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Income Taxes
 12 Months Ended
Dec. 31, 2014
Income Tax Disclosure [Abstract]  
Income Taxes
INCOME TAXES
Earnings before income taxes consisted of the following: 
 
December 31,
(DOLLARS IN THOUSANDS)
2014
 
2013
 
2012
U.S. income (loss) before taxes
$
17,650

 
$
(20,727
)
 
$
(21,308
)
Foreign income before taxes
531,411

 
505,937

 
464,723

Total income before taxes
$
549,061

 
$
485,210

 
$
443,415


The income tax provision consisted of the following: 
 
December 31,
(DOLLARS IN THOUSANDS)
2014
 
2013
 
2012
Current
 
 
 
 
 
Federal
$
1,175

 
$
8,658

 
$
8,280

State and local
264

 
1,246

 
(456
)
Foreign(1)
109,729

 
122,246

 
197,335

 
111,168

 
132,150

 
205,159

Deferred
 
 
 
 
 
Federal
20,795

 
(4,686
)
 
(4,650
)
State and local
113

 
262

 
(74
)
Foreign(1)
2,442

 
3,940

 
(11,154
)
 
23,350

 
(484
)
 
(15,878
)
Total income taxes
$
134,518

 
$
131,666

 
$
189,281

_______________________ 
(1) For the year ended December 31, 2012, the foreign current income tax provision includes $72 million of Spanish tax charges and $12 million of charges related to the Spanish dividend withholding cases. For the year ended December 31, 2012, the foreign deferred income tax provision includes an $11 million tax benefit from the corporate restructuring of certain foreign subsidiaries.








Effective Tax Rate Reconciliation
A reconciliation between the U.S. federal statutory income tax rate to our actual effective tax rate is as follows: 
 
December 31,
 
2014
 
2013
 
2012
Statutory tax rate
35.0
 %
 
35.0
 %
 
35.0
 %
Difference in effective tax rate on foreign earnings and remittances
(9.9
)
 
(10.2
)
 
(10.6
)
Unrecognized tax benefit, net of reversals
0.8

 
1.0

 
0.9

Corporate restructuring of certain foreign subsidiaries
—

 
—

 
(2.4
)
Spanish tax charges
—

 
1.3

 
16.3

Spanish dividend withholdings
(0.7
)
 
—

 
2.6

State and local taxes
0.1

 
0.2

 
(0.1
)
Other, net
(0.8
)
 
(0.2
)
 
1.0

Effective tax rate
24.5
 %
 
27.1
 %
 
42.7
 %


Our effective tax rate reflects the benefit from having significant operations outside the U.S. that are taxed at rates that are lower than the U.S. federal rate of 35%. Included in the 2014 effective tax rate is a $3.8 million tax benefit related to the reserve reversal for the 2001 Spanish dividend withholding tax case. Included in the 2013 effective tax rate is a $6.2 million tax charge related to the 2002-2003 Spanish income tax cases as discussed below. Included in the 2012 effective tax rate is $72.4 million of tax charges pursuant to the Spanish tax settlement. The 2014, 2013 and 2012 effective tax rates were also favorably impacted by the reversals of liabilities for uncertain tax positions of $2 million, $5 million and $1 million, respectively, principally due to statutory expiry and effective settlement.
Deferred Taxes
The deferred tax assets consist of the following amounts: 
 
December 31,
(DOLLARS IN THOUSANDS)
2014
 
2013
Employee and retiree benefits
$
164,542

 
$
136,370

Credit and net operating loss carryforwards(1)
180,296

 
311,562

Property, plant and equipment, net
(7,275
)
 
(699
)
Trademarks and other
149,695

 
189,536

Amortizable R&D expenses
48,982

 
42,303

Other, net
17,320

 
16,957

Gross deferred tax assets
553,560

 
696,029

Valuation allowance(1)
(355,568
)
 
(503,990
)
Total net deferred tax assets
$
197,992

 
$
192,039

_______________________ 
(1)
During 2014 and 2013, the Company decreased its deferred tax assets by $81 million and $30 million, respectively, relating to an adjustment to the 2013 and 2012 foreign net operating loss carryforwards, respectively. The entire decreases of $81 million and $30 million were offset by corresponding decreases in valuation allowances. These adjustments are not considered material to the previously issued financial statements.

