Note 13: Income Taxes

Following is the composition of income tax expense:



	2014			2013			2012
Current:
Federal	$	168.9		$	259.1		$	596.8
Foreign	406.2			553.2			540.6
State	(2.1		)	126.3			56.2
Total current tax expense	573.0			938.6			1,193.6
Deferred:
Federal	(83.3		)	297.0			87.0
Foreign	120.2			(28.2		)	29.9
State	(0.1		)	(2.9		)	9.1
Total deferred tax expense	36.8			265.9			126.0
Income taxes	$	609.8		$	1,204.5		$	1,319.6

Significant components of our deferred tax assets and liabilities as of December 31 are as follows:



	2014			2013
Deferred tax assets:
Compensation and benefits	$	897.3		$	639.8
Purchases of intangible assets	473.3			418.8
Tax credit carryforwards and carrybacks	279.4			494.6
Tax loss carryforwards and carrybacks	265.5			311.7
Product return reserves	241.8			313.7
Debt	176.0			110.0
Contingencies	68.9			106.0
Intercompany profit in inventories	—			104.5
Other	633.3			595.0
Total gross deferred tax assets	3,035.5			3,094.1
Valuation allowances	(601.1		)	(647.1		)
Total deferred tax assets	2,434.4			2,447.0
Deferred tax liabilities:
Unremitted earnings	(737.1		)	(898.3		)
Inventories	(684.6		)	(685.6		)
Intangibles	(582.6		)	(598.9		)
Property and equipment	(424.7		)	(379.1		)
Prepaid employee benefits	(275.8		)	(446.2		)
Financial instruments	(161.5		)	(109.6		)
Total deferred tax liabilities	(2,866.3		)	(3,117.7		)
Deferred tax liabilities - net	$	(431.9	)	$	(670.7	)

At December 31, 2014 and 2013, no individually significant items were classified as “Other” deferred tax assets.

The deferred tax asset and related valuation allowance amounts for U.S. federal and state net operating losses and tax credits shown above have been reduced for differences between financial reporting and tax return filings.

Based on filed tax returns, we have tax credit carryforwards and carrybacks of $459.9 million available to reduce future income taxes; $180.5 million, if unused, will expire by 2021. The remaining portion of the tax credit carryforwards is related to federal tax credits of $80.3 million, international tax credits of $104.4 million, and state tax credits of $94.7 million, all of which are substantially reserved.

At December 31, 2014, based on filed tax returns we had net operating losses and other carryforwards for international and U.S. income tax purposes of $493.9 million: $74.6 million will expire by 2019; $366.1 million will expire between 2019 and 2029; and $53.2 million of the carryforwards will never expire. Net operating losses and other carryforwards for international and U.S. federal income tax purposes are partially reserved. Deferred tax assets related to state net operating losses of $97.0 million and other state carryforwards of $8.9 million are fully reserved.

Domestic and Puerto Rican companies contributed approximately 20 percent, 60 percent, and 55 percent for the years ended December 31, 2014, 2013, and 2012, respectively, to consolidated income before income taxes. We have a subsidiary operating in Puerto Rico under a tax incentive grant effective through the end of 2016. A similar, new tax incentive grant will begin in 2017 and will be in effect for 15 years.

At December 31, 2014, U.S. income taxes have not been provided on approximately $25.7 billion of unremitted earnings of foreign subsidiaries as we consider these unremitted earnings to be indefinitely invested for continued use in our foreign operations. Additional tax provisions will be required if these earnings are repatriated in the future to the United States. Due to complexities in the tax laws and assumptions that we would have to make, it is not practicable to determine the amount of the related unrecognized deferred income tax liability.

Cash payments of income taxes totaled $729.7 million, $1.26 billion, and $992.0 million, for the years ended December 31, 2014, 2013, and 2012, respectively.

Following is a reconciliation of the income tax expense applying the U.S. federal statutory rate to income before income taxes to reported income tax expense:



	2014			2013			2012
Income tax at the U.S. federal statutory tax rate	$	1,050.1		$	2,061.3		$	1,892.9
Add (deduct):
International operations, including Puerto Rico	(344.8		)	(778.3		)	(593.8		)
General business credits	(44.3		)	(175.6		)	(11.2		)
Other	(51.2		)	97.1			31.7
Income taxes	$	609.8		$	1,204.5		$	1,319.6

The American Taxpayer Relief Act of 2012, which included the reinstatement of the research tax credit for the year 2012, was enacted in early 2013. Therefore, the research tax credits for the years 2012 and 2013 are both included in 2013 with general business credits.

A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows:



	2014			2013			2012
Beginning balance at January 1	$	1,136.4		$	1,534.3		$	1,369.3
Additions based on tax positions related to the current year	126.4			142.5			144.8
Additions for tax positions of prior years	132.6			251.5			70.1
Reductions for tax positions of prior years	(32.1		)	(358.2		)	(38.5		)
Settlements	(4.2		)	(404.9		)	(9.2		)
Lapses of statutes of limitation	(3.5		)	(24.9		)	(4.6		)
Changes related to the impact of foreign currency translation	(16.8		)	(3.9		)	2.4
Ending balance at December 31	$	1,338.8		$	1,136.4		$	1,534.3

The total amount of unrecognized tax benefits that, if recognized, would affect our effective tax rate was $638.8 million and $523.3 million at December 31, 2014 and 2013, respectively.

We file income tax returns in the U.S. federal jurisdiction and various state, local, and non-U.S. jurisdictions. We are no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations in most major taxing jurisdictions for years before 2007.

During 2013, we reached resolution on the remaining matters related to tax years 2008–2009 that were not settled as part of a previous U.S. examination. Considering the impact of this resolution on periods that have not yet been examined, as well as its impact on tax asset carryforwards, there was an immaterial benefit to our consolidated results of operations. We made cash payments of approximately $135 million related to tax years 2008–2009 after application of available tax credit carryforwards and carrybacks. The examination of tax years 2010-2012 commenced during the fourth quarter of 2013. While it is reasonably possible that the U.S. examination of 2010-2012 could conclude within the next 12 months, resolution of certain matters is dependent upon a number of factors, including the potential for formal administrative and legal proceedings. As a result, it is not possible to estimate the range of the reasonably possible changes in unrecognized tax benefits that could occur within the next 12 months related to these years, nor is it possible to reliably estimate the total future cash flows related to these unrecognized tax benefits.

We recognize both accrued interest and penalties related to unrecognized tax benefits in income tax expense. During the years ended December 31, 2014, 2013, and 2012, we recognized income tax expense (benefit) of $35.9 million, $(10.9) million, and $42.3 million, respectively, related to interest and penalties. At December 31, 2014 and 2013, our accruals for the payment of interest and penalties totaled $207.2 million and $161.5 million, respectively.