INCOME TAXES

In accordance with GAAP, we have elected to recognize accrued interest related to unrecognized tax benefits and tax-related penalties in the Provision for/(Benefit from) income taxes on our consolidated income statement.

Valuation of Deferred Tax Assets and Liabilities

Deferred tax assets and liabilities are recognized based on the future tax consequences attributable to temporary differences that exist between the financial statement carrying value of assets and liabilities and their respective tax bases, and operating loss and tax credit carryforwards on a taxing jurisdiction basis. We measure deferred tax assets and liabilities using enacted tax rates that will apply in the years in which we expect the temporary differences to be recovered or paid.

Our accounting for deferred tax consequences represents our best estimate of the likely future tax consequences of events that have been recognized in our financial statements or tax returns and their future probability. In assessing the need for a valuation allowance, we consider both positive and negative evidence related to the likelihood of realization of the deferred tax assets. If, based on the weight of available evidence, it is more likely than not that the deferred tax assets will not be realized, we record a valuation allowance.

Components of Income Taxes

Components of income taxes excluding discontinued operations, cumulative effects of changes in accounting principles, other comprehensive income, and equity in net results of affiliated companies accounted for after-tax, are as follows:



	2012			2011			2010
Income before income taxes, excluding equity in net results of affiliated companies accounted for after-tax (in millions)
U.S.	$	6,639		$	6,043		$	4,057
Non-U.S.	493			2,138			2,554
Total	$	7,132		$	8,181		$	6,611
Provision for/(Benefit from) income taxes (in millions)
Current
Federal	$	4		$	(4	)	$	(69	)
Non-U.S.	270			298			289
State and local	3			(24		)	(5		)
Total current	277			270			215
Deferred
Federal	2,076			(9,785		)	—
Non-U.S.	(126		)	(1,590		)	292
State and local	(171		)	(436		)	85
Total deferred	1,779			(11,811		)	377
Total	$	2,056		$	(11,541	)	$	592
Reconciliation of effective tax rate
U.S. statutory rate	35.0		%	35.0		%	35.0		%
Non-U.S. tax rates under U.S. rates	(1.6		)	(1.5		)	(0.1		)
State and local income taxes	0.2			1.1			1.5
General business credits	0.3			(1.9		)	(1.8		)
Dispositions and restructurings	(1.7		)	6.8			(9.5		)
U.S. tax on non-U.S. earnings	(1.0		)	(0.8		)	0.1
Prior year settlements and claims	(1.8		)	(0.2		)	(10.0		)
Tax-related interest	—			(0.9		)	(0.7		)
Tax-exempt income	(3.9		)	(3.9		)	(4.7		)
Other	1.7			(2.5		)	0.2
Valuation allowances	1.6			(172.3		)	(1.0		)
Effective rate	28.8		%	(141.1		)%	9.0		%

NOTE 24. INCOME TAXES (Continued)

We historically have provided deferred taxes for the presumed repatriation to the United States of earnings from nearly all non-U.S. subsidiaries. During 2011, we determined that $6.9 billion of these non-U.S. subsidiaries' undistributed earnings are now indefinitely reinvested outside the United States. As management has determined that the earnings of these subsidiaries are not required as a source of funding for U.S. operations, such earnings are not planned to be distributed to the United States in the foreseeable future. As a result of this change in assertion, deferred tax liabilities related to undistributed foreign earnings decreased by $63 million.

As of December 31, 2012, $6.6 billion of non-U.S. earnings are considered indefinitely reinvested in operations outside the United States, for which deferred taxes have not been provided. These earnings have been subject to significant non-U.S. taxes; repatriation in their entirety would result in a residual U.S. tax liability of about $600 million.

At the end of 2011, our U.S. operations had returned to a position of cumulative profits for the most recent 3-year period. We concluded that this record of cumulative profitability in recent years, our ten consecutive quarters of pre-tax operating profits, our successful completion of labor negotiations with the UAW, and our business plan showing continued profitability provided assurance that our future tax benefits more likely than not would be realized. Accordingly, at year-end 2011, we released almost all of our valuation allowance against net deferred tax assets for entities in the United States, Canada, and Spain.

At December 31, 2012, we have retained a valuation allowance against approximately $500 million in North America related to various state and local operating loss carryforwards that are subject to restrictive rules for future utilization, and a valuation allowance totaling $1.4 billion primarily against deferred tax assets for our South American operations.

Components of Deferred Tax Assets and Liabilities

The components of deferred tax assets and liabilities were as follows (in millions):



	December 31, 2012			December 31, 2011
Deferred tax assets
Employee benefit plans	$	8,079		$	8,189
Net operating loss carryforwards	2,417			3,163
Tax credit carryforwards	4,973			4,534
Research expenditures	2,321			2,297
Dealer and customer allowances and claims	1,820			1,731
Other foreign deferred tax assets	1,790			694
Allowance for credit losses	146			194
All other	1,176			1,483
Total gross deferred tax assets	22,722			22,285
Less: valuation allowances	(1,923		)	(1,545		)
Total net deferred tax assets	20,799			20,740
Deferred tax liabilities
Leasing transactions	1,145			932
Deferred income	2,094			2,098
Depreciation and amortization (excluding leasing transactions)	1,561			1,659
Finance receivables	616			551
Other foreign deferred tax liabilities	379			360
All other	289			711
Total deferred tax liabilities	6,084			6,311
Net deferred tax assets/(liabilities)	$	14,715		$	14,429

Operating loss carryforwards for tax purposes were $6.9 billion at December 31, 2012, resulting in a deferred tax asset of $2.4 billion. A substantial portion of these losses begin to expire in 2029; the remaining losses will begin to expire in 2018. Tax credits available to offset future tax liabilities are $5 billion. A substantial portion of these credits have a remaining carryforward period of 10 years or more. Tax benefits of operating loss and tax credit carryforwards are evaluated on an ongoing basis, including a review of historical and projected future operating results, the eligible carryforward period, and other circumstances.

NOTE 24. INCOME TAXES (Continued)

Other

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows for the years listed (in millions):



	2012			2011
Beginning balance	$	1,721		$	966
Increase – tax positions in prior periods	84			1,045
Increase – tax positions in current period	19			59
Decrease – tax positions in prior periods	(246		)	(134		)
Settlements	(31		)	(186		)
Lapse of statute of limitations	(14		)	(21		)
Foreign currency translation adjustment	14			(8		)
Ending balance	$	1,547		$	1,721

The amount of unrecognized tax benefits at December 31, 2012 and 2011 that would affect the effective tax rate if recognized was $1.2 billion and $1.2 billion, respectively.

Examinations by tax authorities have been completed through 2004 in Germany, and through 2007 in Canada, the United States, and the United Kingdom. Although examinations have been completed in these jurisdictions, limited transfer pricing disputes exist for years dating back to 1996.

We recorded in our consolidated income statement approximately $9 million, $77 million, and $45 million in tax-related interest income for the years ended December 31, 2012, 2011, and 2010. As of December 31, 2012 and 2011, we had recorded a net payable of $120 million and $171 million, respectively, for tax-related interest.