INCOME TAXES

The components of income tax expense (benefit) applicable to pretax earnings for the years ended December 31 were as follows:



(In millions)	Japan				U.S.				Total
2012:
Current		$	513			$	303			$	816
Deferred		950				(330		)		620
Total income tax expense		$	1,463			$	(27	)		$	1,436
2011:
Current		$	358			$	533			$	891
Deferred		(301		)		423				122
Total income tax expense		$	57			$	956			$	1,013
2010:
Current		$	513			$	349			$	862
Deferred		538				(167		)		371
Total income tax expense		$	1,051			$	182			$	1,233

Prior-year amounts have been adjusted for the adoption of accounting guidance on January 1, 2012 related to deferred policy acquisition costs.

Japan has enacted an income tax rate reduction effective for fiscal years beginning after March 31, 2012. The rate was reduced to 33.3% effective April 1, 2012, and an additional reduction to 30.8% will be effective April 1, 2015. The estimated reversal of the temporary differences resulted in a decrease to deferred taxes in Japan of $744 million and a corresponding increase in U.S. deferred taxes, due to the loss of foreign tax credits, of $744 million as of December 31, 2011. Based on the actual reversal pattern of these temporary differences, we revised our estimate of the impact of the tax rate reduction, resulting in an increase to deferred taxes in Japan of $374 million and a corresponding decrease in U.S. deferred taxes of $374 million as of December 31, 2012.

Income tax expense in the accompanying statements of earnings varies from the amount computed by applying the expected U.S. tax rate of 35% to pretax earnings. The principal reasons for the differences and the related tax effects for the years ended December 31 were as follows:



(In millions)	2012				2011				2010
Income taxes based on U.S. statutory rates		$	1,506			$	1,032			$	1,247
Utilization of foreign tax credit		(53		)		(36		)		(31		)
Nondeductible expenses		8				10				10
Other, net		(25		)		7				7
Income tax expense		$	1,436			$	1,013			$	1,233

Prior-year amounts have been adjusted for the adoption of accounting guidance on January 1, 2012 related to deferred policy acquisition costs.

Total income tax expense for the years ended December 31 was allocated as follows:



(In millions)	2012				2011				2010
Statements of earnings		$	1,436			$	1,013			$	1,233
Other comprehensive income (loss):
Unrealized foreign currency translation gains (losses) during period		363				(185		)		(339		)
Unrealized gains (losses) on investment securities:
Unrealized holding gains (losses) on investment securities during period		904				1,016				447
Reclassification adjustment for realized (gains) losses on investment securities included in net earnings		(174		)		(404		)		(147		)
Unrealized gains (losses) on derivatives during period		(8		)		(12		)		18
Pension liability adjustment during period		(7		)		(23		)		(11		)
Total income tax expense (benefit) related to items of other comprehensive income (loss)		1,078				392				(32		)
Additional paid-in capital (exercise of stock options)		(12		)		(7		)		(31		)
Cumulative effect of change in accounting principle		0				0				(89		)
Total income taxes		$	2,502			$	1,398			$	1,081

Prior-year amounts have been adjusted for the adoption of accounting guidance on January 1, 2012 related to deferred policy acquisition costs.

The tax effect on other comprehensive income (loss) shown in the table above included a deferred income tax expense of $492 million in 2012, compared with a deferred income tax benefit of $152 million in 2011 and $322 million in 2010, related to the dollar-denominated investment portfolio that Aflac Japan maintains on behalf of Aflac U.S. As discussed in Note 1, there is no translation adjustment to record in pretax other comprehensive income for the portfolio when the yen/dollar exchange rate changes, however deferred tax expense or benefit associated with the foreign exchange translation gains or losses on this dollar-denominated portfolio is recognized in total income tax expense on other comprehensive income until the securities mature or are sold. Excluding the tax amounts for this dollar-denominated investment portfolio from total taxes on other comprehensive income would result in an effective income tax rate on pretax other comprehensive income (loss) of 32% in 2012, 34% in 2011, and 32% in 2010.

The income tax effects of the temporary differences that gave rise to deferred income tax assets and liabilities as of December 31 were as follows:



(In millions)	2012			2011
Deferred income tax liabilities:
Deferred policy acquisition costs		$	2,731		$	2,799
Unrealized gains on investment securities		1,522			397
Policyholder protection corporation obligation		10			0
Difference in tax basis of investment in Aflac Japan		288			0
Premiums receivable		164			153
Policy benefit reserves		1,995			1,896
Total deferred income tax liabilities		6,710			5,245
Deferred income tax assets:
Depreciation		124			134
Policyholder protection corporation obligation		0			5
Difference in tax basis of investment in Aflac Japan		0			47
Other basis differences in investment securities		1,471			1,363
Unfunded retirement benefits		45			44
Other accrued expenses		60			64
Policy and contract claims		67			106
Unrealized exchange loss on yen-denominated notes payable		36			124
Deferred compensation		203			201
Capital loss carryforwards		716			784
Other		438			405
Total deferred income tax assets		3,160			3,277
Net deferred income tax liability		3,550			1,968
Current income tax liability		308			340
Total income tax liability		$	3,858		$	2,308

Prior-year amounts have been adjusted for the adoption of accounting guidance on January 1, 2012 related to deferred policy acquisition costs.

Under U.S. income tax rules, only 35% of non-life operating losses can be offset against life insurance taxable income each year. For current U.S. income tax purposes, there were non-life operating loss carryforwards of $22 million, $38 million and $83 million expiring in 2030, 2031 and 2032, respectively, and no tax credit carryforwards available at December 31, 2012. The Company has capital loss carryforwards of $2,045 million available to offset capital gains, of which $3 million expires in 2013, $181 million expires in 2014, $550 million expires in 2015, and $1,311 million expires in 2016. There were no capital loss carryforwards that expired in 2012.

We file federal income tax returns in the United States and Japan as well as state or prefecture income tax returns in various jurisdictions in the two countries. U.S. federal income tax returns for years before 2010 are no longer subject to examination. In Japan, the National Tax Agency (NTA) has completed exams through tax year 2008.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows for the years ended December 31:



(In millions)	2012				2011
Balance, beginning of year	$	31		⁽¹⁾	$	24	⁽¹⁾
Additions for tax positions of prior years	7				7
Settlements	(3		)		0
Reductions for tax positions of prior years	(14		)		0
Balance, end of year	$	21		⁽¹⁾	$	31	⁽¹⁾

⁽¹⁾Amounts do not include tax deductions of $7 at December 31, 2012, $10 at December 31, 2011, and $8 at January 1, 2011.

Included in the balance of the liability for unrecognized tax benefits at December 31, 2012, are $21 million of tax positions for which the ultimate deductibility is highly certain, but for which there is uncertainty about the timing of such deductibility, compared with $31 million at December 31, 2011. Because of the impact of deferred tax accounting, other than interest and penalties, the disallowance of the shorter deductibility period would not affect the annual effective tax rate, but would accelerate the payment of cash to the taxing authority to an earlier period. The Company has accrued approximately $2 million as of December 31, 2012, for permanent uncertainties, which if reversed would not have a material effect on the annual effective rate.

The Company recognizes accrued interest and penalties related to unrecognized tax benefits in income tax expense. We recognized approximately $7 million in interest and penalties in 2012, compared with $5 million in 2011 and $3 million in 2010. The Company has accrued approximately $12 million for the payment of interest and penalties as of December 31, 2012, compared with $19 million a year ago.

As of December 31, 2012, there were no material uncertain tax positions for which the total amounts of unrecognized tax benefits will significantly increase or decrease within the next 12 months.