Income Taxes

Income (loss) from continuing operations before income taxes and equity income as reported in the Consolidated Statements of Operations consists of the following:



(In thousands)	2013			2012			2011
United States	$	(26,855	)	$	40,411		$	47,680
International	(156,477		)	(258,906		)	(6,015		)
Total income (loss) before income taxes and equity income	$	(183,332	)	$	(218,495	)	$	41,665

Income tax expense as reported in the Consolidated Statements of Operations consists of the following:



(In thousands)	2013			2012			2011
Income tax expense (benefit):
Currently payable:
U.S. federal	$	10,949		$	22,603		$	4,249
U.S. state	1,375			1,561			913
International	41,015			21,795			23,860
Total income taxes currently payable	53,339			45,959			29,022
Deferred U.S. federal	(17,341		)	(3,831		)	670
Deferred U.S. state	401			(843		)	503
Deferred international	(1,487		)	(6,034		)	19,653
Total income tax expense	$	34,912		$	35,251		$	49,848

Cash payments for income taxes, including taxes on the gain or loss from discontinued business, were $44.4 million, $42.6 million and $42.3 million for 2013, 2012 and 2011, respectively.

The following is a reconciliation of the normal expected statutory U.S. federal income tax rate to the effective income tax rate as a percentage of Income (loss) from continuing operations before income taxes and equity income as reported in the Consolidated Statements of Operations:



	2013		2012		2011
U.S. federal income tax rate	35.0	%	35.0	%	35.0	%
U.S. state income taxes, net of federal income tax benefit	0.5		(0.1	)	2.9
U.S. domestic manufacturing deductions and credits	2.6		1.7		(9.6	)
Tax costs of repatriation from the Infrastructure transaction	(7.2	)	—		—
Difference in effective tax rates on international earnings and remittances	0.2		(0.7	)	(11.7	)
Uncertain tax position contingencies and settlements	3.0		2.5		(18.0	)
Changes in realization on beginning of the year deferred tax assets	(11.0	)	(1.8	)	89.1
Restructuring charges with no realizable tax benefits	—		(9.8	)	23.0
U.S. nondeductible items	(1.6	)	(0.7	)	6.0
Loss from disposal from the Infrastructure transaction	(40.9	)	—		—
Non-deductible goodwill impairment	—		(42.5	)	—
Cumulative effect of change in statutory tax rates/laws	0.3		0.1		3.5
Other, net	0.1		0.2		(0.6	)
Effective income tax rate	(19.0	)%	(16.1	)%	119.6	%

The effective income tax rate changed between 2013 and 2012 primarily due to the jurisdictional mix of the $271.3 million estimated loss on disposal of Harsco Infrastructure Segment recorded in 2013 on the Infrastructure transaction compared with $265.0 million non-deductible goodwill impairment charges recorded during 2012, tax expense recorded for valuation allowances on deferred tax assets within certain foreign jurisdictions that Infrastructure operates, and for the tax costs of repatriation from the Infrastructure transaction. The effective income tax rate changed between 2012 and 2011 primarily due to lower earnings from continuing operations, a non-deductible goodwill impairment charge of $265.0 million for which the Company has no tax basis as a result of historical stock acquisitions, and a change in the realizability of beginning of the year deferred tax assets of $37.3 million primarily related to the Company's U.K. deferred tax assets on its U.K. pension obligations recorded in 2011 and not repeated in 2012.

The tax effects of the temporary differences giving rise to the Company's deferred tax assets and liabilities at December 31, 2013 and 2012 are as follows:



	2013					2012
(In thousands)	Asset			Liability		Asset			Liability
Depreciation and amortization	$	—		$	35,378	$	—		$	99,219
Expense accruals	28,550			—		38,595			—
Inventories	3,592			—		2,649			—
Provision for receivables	752			—		1,677			—
Deferred revenue	—			1,764		—			2,014
Operating loss carryforwards	86,236			—		99,475			—
Foreign tax credit carryforwards	16,085			—		24,223			—
Capital loss carryforwards	3,177			—		—			—
Pensions	81,564			—		104,413			—
Currency adjustments	27,536			—		26,661			—
Equity investment in Infrastructure strategic venture	—			28,965		—			—
Unit adjustment liability	39,335			—		—			—
Post-retirement benefits	1,013			—		1,160			—
Other	6,159			—		25,324			—
Subtotal	293,999			66,107		324,177			101,233
Valuation allowance	(127,164		)	—		(126,532		)	—
Total deferred income taxes	$	166,835		$	66,107	$	197,645		$	101,233

The deferred tax asset and liability balances recognized on the Consolidated Balance Sheets at December 31, 2013 and 2012 are as follows:



(In thousands)	2013		2012
Other current assets	$	44,315	$	45,672
Other assets	65,105		70,271
Other current liabilities	475		651
Deferred income taxes	8,217		18,880

At December 31, 2013, the tax-effected amount of net operating loss carryforwards ("NOLs") totaled $86.2 million. Tax-effected NOLs from international operations are $77.4 million. Of that amount, $55.5 million can be carried forward indefinitely, and $21.9 million will expire at various times between 2014 and 2031. Tax-effected U.S. state NOLs are $8.8 million. Of that amount, $0.2 million expire at various times between 2014 and 2018, $3.6 million expire at various times between 2019 and 2023, $2.1 million expire at various times between 2024 and 2028, and $2.9 million expire at various times between 2029 and 2033. At December 31, 2013, the tax-effected amount of capital loss carryforwards totaled $3.2 million which expire in 2018.