Net operating loss carryforwards were $141 million and $264 million at December 31, 2014 and 2013, respectively. If unused, $5 million will expire between 2015 and 2034. The remainder, totaling $136 million, may be carried forward indefinitely. Tax credit carryforwards were $40 million and $48 million at December 31, 2014 and 2013, respectively. If unused, the credit carryforwards will expire between 2015 and 2034.
The U.S. consolidated group has historically generated taxable income after the inclusion of foreign dividends. As such, the Company is not in a federal net operating loss position. This allows IFF and its U.S. subsidiaries to realize tax benefits from the reversal of temporary differences and the utilization of its federal tax credits before the expiration of the applicable carryforward periods. The Company has not factored any future trends, other than inflation, in its U.S. taxable income projections. The corresponding U.S. federal taxable income is sufficient to realize $160.3 million in deferred tax assets as of December 31, 2014.

The majority of states in the U.S. where IFF and its subsidiaries file income tax returns allow a 100% foreign dividend exclusion, effectively converting the domestic companies’ reversing temporary differences into net operating losses. As there is significant doubt with respect to realizability of these net operating losses, we have established a full valuation allowance against these deferred tax assets.
Of the $181 million deferred tax asset for net operating loss carryforwards and credits at December 31, 2014, we consider it unlikely that a portion of the tax benefit will be realized. Accordingly, a valuation allowance of $138 million of net operating loss carryforwards and $8 million of tax credits has been established against these deferred tax assets, respectively. In addition, due to realizability concerns, we established a valuation allowance against certain other net deferred tax assets of $210 million.

Uncertain Tax Positions
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows: 
 
December 31,
(DOLLARS IN THOUSANDS)
2014
 
2013
 
2012
Balance of unrecognized tax benefits at beginning of year
$
21,553

 
$
41,153

 
$
67,615

Gross amount of increases in unrecognized tax benefits as a result of positions taken during a prior year
1,795

 
7,364

 
22,031

Gross amount of decreases in unrecognized tax benefits as a result of positions taken during a prior year
(823
)
 
(993
)
 
(1,853
)
Gross amount of increases in unrecognized tax benefits as a result of positions taken during the current year
5,378

 
4,951

 
3,854

The amounts of decreases in unrecognized benefits relating to settlements with taxing authorities
—

 
(26,712
)
 
(48,355
)
Reduction in unrecognized tax benefits due to the lapse of applicable statute of limitation
(4,848
)
 
(4,210
)
 
(2,139
)
Balance of unrecognized tax benefits at end of year
$
23,055

 
$
21,553

 
$
41,153


At December 31, 2014, 2013 and 2012, there are $22.3 million, $21.6 million, and $36.4 million, respectively, of unrecognized tax benefits recorded to Other liabilities and $0.7 million and $4.8 million recorded to Other current liabilities for 2014 and 2012, respectively. If these unrecognized tax benefits were recognized, all the benefits and related interest would be recorded as a benefit to income tax expense.

For the year ended December 31, 2014, the Company reduced its liabilities for interest and penalties by $0.1 million, net, and $5.2 million, net, and $5.3 million, net for the years ended 2013 and 2012, respectively, principally due to payments made pursuant to the Spanish tax settlement, as discussed below. At December 31, 2014, 2013 and 2012, we had accrued $1.7 million, $2.3 million and $7.4 million, respectively, of interest and penalties classified as Other liabilities and $0.5 million in 2014 recorded to Other current liabilities.
As of December 31, 2014, the Company’s aggregate provisions for uncertain tax positions, including interest and penalties, was $25.2 million, which includes $2.3 million associated with the tax positions taken by our Spanish subsidiaries for the 2002 fiscal year (as discussed below) and the remainder associated with various other tax positions asserted in foreign jurisdictions, none of which is individually material.

