Income Taxes

An analysis of the provision for income taxes follows:



	Year Ended December 31
	2011			2010			2009
	(Millions of dollars)
Current income taxes:
United States	$	43		$	368		$	313
State	32			95			(5		)
Other countries	311			337			297
Total	386			800			605
Deferred income taxes:
United States	254			(15		)	99
State	29			(24		)	(5		)
Other countries	(9		)	27			47
Total	274			(12		)	141
Total provision for income taxes	$	660		$	788		$	746

Income before income taxes is earned in the following tax jurisdictions:



	Year Ended December 31
	2011		2010		2009
	(Millions of dollars)
United States	$	1,317	$	1,609	$	1,643
Other countries	866		941		933
Total income before income taxes	$	2,183	$	2,550	$	2,576

Deferred income tax assets (liabilities) are composed of the following:



	December 31
	2011			2010
	(Millions of dollars)
Net current deferred income tax asset attributable to:
Accrued expenses	$	109		$	103
Pension, postretirement and other employee benefits	87			82
Other	(9		)	2
Net current deferred income tax asset included in other current assets	$	187		$	187
Net current deferred income tax liability included in accrued expenses	$	(26	)	$	(28	)
Net noncurrent deferred income tax asset attributable to:
Tax credits and loss carryforwards	$	414		$	447
Pension and other postretirement benefits	69			153
Other	10			(55		)
Valuation allowances	(195		)	(233		)
Net noncurrent deferred income tax asset included in other assets	$	298		$	312
Net noncurrent deferred income tax liability attributable to:
Property, plant and equipment, net	$	(1,176	)	$	(1,081	)
Pension, postretirement and other employee benefits	514			550
Tax credits and loss carryforwards	343			447
Installment sales	(118		)	(112		)
Other	(46		)	(173		)
Net noncurrent deferred income tax liability included in other liabilities	$	(483	)	$	(369	)

Valuation allowances decreased $58 million in 2011 and increased $43 million in 2010, of which $36 million and $25 million impacted 2011 and 2010 earnings, respectively. Total valuation allowances were$229 million and $287 million at December 31, 2011 and 2010, respectively. Valuation allowances at the end of 2011 primarily relate to tax credits and income tax loss carryforwards of $1.2 billion. If these items are not utilized against taxable income, $532 million of the loss carryforwards will expire from 2012 through 2031. The remaining $656 million has no expiration date.

Realization of income tax loss carryforwards is dependent on generating sufficient taxable income prior to expiration of these carryforwards. Although realization is not assured, we believe it is more likely than not that all of the deferred tax assets, net of applicable valuation allowances, will be realized. The amount of the deferred tax assets considered realizable could be reduced or increased due to changes in the tax environment or if estimates of future taxable income change during the carryforward period.

Presented below is a reconciliation of the income tax provision computed at the U.S. federal statutory tax rate to the actual effective provision for income taxes:



	Year Ended December 31
	2011		2010		2009

Tax at U.S. statutory rate applied to income before income taxes	35.0	%	35.0	%	35.0	%
State income taxes, net of federal tax benefit	1.8		1.8		(0.3	)
Statutory rates other than U.S. statutory rate	(2.3	)	(3.0	)	(2.4	)
Other - net^(a)	(4.3	)	(2.9	)	(3.3	)
Effective income tax rate	30.2	%	30.9	%	29.0	%


^(a)	Other-net is comprised of numerous items, none of which is greater than 1.75 percent of income before income taxes.

At December 31, 2011, U.S. income taxes and foreign withholding taxes have not been provided on $8.4 billion of unremitted earnings of subsidiaries operating outside the U.S. These earnings, which are considered to be invested indefinitely, would become subject to income tax if they were remitted as dividends, were lent to one of our U.S. entities, or if we were to sell our stock in the subsidiaries. Determination of the amount of unrecognized deferred U.S. income tax liability on these unremitted earnings is not practicable because of the complexities associated with this hypothetical calculation. We do not expect restrictions or taxes on repatriation of cash held outside of the United States to have a material effect on our overall liquidity, financial condition or results of operations in the foreseeable future.

Accounting for Uncertainty in Income Taxes

Presented below is a reconciliation of the beginning and ending amounts of unrecognized income tax benefits:



	2011			2010			2009
	(Millions of dollars)
Balance at January 1	$	568		$	570		$	438
Gross increases for tax positions of prior years	17			67			139
Gross decreases for tax positions of prior years	(60		)	(89		)	(77		)
Gross increases for tax positions of the current year	55			54			113
Settlements	(15		)	(36		)	(39		)
Lapse of statute of limitations	(4		)	—			(10		)
Currency	(3		)	2			6
Balance at December 31	$	558		$	568		$	570

Of the amounts recorded as unrecognized tax benefits at December 31, 2011, 2010 and 2009, $383 million, $474 million and $488 million would reduce our effective tax rate if recognized.

We recognize accrued interest and penalties related to unrecognized tax benefits in income tax expense. During the years ended December 31, 2011, 2010 and 2009, we recognized a net cost of $9 million, $8 million and $2 million, respectively, in interest and penalties. Total accrued penalties and net accrued interest was $25 million and $15 million at December 31, 2011 and 2010, respectively.

It is reasonably possible that a number of uncertainties could be resolved within the next 12 months. The most significant uncertainties involve certain financing structures and tax credits. Various other uncertain tax positions also may be resolved. It is reasonably possible the aggregate resolution of the uncertainties could be up to $200 million, while none of the uncertainties is individually significant. Resolution of these matters is not expected to have a material effect on our financial condition, results of operations or liquidity.

As of December 31, 2011, the following tax years remain subject to examination for the major jurisdictions where we conduct business:



Jurisdiction	Years

United States	2008 to 2011
United Kingdom	2009 to 2011
Canada	2007 to 2011
South Korea	2006 to 2011
Australia	2008 to 2011

Our U.S. federal income tax returns have been audited through 2007. We have various federal income tax return positions in administrative appeals or litigation for 1999 to 2007.

State income tax returns are generally subject to examination for a period of 3 to 5 years after filing of the respective return. The state effect of any changes to filed federal positions remains subject to examination by various states for a period of up to two years after formal notification to the states. We have various state income tax return positions in the process of examination, administrative appeals or litigation.