.S. income taxes or foreign withholding taxes has been made, because it is expected that such earnings will be reinvested outside the U.S. indefinitely. Determination of the amount of unrecognized deferred tax liability on these unremitted earnings is not practicable. At October 31, 2012, the amount of cash and cash equivalents and marketable securities held by these foreign subsidiaries was $628 million.

Deferred income taxes arise because there are certain items that are treated differently for financial accounting than for income tax reporting purposes. An analysis of the deferred income tax assets and liabilities at October 31 in millions of dollars follows:

	2012					2011
	Deferred			Deferred		Deferred			Deferred
	Tax			Tax		Tax			Tax
	Assets			Liabilities		Assets			Liabilities
Other postretirement benefit liabilities	$	2,136				$	1,944
Tax over book depreciation				$	606				$	492
Accrual for sales allowances	546					438
Pension liabilities - net	457					279
Lease transactions				317					309
Accrual for employee benefits	249					189
Tax loss and tax credit carryforwards	249					121
Share-based compensation	133					113
Inventory	131					152
Goodwill and other intangible assets				110					123
Allowance for credit losses	92					115
Deferred gains on distributed foreign earnings	84					83
Deferred compensation	40					37
Undistributed foreign earnings				11					19
Other items	443			115		348			112
Less valuation allowances	(285		)			(74		)
Deferred income tax assets and liabilities	$	4,275		$	1,159	$	3,745		$	1,055

Deere & Company files a consolidated federal income tax return in the U.S., which includes the wholly-owned financial services subsidiaries. These subsidiaries account for income taxes generally as if they filed separate income tax returns.

At October 31, 2012, certain tax loss and tax credit carryforwards of $249 million were available with $127 million expiring from 2013 through 2032 and $122 million with an indefinite carryforward period.

The Patient Protection and Affordable Care Act as amended by the Healthcare and Education Reconciliation Act of 2010 was signed into law in the company’s second fiscal quarter of 2010. Under the legislation, to the extent the company’s future health care drug expenses are reimbursed under the Medicare Part D retiree drug subsidy program, the expenses will no longer be tax deductible effective November 1, 2013. Since the tax effects for the retiree health care liabilities were reflected in the company’s financial statements, the entire impact of this tax change relating to the future retiree drug costs was recorded in tax expense in the second quarter of 2010, which was the period in which the legislation was enacted. As a result of the legislation, the company’s tax expenses increased approximately $130 million in 2010.

A reconciliation of the total amounts of unrecognized tax benefits at October 31 in millions of dollars follows:

	2012			2011			2010
Beginning of year balance	$	199		$	218		$	260
Increases to tax positions taken during the current year	46			23			36
Increases to tax positions taken during prior years	54			13			83
Decreases to tax positions taken during prior years	(14		)	(42		)	(133		)
Decreases due to lapse of statute of limitations	(9		)	(13		)	(2		)
Settlements				(1		)	(19		)
Foreign exchange	(11		)	1			(7		)
End of year balance	$	265		$	199		$	218

The amount of unrecognized tax benefits at October 31, 2012 that would affect the effective tax rate if the tax benefits were recognized was $65 million. The remaining liability was related to tax positions for which there are offsetting tax receivables, or the uncertainty was only related to timing. The company expects that any reasonably possible change in the amounts of unrecognized tax benefits in the next twelve months would not be significant.

The company files its tax returns according to the tax laws of the jurisdictions in which it operates, which includes the U.S. federal jurisdiction, and various state and foreign jurisdictions. The U.S. Internal Revenue Service has completed the examination of the company’s federal income tax returns for periods prior to 2009. The years 2009 and 2010 federal income tax returns are currently under examination. Various state and foreign income tax returns, including major tax jurisdictions in Canada and Germany, also remain subject to examination by taxing authorities.

The company’s policy is to recognize interest related to income taxes in interest expense and interest income, and recognize penalties in selling, administrative and general expenses. During 2012, 2011 and 2010, the total amount of expense from interest and penalties was $6 million, $3 million and $3 million and the interest income was $1 million, $3 million and $5 million, respectively. At October 31, 2012 and 2011, the liability for accrued interest and penalties totaled $39 million and $39 million and the receivable for interest was $1 million and $7 million, respectively.