Income Taxes

For financial reporting purposes, income before income taxes includes the following components:



For the Years Ended December 31,
(In millions of dollars)	2014		2013		2012
Income before income taxes:
U.S.	$	313	$	407	$	398
Other	1,744		1,566		1,298
	$	2,057	$	1,973	$	1,696

The expense (benefit) for income taxes is comprised of:
Income taxes:
Current–
U.S. Federal	$	80	$	102	$	42
Other national governments	369		264		336
U.S. state and local	26		45		24
	475		411		402
Deferred–
U.S. Federal	27		12		(18		)
Other national governments	62		149		89
U.S. state and local	22		22		19
	111		183		90
Total income taxes	$	586	$	594	$	492

The significant components of deferred income tax assets and liabilities and their balance sheet classifications are as follows:



December 31,
(In millions of dollars)	2014		2013
Deferred tax assets:
Accrued expenses not currently deductible	$	572	$	570
Differences related to non-U.S. operations ^(a)	119		140
Accrued retirement benefits U.S.	638		297
Net operating losses ^(b)	57		79
Income currently recognized for tax	75		74
Foreign tax credit carryforwards	109		157
Other	84		90
	$	1,654	$	1,407



Deferred tax liabilities:
Differences related to non-U.S. operations	$131		$112
Depreciation and amortization	307		273
Accrued retirement & postretirement benefits - non-U.S. operations	41		89
Other	5		5
	$	484	$	479


(a)	Net of valuation allowances of $15 million in 2014 and $12 million in 2013.


(b)	Net of valuation allowances of $82 million in 2014 and $70 million in 2013.



December 31,
(In millions of dollars)	2014		2013
Balance sheet classifications:
Current assets	$	521	$	482
Other assets	$	876	$	626
Current liabilities	$	28	$	18
Other liabilities	$	199	$	162

U.S. Federal income taxes are not provided on temporary differences with respect to investments in foreign subsidiaries that are essentially permanent in duration, which at December 31, 2014, the Company estimates, amounted to approximately $6.3 billion. The determination of the unrecognized deferred tax liability with respect to these investments is not practicable.

A reconciliation from the U.S. Federal statutory income tax rate to the Company’s effective income tax rate is shown below.



For the Years Ended December 31,	2014		2013		2012
U.S. Federal statutory rate	35.0	%	35.0	%	35.0	%
U.S. state and local income taxes—net of U.S. Federal income tax benefit	1.7		2.1		1.9
Differences related to non-U.S. operations	(7.5	)	(6.0	)	(6.1	)
Other	(0.7	)	(1.0	)	(1.8	)
Effective tax rate	28.5	%	30.1	%	29.0	%

The Company’s consolidated tax rate was 28.5%, 30.1% and 29.0% in 2014, 2013 and 2012, respectively. The tax rate in each year reflects foreign operations, which are generally taxed at rates lower than the U.S. statutory tax rate.

Valuation allowances had net increases of $15 million, $10 million and $23 million in 2014, 2013 and 2012, respectively. During the respective years, adjustments of the beginning of the year balances of valuation allowances decreased income tax expense by $9 million and $3 million in 2014 and 2013, respectively, and increased income tax expense by $16 million in 2012. Approximately 55% of the Company’s net operating loss carryforwards expire from 2015 through 2034, and others are unlimited. The potential tax benefit from net operating loss carryforwards at the end of 2014 comprised federal, state and local, and non-U.S. tax benefits of $3 million, $40 million and $96 million, respectively, before reduction for valuation allowances. Foreign tax credit carryforwards expire from 2020 through 2022.

The realization of deferred tax assets depends on generating future taxable income during the periods in which the tax benefits are deductible or creditable. Tax liabilities are determined and assessed jurisdictionally by legal entity or filing group. Certain taxing jurisdictions allow or require combined or consolidated tax filings. The Company assessed the realizability of its deferred tax assets and considered all available evidence, including the existence of a recent history of losses, placing particular weight on evidence that could be objectively verified. A valuation allowance was recorded to reduce deferred tax assets to the amount that the Company believes is more likely than not to be realized.

Following is a reconciliation of the Company’s total gross unrecognized tax benefits for the years ended December 31, 2014, 2013 and 2012:



(In millions of dollars)	2014			2013			2012
Balance at January 1,	$	128		$	117		$	143
Additions, based on tax positions related to current year	13			16			26
Additions for tax positions of prior years	3			35			35
Reductions for tax positions of prior years	(29		)	(7		)	(41		)
Settlements	(4		)	(3		)	(6		)
Lapses in statutes of limitation	(14		)	(30		)	(40		)
Balance at December 31,	$	97		$	128		$	117

Of the total unrecognized tax benefits at December 31, 2014, 2013 and 2012, $51 million, $71 million and $96 million, respectively, represent the amount that, if recognized, would favorably affect the effective tax rate in any future periods. The total gross amount of accrued interest and penalties at December 31, 2014, 2013 and 2012, before any applicable federal benefit, was $7 million, $10 million and $13 million, respectively.

As discussed in Note 5, the Company has provided certain indemnities related to contingent tax liabilities as part of the disposals of Putnam and Kroll. At December 31, 2014, 2013 and 2012, $2 million, $2 million and $6 million, respectively, included in the table above, relates to Putnam and Kroll positions included in consolidated Company tax returns. Since the Company remains primarily liable to the taxing authorities for resolution of uncertain tax positions related to consolidated returns, these balances will remain as part of the Company’s consolidated liability for uncertain tax positions. Any future charges or credits related to these matters, including interest accrued, will be recorded in discontinued operations as incurred.

The Company is routinely examined by the jurisdictions in which it has significant operations. In the U.S. federal jurisdiction, the Company participates in the Internal Revenue Service’s (IRS) Compliance Assurance Process (CAP), which is structured to conduct real-time compliance reviews. The IRS is currently examining the Company’s 2013 tax return and performing a pre-filing review of 2014. During 2014, the Company settled its federal tax audit with the IRS for the year 2012, and in 2013 settled the years 2007, and 2009 through 2011. The tax year 2008 was settled in a prior period. New York State and New York City have examinations underway for various entities covering the years 2007 through 2012. Illinois is auditing the Company for years 2009 through 2013. During 2014, California commenced an audit covering the years 2009 through 2013. Outside the U.S., during 2014, examinations commenced in Canada for the year 2012 and in France for years 2011 and 2012. There is an ongoing examination of various subsidiaries for years 2011 and 2012 in the United Kingdom that started in 2013. The Company regularly considers the likelihood of assessments in each of the taxing jurisdictions resulting from examinations. The Company has established liabilities for uncertain tax positions in relation to the potential assessments. The Company believes the resolution of tax matters will not have a material effect on the consolidated financial position of the Company, although a resolution of tax matters could have a material impact on the Company's net income or cash flows and on its effective tax rate in a particular future period. It is reasonably possible that the total amount of unrecognized tax benefits will decrease between zero and approximately $16 million within the next twelve months due to the settlement of audits and the expiration of statutes of limitation.