Income Taxes

The components of the (provision)/benefit for income taxes on continuing operations were:



	Year Ended December 31
Millions of dollars	2012			2011			2010
Current income taxes:
Federal	$	(695	)	$	(1,026	)	$	(400	)
Foreign	(328		)	(334		)	(287		)
State	(47		)	(109		)	(42		)
Total current	(1,070		)	(1,469		)	(729		)
Deferred income taxes:
Federal	(168		)	(28		)	(124		)
Foreign	15			57			3
State	(12		)	1			(3		)
Total deferred	(165		)	30			(124		)
Provision for income taxes	$	(1,235	)	$	(1,439	)	$	(853	)

The United States and foreign components of income from continuing operations before income taxes were as follows:



	Year Ended December 31
Millions of dollars	2012		2011		2010
United States	$	2,826	$	4,040	$	1,918
Foreign	996		409		737
Total	$	3,822	$	4,449	$	2,655

Reconciliations between the actual provision for income taxes on continuing operations and that computed by applying the United States statutory rate to income from continuing operations before income taxes were as follows:



	Year Ended December 31
	2012		2011		2010
United States statutory rate	35.0	%	35.0	%	35.0	%
Impact of foreign income taxed at different rates	(2.5	)	(0.5	)	(1.3	)
Domestic manufacturing deduction	(2.2	)	(2.1	)	(1.8	)
State income taxes	1.6		1.6		1.5
Adjustments of prior year taxes	(0.6	)	(1.5	)	(1.2	)
Other impact of foreign operations	(0.5	)	(0.4	)	(1.3	)
Impact of devaluation of Venezuelan Bolívar Fuerte	—		—		0.8
Other items, net	1.5		0.2		0.4
Total effective tax rate on continuing operations	32.3	%	32.3	%	32.1	%

On January 2, 2013, the American Taxpayer Relief Act of 2012 (Act) was enacted. The Act provides tax relief for businesses by reinstating certain tax benefits and credits retroactively to January 1, 2012. There are several provisions of the Act that impact us, most notably the extension of the Research and Development credit. Income tax accounting rules require tax law changes to be recognized in the period of enactment; as such, the associated tax benefits of the Act will be recognized in our provision for income taxes in the first quarter of 2013.

We have not provided United States income taxes and foreign withholding taxes on the undistributed earnings of foreign subsidiaries as of December 31, 2012 because we intend to permanently reinvest such earnings outside the United States. If these foreign earnings were to be repatriated in the future, the related United States tax liability may be reduced by any foreign income taxes previously paid on these earnings. As of December 31, 2012, the cumulative amount of earnings upon which United States income taxes have not been provided is approximately $4.4 billion. It is not possible to estimate the amount of unrecognized deferred tax liability related to these earnings at this time.

The primary components of our deferred tax assets and liabilities were as follows:



	December 31
Millions of dollars	2012			2011
Gross deferred tax assets:
Net operating loss carryforwards	$	396		$	380
Employee compensation and benefits	361			345
Accrued liabilities	274			64
Insurance accruals	54			48
Software revenue recognition	32			44
Inventory	30			30
Capitalized research and experimentation	18			29
Other	94			110
Total gross deferred tax assets	1,259			1,050
Gross deferred tax liabilities:
Depreciation and amortization	867			648
Joint ventures, partnerships, and unconsolidated affiliates	42			38
Other	76			68
Total gross deferred tax liabilities	985			754
Valuation allowances – net operating loss carryforwards	327			285
Net deferred income tax asset (liability)	$	(53	)	$	11

At December 31, 2012, we had a total of $1.1 billion of foreign net operating loss carryforwards, of which $219 million will expire from 2013 through 2033. The balance will not expire due to indefinite expiration dates.

The following table presents a rollforward of our unrecognized tax benefits and associated interest and penalties.



Millions of dollars	Unrecognized Tax Benefits				Interest and Penalties
Balance at January 1, 2010	$	263			$	29
Change in prior year tax positions	(74		)		7
Change in current year tax positions	19				2
Cash settlements with taxing authorities	(28		)		(5		)
Lapse of statute of limitations	(3		)		(1		)
Balance at December 31, 2010	$	177			$	32
Change in prior year tax positions	38				41
Change in current year tax positions	5				1
Cash settlements with taxing authorities	(12		)		(3		)
Lapse of statute of limitations	(3		)		(2		)
Balance at December 31, 2011	$	205		(a)	$	69
Change in prior year tax positions	16				(1		)
Change in current year tax positions	14				1
Cash settlements with taxing authorities	(3		)		—
Lapse of statute of limitations	(4		)		(1		)
Balance at December 31, 2012	$	228		(a)(b)	$	68

(a)

Includes $59 million as of December 31, 2012 and $67 million as of December 31, 2011 in amounts to be settled in accordance with our Tax Sharing Agreement with KBR and foreign unrecognized tax benefits that would give rise to a United States tax credit. See Note 7 for further information. The remaining balance of $169 million as of December 31, 2012 and $138 million as of December 31, 2011, if resolved in our favor, would positively impact the effective tax rate and, therefore, be recognized as additional tax benefits in our statement of operations.


(b)	Includes $43 million that could be resolved within the next 12 months.

We file income tax returns in the United States federal jurisdiction and in various states and foreign jurisdictions. In most cases, we are no longer subject to state, local, or non-United States income tax examination by tax authorities for years before 2005. Tax filings of our subsidiaries, unconsolidated affiliates, and related entities are routinely examined in the normal course of business by tax authorities. Currently, our United States federal tax filings for tax years 2010 and 2011 are open for review but no examination has been initiated.