The valuation allowances of $127.2 million and $126.5 million at December 31, 2013 and 2012, respectively, related principally to deferred tax assets for U.K. pension liabilities, NOLs, capital losses, currency translation and foreign investment tax credits that are uncertain as to realizability. In 2013, the Company recorded a net increase in the valuation allowance of $9.4 million related to the Infrastructure transaction and $7.1 million related to losses in certain jurisdictions that the Company determined it is more-likely-than not that these assets will not be realized. This was offset by a $15.8 million reduction in valuation allowance related to U.K. pension and currency translation adjustments recorded through Accumulated other comprehensive loss. Additionally in 2012, due to the negative financial performance of the Company's U.K. operations and restructuring charges, the Company recorded a non-cash tax expense of approximately $6.1 million to recognize a valuation allowance to fully offset the U.K. operations' net deferred tax assets primarily related to U.K. pension liabilities and losses from operations, as the Company determined it is more-likely-than-not that these assets will not be realized.

The Company has not provided U.S. income taxes on certain of its non-U.S. subsidiaries' undistributed earnings as such amounts are indefinitely reinvested outside the United States. At December 31, 2013 and 2012, such earnings were approximately $815 million and $882 million, respectively. If these earnings were repatriated at December 31, 2013, the one-time tax cost associated with the repatriation would be approximately $159 million.

The Company had a tax holiday in Asia that expired in 2012. The Company no longer has tax holidays in Europe and the Middle East as they have all expired. During 2011, tax holidays in Asia, Europe and the Middle East resulted in a reduction of $0.1 million in income tax expense, while during 2012 and 2013 these tax holidays resulted in no change to income tax expense.

The Company recognizes accrued interest and penalty expense related to unrecognized income tax benefits in income tax expense. During 2013, 2012 and 2011, the Company recognized an income tax benefit of $3.1 million, $1.8 million and $1.0 million, respectively, for interest and penalties. The Company has accrued $4.9 million and $8.0 million for the payment of interest and penalties at December 31, 2013 and 2012, respectively.

A reconciliation of the change in the unrecognized income tax benefits balance from January 1, 2011 to December 31, 2013 is as follows:



(In thousands)	Unrecognized Income Tax Benefits			Deferred Income Tax Benefits			Unrecognized Income Tax Benefits, Net of Deferred Income Tax Benefits
Balances, January 1, 2011	$	35,889		$	(738	)	$	35,151
Additions for tax positions related to the current year (includes currency translation adjustment)	2,534			(10		)	2,524
Additions for tax positions related to prior years (includes currency translation adjustment)	4,014			(11		)	4,003
Other reductions for tax positions related to prior years	(147		)	—			(147		)
Statutes of limitation expirations	(8,521		)	224			(8,297		)
Settlements	(361		)	18			(343		)
Balance at December 31, 2011	$	33,408		$	(517	)	$	32,891
Additions for tax positions related to the current year (includes currency translation adjustment)	584			(8		)	576
Additions for tax positions related to prior years (includes currency translation adjustment)	37			2			39
Other reductions for tax positions related to prior years	(3,987		)	—			(3,987		)
Statutes of limitation expirations	(5,124		)	154			(4,970		)
Settlements	—			—			—
Balance at December 31, 2012	$	24,918		$	(369	)	$	24,549
Additions for tax positions related to the current year (includes currency translation adjustment)	500			(5		)	495
Additions for tax positions related to prior years (includes currency translation adjustment)	145			(4		)	141
Other reductions for tax positions related to prior years	(3,050		)	—			(3,050		)
Statutes of limitation expirations	(3,348		)	180			(3,168		)
Settlements	(1,616		)	—			(1,616		)
Total unrecognized income tax benefits that, if recognized, would impact the effective income tax rate at December 31, 2013	$	17,549		$	(198	)	$	17,351

Included in the additions for tax positions related to the current year for 2013 is approximately $0.1 million of unrecognized tax benefits that created additional operating losses in a foreign jurisdiction. To the extent the unrecognized tax benefit is recognized, a full valuation allowance would be recorded against these operating losses.

Included in the other reductions for tax positions related to prior years for 2013 is $3.1 million of previously unrecognized tax benefits, of which $1.5 million were recognized in 2013 as a result of closure of various foreign income tax examinations, $1.4 million were transferred as part of the Infrastructure transaction and $0.2 million related to adjustments to other prior year tax positions. These benefits were previously deemed to not meet the more-likely-than-not standard.

Within the next twelve months, it is reasonably possible that up to $2.3 million of unrecognized income tax benefits will be recognized upon settlement of tax examinations and the expiration of various statutes of limitations

The Company files its income tax returns as prescribed by the tax laws of the jurisdictions in which it operates. With few exceptions, the Company is no longer subject to U.S and international income tax examinations by tax authorities through 2006.

The Company was contacted by the U.S. Internal Revenue Service to audit the Company's 2010 income tax return. The Internal Revenue Service commenced its audit during the second quarter of 2013.