Income Taxes

12 Months Ended

Dec. 29, 2012

Income Taxes [Abstract]

Income Taxes [Text Block]

NOTE 11

INCOME TAXES

The components of income before income taxes and the provision for income taxes were as follows:

(millions)				2012		2011		2010
Income before income taxes
	United States		$	1,008	$	935	$	1,262
	Foreign			317		249		528
				1,325		1,184		1,790
Income taxes
	Currently payable
		Federal		383		285		97
		State		34		26		10
		Foreign		105		108		129
				522		419		236
	Deferred
		Federal		(129)		(57)		235
		State		8		3		26
		Foreign		(38)		(45)		13
				(159)		(99)		274
Total income taxes			$	363	$	320	$	510

The difference between the U.S. federal statutory tax rate and the Company's effective income tax rate was:

	2012		2011		2010
U.S. statutory income tax rate	35.0	%	35.0	%	35.0	%
Foreign rates varying from 35%	(4.4)		(4.9)		(4.4)
State income taxes, net of federal benefit	2.1		1.6		1.4
Cost (benefit) of remitted and unremitted foreign earnings	(1.8)		(1.8)		0.9
Tax audit activity	0.0		(0.5)		(1.6)
Net change in valuation allowances	0.8		0.9		0.5
Statutory rate changes, deferred tax impact	(0.3)		(0.5)		0.0
U.S. deduction for qualified production activities	(2.1)		(1.8)		(1.1)
Other	(1.9)		(1.0)		(2.2)
Effective income tax rate	27.4	%	27.0	%	28.5	%

As presented in the preceding table, the Company's 2012 consolidated effective tax rate was 27.4%, as compared to 27.0% in 2011 and 28.5% in 2010. The 2012 effective income tax rate benefited from the elimination of a tax liability related to certain international earnings now considered indefinitely reinvested.

As of December 29, 2012, the Company had recorded a deferred tax liability of $5 million related to $258 million of earnings. Accumulated foreign earnings of approximately $1.7 billion, primarily in Europe, were considered indefinitely reinvested. Accordingly, deferred income taxes have not been provided on these earnings and it is not practical to estimate the deferred tax impact of those earnings.

The 2011 effective income tax rate benefited from an international legal restructuring reflected in the cost (benefit) of remitted and unremitted foreign earnings. During the third quarter of 2011, the Company recorded a benefit of $7 million from the decrease in the statutory rate in the United Kingdom.

The 2010 effective income tax rate was impacted primarily by the remeasurement of liabilities for uncertain tax positions. Authoritative guidance related to liabilities for uncertain tax positions requires the Company to remeasure its liabilities for uncertain tax positions based on information obtained during the period, including interactions with tax authorities. Based on these interactions with tax authorities in various state and foreign jurisdictions, the Company reduced certain liabilities for uncertain tax positions by $42 million and increased others by $13 million in 2010. The other line item contains the benefit from an immaterial correction of an item related to prior years that was booked in the first quarter of 2010, as well as the U.S. research and development tax credit.

Changes in valuation allowances on deferred tax assets and the corresponding impacts on the effective income tax rate result from management's assessment of the Company's ability to utilize certain future tax deductions, operating losses and tax credit carryforwards prior to expiration. Valuation allowances were recorded to reduce deferred tax assets to an amount that will, more likely than not, be realized in the future. The total tax benefit of carryforwards at year-end 2012 and 2011 were 61 million and 41million, respectively, with related valuation allowances at year-end 2012 and 2011 of $50 and $38 million. Of the total carryforwards at year-end 2012, $3 million expire in 2014, $3 million in 2015and the remainder expiring thereafter.

The following table provides an analysis of the Company's deferred tax assets and liabilities as of year-end 2012 and 2011. Deferred tax assets on employee benefits increased in 2012 due to discount rate reductions associated with the Company's pension and postretirement plans. Additionally, the deferred tax liability for unremitted foreign earnings decreased by $20 million due to foreign earnings considered to be permanently reinvested.

