9. 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
2011:
Current		$358			$533			$891
Deferred		(290	)		427			137

Total income tax expense		$68			$960			$1,028

2010:
Current	$	513		$	349		$	862
Deferred		546			(167	)		379

Total income tax expense	$	1,059		$	182		$	1,241

2009:
Current	$	565		$	265		$	830
Deferred		62			(154	)		(92	)

Total income tax expense	$	627		$	111		$	738

Japan has enacted an income tax rate reduction effective for fiscal years beginning after March 31, 2012. The rate will be reduced to 33.3% effective April 1, 2012, with an additional reduction to 30.8% 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.

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)	2011			2010			2009
Income taxes based on U.S. statutory rates	$	1,047		$	1,255		$	782
Utilization of foreign tax credit		(36	)		(31	)		(29	)
Nondeductible expenses		10			10			11
Other, net		7			7			(26	)

Income tax expense	$	1,028		$	1,241		$	738

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


(In millions)	2011			2010			2009
Statements of earnings	$	1,028		$	1,241		$	738

Other comprehensive income (loss):
Unrealized foreign currency translation gains (losses) during period		(185	)		(339	)		39
Unrealized gains (losses) on investment securities:
Unrealized holding gains (losses) on investment securities during period		1,016			447			728
Reclassification adjustment for realized (gains) losses on investment securities included in net earnings		(404	)		(147	)		(424	)
Unrealized gains (losses) on derivatives during period		(12	)		18			0
Pension liability adjustment during period		(23	)		(11	)		8

Total income tax expense (benefit) related to items of other comprehensive income (loss)		392			(32	)		351

Additional paid-in capital (exercise of stock options)		(7	)		(31	)		(3	)
Cumulative effect of change in accounting principle		0			(89	)		0

Total income taxes	$	1,413		$	1,089		$	1,086

The tax effect on other comprehensive income (loss) shown in the table above included a deferred income tax benefit of $152 million in 2011, compared with a deferred income tax benefit of $322 million in 2010 and a deferred income tax expense of $12 million in 2009, 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 34% in 2011, 31% in 2010, and 35% in 2009.

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)	2011		2010
Deferred income tax liabilities:
Deferred policy acquisition costs	$	3,104	$	2,814
Unrealized gains on investment securities		397		114
Premiums receivable		153		151
Policy benefit reserves		1,896		1,583
Other		0		297

Total deferred income tax liabilities		5,550		4,959

Deferred income tax assets:
Depreciation		134		144
Policyholder protection corporation obligation		5		22
Difference in tax basis of investment in Aflac Japan		47		244
Other basis differences in investment securities		1,363		1,557
Unfunded retirement benefits		44		44
Other accrued expenses		64		70
Policy and contract claims		106		107
Unrealized exchange loss on yen-denominated notes payable		124		142
Deferred compensation		201		168
Capital loss carryforwards		784		374
Other		405		385

Total deferred income tax assets		3,277		3,257

Net deferred income tax liability		2,273		1,702
Current income tax liability		340		267

Total income tax liability	$	2,613	$	1,969

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 $17 million, $39 million and $34 million expiring in 2029, 2030 and 2031, respectively, and no tax credit carryforwards available at December 31, 2011. The Company has capital loss carryforwards of $2,240 million available to offset capital gains, of which $214 million expires in 2013, $299 million expires in 2014, $550 million expires in 2015, and $1,177 million expires in 2016. A total of $7 million in capital loss carryforwards expired in 2011.

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 and state income tax returns for years before 2008 are no longer subject to examination. In Japan, the National Tax Agency (NTA) has completed exams through tax year 2009.

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


(In millions)	2011			2010
Balance, beginning of year	$	24	⁽¹⁾	$	17	⁽¹⁾
Additions for tax positions of prior years		7			7
Settlements		0			0
Reductions for tax positions of prior years		0			0

Balance, end of year	$	31	⁽¹⁾	$	24	⁽¹⁾

⁽¹⁾

Amounts do not include tax deductions of $10 at December 31, 2011, $8 at December 31, 2010, and $6 at January 1, 2010.

Included in the balance of the liability for unrecognized tax benefits at December 31, 2011, are $31 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 $24 million at December 31, 2010. 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, 2011, 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 $5 million in interest and penalties in 2011, compared with $3 million in 2010 and $1 million in 2009. The Company has accrued approximately $19 million for the payment of interest and penalties as of December 31, 2011, compared with $14 million a year ago.

As of December 31, 2011, 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.