NCOME TAXES

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



(In millions)	Foreign			U.S.				Total
2014:
Current		$	995		$	84			$	1,079
Deferred		125			336				461
Total income tax expense		$	1,120		$	420			$	1,540
2013:
Current		$	934		$	302			$	1,236
Deferred		299			123				422
Total income tax expense		$	1,233		$	425			$	1,658
2012:
Current		$	513		$	303			$	816
Deferred		950			(330		)		620
Total income tax expense		$	1,463		$	(27	)		$	1,436

Japan 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% became effective January 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)	2014				2013				2012
Income taxes based on U.S. statutory rates		$	1,572			$	1,685			$	1,506
Utilization of foreign tax credit		(32		)		(37		)		(53		)
Nondeductible expenses		5				6				8
Other, net		(5		)		4				(25		)
Income tax expense		$	1,540			$	1,658			$	1,436

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



(In millions)	2014				2013				2012
Statements of earnings		$	1,540			$	1,658			$	1,436
Other comprehensive income (loss):
Unrealized foreign currency translation gains (losses) during period		(419		)		253				363
Unrealized gains (losses) on investment securities:
Unrealized holding gains (losses) on investment securities during period		2,237				(904		)		904
Reclassification adjustment for realized (gains) losses on investment securities included in net earnings		19				19				(174		)
Unrealized gains (losses) on derivatives during period		(3		)		(4		)		(8		)
Pension liability adjustment during period		(31		)		55				(7		)
Total income tax expense (benefit) related to items of other comprehensive income (loss)		1,803				(581		)		1,078
Additional paid-in capital (exercise of stock options)		(7		)		(8		)		(12		)
Total income taxes		$	3,336			$	1,069			$	2,502

The tax effect on other comprehensive income (loss) shown in the table above included a deferred income tax expense of $614 million in 2013 and $492 million in 2012, related to certain dollar-denominated investments that Aflac Japan maintained on behalf of Aflac U.S. As discussed in Note 1, prior to October 1, 2013, there was no translation adjustment to record in pretax other comprehensive income for the portfolio when the yen/dollar exchange rate changed, however deferred tax expense or benefit associated with the foreign exchange translation gains or losses on these dollar-denominated investments is recognized in total income tax expense on other comprehensive income until the securities mature or are sold. Excluding the tax amounts for these dollar-denominated investments from total taxes on other comprehensive income would result in an effective income tax rate on pretax other comprehensive income (loss) of 31% in 2013 and 32% in 2012.

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)	2014			2013
Deferred income tax liabilities:
Deferred policy acquisition costs		$	2,209		$	2,406
Unrealized gains on investment securities		2,584			533
Premiums receivable		139			134
Policy benefit reserves		1,376			1,451
Depreciation		51			54
Other		20			22
Total deferred income tax liabilities		6,379			4,600
Deferred income tax assets:
Other basis differences in investment securities		1,331			1,129
Unfunded retirement benefits		16			16
Other accrued expenses		4			23
Policy and contract claims		99			111
Foreign currency loss on Japan branch		327			189
Deferred compensation		226			182
Capital loss carryforwards		26			514
Total deferred income tax assets		2,029			2,164
Net deferred income tax liability		4,350			2,436
Current income tax liability		943			1,282
Total income tax liability		$	5,293		$	3,718

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 $18 million, $17 million, $2 million and $1 million expiring in 2031, 2032, 2033 and 2034, respectively, and no tax credit carryforwards available at December 31, 2014. The Company has capital loss carryforwards of $73 million available to offset capital gains, which expire in 2016.

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 2011.

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



(In millions)	2014			2013
Balance, beginning of year	$	328		$	401
Additions for tax positions of prior years	2			1
Reductions for tax positions of prior years	(21		)	(74		)
Balance, end of year	$	309		$	328

Included in the balance of the liability for unrecognized tax benefits at December 31, 2014, are $307 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 $327 million at December 31, 2013. 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, 2014, 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 $11 million in interest and penalties in 2014 and 2013, and $7 million in 2012. The Company has accrued approximately $30 million for the payment of interest and penalties as of December 31, 2014, compared with $26 million a year ago.

As of December 31, 2014, 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.