Other

Tax benefits credited to Shareholders’ equity totaled $0.2 million, $0.6 million and $0.4 million for 2014, 2013 and 2012, respectively, associated with stock option exercises and Purchased Restricted Stock ("PRS") dividends.
U.S. income taxes and foreign withholding taxes associated with the repatriation of earnings of its foreign subsidiaries were not provided on a cumulative total of $1.5 billion of undistributed earnings of foreign subsidiaries. We intend to, and have plans to, reinvest these earnings indefinitely in our foreign subsidiaries to fund local operations and/or capital projects. The unrecognized deferred tax liability on these undistributed earnings approximates $219 million.
The Company has ongoing income tax audits and legal proceedings which are at various stages of administrative or judicial review, of which the material items are discussed below. In addition, the Company has other ongoing tax audits and legal proceedings that relate to indirect taxes, such as value-added taxes, capital tax, sales and use and property taxes, which are discussed in Note 17.
Spanish Tax Items
During 2012 the Company and the Spanish tax authorities entered into an overall settlement with respect to assessments imposed in connection with audits for the 2004-2010 fiscal years. In connection with this settlement, the Company paid Euro 84.0 million ($105.5 million based on exchange rates at the respective payment dates) during 2012 and paid the remainder of Euro 1.5 million ($1.9 million based on the exchange rate at the payment date) in 2013. This settlement did not address either the 2002-2003 fiscal years or the 2011 fiscal year. Also during 2012, the Company and the Spanish tax authorities finalized a multi-year agreement that established the tax basis for the Company’s activities in Spain for 2012 through 2014 consistent with the key principles preliminarily agreed upon as part of the overall settlement.
During 2013, the Company reached a settlement with the Spanish tax authorities related to the 2011 fiscal year audit, on a basis consistent with the overall settlement reached for the 2004-2010 fiscal year audits, and paid Euro 3.9 million ($5.2 million based on the exchange rate at the payment date).
With respect to the audits of 2002-2003 fiscal years, the Spanish tax authorities imposed assessments aggregating Euro 22.4 million ($28.6 million), including aggregate estimated interest. The Company appealed these assessments, however, in February 2013, the Appellate Court upheld the administrative ruling with respect to the 2003 tax assessment and the related tax avoidance claims. The Company decided not to pursue the appeals process with respect to the 2003 tax assessment and paid Euro 20.8 million ($27.3 million based on the exchange rate at the respective payment dates) in connection with the 2003 tax assessment in 2013. In June 2013, the Appellate Court ruled against us on our appeal of the 2002 income tax assessment and related claims, which the Company also decided not to appeal. However, this case did not have a related tax exposure associated with it. In an unrelated matter, there was a remaining aggregate assessment related to the 2002 fiscal year of Euro 1.9 million ($2.3 million) as of December 31, 2014. To proceed with its appeal of the tax assessment for the 2002 fiscal year, the Company was required to post bank guarantees. As of December 31, 2014, the Company had remaining posted bank guarantees of Euro 1.9 million ($2.3 million) associated with the 2002 appeal. On February 11, 2015, the Company received a favorable ruling on this appeal.

In addition to the above, the Company has also been a party to four dividend withholding tax controversies in Spain in which the Spanish tax authorities alleged that the Company’s Spanish subsidiaries underpaid withholding taxes during the 1995-2001 fiscal years. The Company had previously appealed each of these controversies. During 2012, the Company received unfavorable decisions on the first three cases. As a result of these rulings, during 2012 the Company (i) recorded charges (including estimated interest) of approximately $12.0 million after-tax and (ii) made payments of Euro 9.8 million ($12.8 million based on exchange rate at the respective payment dates). At December 31, 2014, the Company had Euro 4.7 million ($5.6 million) reflected in income taxes payable in connection with these three cases. The fourth case was heard by the Spanish National High Court in October, 2014 and we received a favorable ruling. Accordingly, during the fourth quarter of 2014, we reversed the total reserve related to the 2001 fiscal year (with a value of Euro 3.6 million of $4.3 million). As of December 31, 2014, the Company had posted bank guarantees of Euro 4.7 million ($5.6 million) in order to proceed with the appeals of the interest portion of these three remaining controversies.
In addition, the Company has several other tax audits in process and has open tax years with various taxing jurisdictions that range primarily from 2004 to 2013. Based on currently available information, we do not believe the ultimate outcome of any of these tax audits and other tax positions related to open tax years, when finalized, will have a material impact on our financial position.