5. Income Taxes

An analysis of the provision for income taxes follows:



	Year Ended December 31
	2012			2011			2010
Current income taxes:
United States	$	182		$	43		$	368
State	30			32			95
Other countries	332			311			337
Total	544			386			800
Deferred income taxes:
United States	204			254			(15		)
State	34			29			(24		)
Other countries	(14		)	(9		)	27
Total	224			274			(12		)
Total provision for income taxes	$	768		$	660		$	788

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



	Year Ended December 31
	2012		2011		2010
United States	$	1,415	$	1,317	$	1,609
Other countries	1,005		866		941
Total income before income taxes	$	2,420	$	2,183	$	2,550

Deferred income tax assets and liabilities are composed of the following:



	December 31
	2012			2011
Deferred tax assets:
Pension and other postretirement benefits	$	972		$	756
Tax credits and loss carryforwards	729			812
Property, plant and equipment, net	110			128
Other	492			562
	2,303			2,258
Valuation allowance	(215		)	(229		)
Total deferred assets	2,088			2,029

Deferred tax liabilities:
Pension and other postretirement benefits	269			206
Property, plant and equipment, net	1,228			1,305
Installment sales	120			119
Unremitted earnings	108			58
Other	385			365
Total deferred tax liabilities	2,110			2,053
Net deferred tax liabilities	$	22		$	24

Valuation allowances decreased $14 and $58 in 2012 and 2011, respectively, of which $3 and $36 impacted 2012 and 2011 earnings, respectively. Valuation allowances at the end of 2012 primarily relate to tax credits and income tax loss carryforwards of $1.1 billion. If these items are not utilized against taxable income, $491 of the loss carryforwards will expire from 2013 through 2032. The remaining $638 have 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 tax rate:



	Year Ended December 31
	2012		2011		2010
U.S. statutory rate applied to income before income taxes	35.0	%	35.0	%	35.0	%
Rate of State income taxes, net of federal tax benefit	1.7		1.8		1.8
Statutory rates other than U.S. statutory rate	(2.8	)	(2.3	)	(3.0	)
Other - net^(a)	(2.2	)	(4.3	)	(2.9	)
Effective income tax rate	31.7	%	30.2	%	30.9	%


(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, 2012, U.S. income taxes and foreign withholding taxes have not been provided on $9.5 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.

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



	2012			2011			2010
Balance at January 1	$	558		$	568		$	570
Gross increases for tax positions of prior years	30			17			67
Gross decreases for tax positions of prior years	(104		)	(60		)	(89		)
Gross increases for tax positions of the current year	52			55			54
Settlements	(100		)	(15		)	(36		)
Lapse of statute of limitations	(3		)	(4		)	—
Currency	2			(3		)	2
Balance at December 31	$	435		$	558		$	568

Of the amounts recorded as unrecognized tax benefits at December 31, 2012, $276 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, 2012, 2011 and 2010, the net cost in interest and penalties was not significant. Total accrued penalties and net accrued interest was $47 and $25 at December 31, 2012 and 2011, respectively.

It is reasonably possible that a number of uncertainties could be resolved within the next 12 months. The most significant uncertainties involve 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, 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, 2012, the following tax years remain subject to examination for the major jurisdictions where we conduct business:



Jurisdiction	Years
United States	2010 to 2012
United Kingdom	2011 to 2012
Canada	2008 to 2012
South Korea	2007 to 2012
Australia	2008 to 2012

Our U.S. federal income tax returns have been audited through 2009. We have various federal income tax return positions in administrative appeals or litigation for 1999 to 2009.

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.