		Deferred tax assets				Deferred tax liabilities
(millions)		2012		2011		2012		2011
U.S. state income taxes	$	7	$	8	$	63	$	85
Advertising and promotion-related		23		22		-		-
Wages and payroll taxes		26		29		-		-
Inventory valuation		22		26		-		-
Employee benefits		426		306		-		-
Operating loss and credit carryforwards		61		41		-		-
Hedging transactions		2		3		-		-
Depreciation and asset disposals		-		-		386		365
Capitalized interest		-		-		-		2
Trademarks and other intangibles		-		-		496		477
Deferred compensation		39		39		-		-
Stock options		51		48		-		-
Unremitted foreign earnings		-		-		5		25
Other		90		53		-		-
		747		575		950		954
Less valuation allowance		(59)		(46)		-		-
Total deferred taxes	$	688	$	529	$	950	$	954
Net deferred tax asset (liability)	$	(262)	$	(425)
Classified in balance sheet as:
Other current assets	$	159	$	149
Other current liabilities		(8)		(7)
Other assets		110		76
Other liabilities		(523)		(643)
Net deferred tax asset (liability)	$	(262)	$	(425)

The change in valuation allowance reducing deferred tax assets was:

(millions)		2012		2011		2010
Balance at beginning of year	$	46	$	36	$	28
Additions charged to income tax expense		12		12		11
Reductions credited to income tax expense		-		(1)		(2)
Currency translation adjustments		1		(1)		(1)
Balance at end of year	$	59	$	46	$	36

Cash paid for income taxes was (in millions): 2012–$508; 2011–$271; 2010–$409. Income tax benefits realized from stock option exercises and deductibility of other equity-based awards are presented in Note 7.

Uncertain tax positions

The Company is subject to federal income taxes in the U.S. as well as various state, local, and foreign jurisdictions. The Company's annual provision for U.S. federal income taxes represents approximately 70% of the Company's consolidated income tax provision. The Company was chosen to participate in the Internal Revenue Service (IRS) Compliance Assurance Program (CAP) beginning with the 2008 tax year. As a result, with limited exceptions, the Company is no longer subject to U.S. federal examinations by the IRS for years prior to 2012. The Company is under examination for income and non-income tax filings in various state and foreign jurisdictions. Spanish tax authorities have issued assessments for the 2005 and 2006 tax years related to intercompany activity. The Company has appealed to the Spanish tax court and does not anticipate the resolution will have a material impact to its financial position.

As of December 29, 2012, the Company has classified $21 million of unrecognized tax benefits as a current liability. Management's estimate of reasonably possible changes in unrecognized tax benefits during the next twelve months is comprised of the current liability balance expected to be settled within one year, offset by approximately $9 million of projected additions related primarily to ongoing intercompany transfer pricing activity. Management is currently unaware of any issues under review that could result in significant additional payments, accruals, or other material deviation in this estimate.

Following is a reconciliation of the Company's total gross unrecognized tax benefits as of the years ended December 29, 2012, December 31, 2011 and January 1, 2011. For the 2012 year, approximately $59 million represents the amount that, if recognized, would affect the Company's effective income tax rate in future periods.

(millions)			2012		2011		2010
Balance at beginning of year		$	66	$	104	$	130
Tax positions related to current year:
	Additions		8		7		12
Tax positions related to prior years:
	Additions		14		8		13
	Reductions		(4)		(19)		(42)
Settlements			(1)		(27)		(6)
Lapses in statutes of limitation			(3)		(7)		(3)
Balance at end of year		$	80	$	66	$	104

For the year ended December 29, 2012, the Company recognized an increase of $4million of tax-related interest and penalties and had $19 million accrued at year end. For the year ended December 31, 2011, the Company recognized a decrease of $3 million of tax-related interest and penalties and had approximately $16 million accrued atDecember 31, 2011. For the year ended January 1, 2011, the Company recognized an increase of $2 million of tax-related interest and penalties and had approximately $26 million accrued at January 1, 2011.