8. INCOME TAXES

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


	2013		2012		2011

Current:
U.S.:
Federal	$	1,405	$	1,277	$	928
State	145		119		144
Foreign	569		355		520
Total current	2,119		1,751		1,592
Deferred:
U.S.:
Federal	(117)		(76)		(135)
State	(11)		(7)		(28)
Foreign	(45)		(9)		(5)
Total deferred	(173)		(92)		(168)
Provision for income taxes	$	1,946	$	1,659	$	1,424

Based upon the location of the company’s operations, the consolidated income before income taxes in the U.S. in 2013, 2012 and 2011 was $4,124 million, $3,582 million and $2,618 million, respectively, and in foreign countries was $1,359 million, $1,152 million and $1,605 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:


	2013		2012		2011

U.S. federal income tax provision at a statutory rate of 35 percent	$	1,919	$	1,657	$	1,478
Increase (decrease) resulting from:
State and local income taxes, net of federal income tax benefit	87		73		75
German branch deferred tax write-off	56
Nontaxable foreign partnership (earnings) losses	43		(172)
Nondeductible impairment charges	29		6
Research and development tax credits	(56)		(10)		(38)


	2013		2012		2011

Tax rates on foreign earnings	(34)		(69)		(70)
Valuation allowance on foreign deferred taxes	(14)		200		18
Other-net	(84)		(26)		(39)
Provision for income taxes	$	1,946	$	1,659	$	1,424

At October 31, 2013, accumulated earnings in certain subsidiaries outside the U.S. totaled $4,297 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, 2013, the amount of cash and cash equivalents and marketable securities held by these foreign subsidiaries was $559 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:


	2013				2012
	Deferred Tax Assets		Deferred Tax Liabilities		Deferred Tax Assets		Deferred Tax Liabilities

Other postretirement benefit liabilities	$	1,777			$	2,136
Tax over book depreciation			$	582			$	606
Accrual for sales allowances	602				546
Pension liabilities - net					457
Lease transactions			424				317
Pension asset - net			137
Tax loss and tax credit carryforwards	371				249
Accrual for employee benefits	234				249
Share-based compensation	142				133
Inventory	161				131
Goodwill and other intangible assets			100				110
Allowance for credit losses	69				92
Deferred gains on distributed foreign earnings	26				84
Deferred compensation	44				40
Undistributed foreign earnings			26				11
Other items	419		157		443		115
Less valuation allowances	(254)				(285)
Deferred income tax assets and liabilities	$	3,591	$	1,426	$	4,275	$	1,159

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, 2013, certain tax loss and tax credit carryforwards of $371 million were available with $127 million expiring from 2014 through 2033 and $244 million with an indefinite carryforward period.

In March 2013, the company changed the corporate structure of most of its German operations from a branch to a subsidiary of Deere & Company. The change provides the company increased flexibility and efficiency in funding growth in international operations. As a result, the tax status of these operations has changed. Formerly, as a branch these earnings were taxable in the U.S. as earned. As a subsidiary, these earnings will now be taxable in the U.S. if they are distributed to Deere & Company as dividends, which is the same as the company’s other foreign subsidiaries. The earnings of the new German subsidiary remain taxable in Germany. Due to the change in tax status and the expectation that the German subsidiary’s earnings are indefinitely reinvested, the deferred tax assets and liabilities related to U.S. taxable temporary differences for the previous German branch were written off. The effect of this write-off was a decrease in net deferred tax assets and a charge to the income tax provision of $56 million during the second fiscal quarter of 2013.

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


	2013		2012		2011

Beginning of year balance	$	265	$	199	$	218
Increases to tax positions taken during the current year	30		46		23
Increases to tax positions taken during prior years	24		54		13
Decreases to tax positions taken during prior years	(51)		(14)		(42)
Decreases due to lapse of statute of limitations	(5)		(9)		(13)
Settlements					(1)
Foreign exchange	9		(11)		1
End of year balance	$	272	$	265	$	199

The amount of unrecognized tax benefits at October 31, 2013 that would affect the effective tax rate if the tax benefits were recognized was $59 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 2013, 2012 and 2011, the total amount of expense from interest and penalties was $9 million, $6 million and $3 million and the interest income was $4 million, $1 million and $3 million, respectively. At October 31, 2013 and 2012, the liability for accrued interest and penalties totaled $49 million and $39 million and the receivable for interest was $2 million and $1 million, respectively.