8. Income Taxes

Income tax provision (benefit) consisted of the following components:


	Year Ended December 31,
	2011			2010			2009
(In thousands)
Federal:
Current	$	96,725		$	(72,518	)	$	42,636
Deferred		28,138			82,471			(87,773	)

		124,863			9,953			(45,137	)

State and Puerto Rico:
Current		8,111			4,295			11,931
Deferred		1,819			(3,629	)		(6,616	)

		9,930			666			5,315

Foreign:
Current		68,605			67,338			79,590
Deferred		(87,565	)		(67,555	)		(60,541	)

		(18,960	)		(217	)		19,049

Income tax provision (benefit)	$	115,833		$	10,402		$	(20,773	)

Earnings (loss) before income taxes and noncontrolling interest
Domestic	$	537,009		$	(273,699	)	$	(491,810	)
Foreign		117,627			629,643			718,785

Total Earnings before income taxes and noncontrolling interest	$	654,636		$	355,944		$	226,975

In 2010 and 2009, the allocation of earnings (loss) before income taxes and noncontrolling interest between domestic and foreign operations includes intercompany interest between certain domestic and foreign subsidiaries, which was eliminated on a consolidated basis. The impact of this intercompany financing arrangement in 2010 and 2009 was to decrease the amount of domestic earnings (loss) before income taxes and noncontrolling interest, with a corresponding increase to the foreign amount. While this arrangement increased the amount of earnings (loss) before income taxes and noncontrolling interest allocated to foreign operations, the taxation of these earnings was included in the calculation of the Company's taxable income reported on its U.S. corporate income tax returns. In 2011, the Company made internal changes to the intercompany financing arrangement such that the related interest income and expense is all reflected in foreign earnings (loss).

Temporary differences and carryforwards that result in the deferred tax assets and liabilities were as follows:


	December 31, 2011			December 31, 2010
(In thousands)
Deferred tax assets:
Employee benefits	$	92,983		$	86,848
Legal matters		68,398			69,075
Accounts receivable allowances		101,342			179,474
Inventories		30,004			33,178
Other reserves		28,230			30,713
Tax credits		17,707			17,646
Net operating losses carryforward		258,482			233,593
Intangibles		49,151			49,294
Capital-loss carryforward		19,324			39,249
Convertible debt		30,072			21,492
Other		133,959			59,411

		829,652			819,973
Less: Valuation allowance		(231,436	)		(232,147	)

Total deferred tax assets		598,216			587,826

Deferred tax liabilities:
Plant and equipment		110,392			102,081
Intangibles		514,203			582,252
Other		41,476			67,029

Total deferred tax liabilities		666,071			751,362

Deferred tax liabilities, net	$	(67,855	)	$	(163,536	)

U.S. income and foreign withholding taxes have not been provided on the excess of the amount for financial reporting over the tax basis of investments in foreign subsidiaries that are essentially permanent in duration. This amount becomes taxable upon a repatriation of assets from the subsidiary or a sale or liquidation of the subsidiary. The amount of such temporary differences totaled approximately $125 million at December 31, 2011. Determination of the amount of any unrecognized deferred income tax liability on this temporary difference is not practicable. No deferred taxes have been recorded on the instances whereby the Company's investment in foreign subsidiaries is currently greater for U.S. tax purposes than for GAAP purposes, as management has no current plans that would cause that temporary difference to reverse in the foreseeable future.

A reconciliation of the statutory tax rate to the effective tax rate is as follows:


	Year Ended December 31,
	2011			2010			2009
Statutory tax rate		35.0	%		35.0	%		35.0	%
State income taxes and credits		1.1	%		(0.3	)%		0.5	%
Foreign rate differential		(13.1	)%		(18.2	)%		0.7	%
Other foreign items		2.6	%		(0.6	)%		(17.2	)%
Uncertain tax position		(4.5	)%		(13.1	)%		(8.5	)%
Net benefit on repatriated earnings		(5.7	)%		(6.0	)%		—
Valuation allowance		(0.2	)%		9.1	%		2.1	%
Other		2.5	%		(3.0	)%		9.4	%
Effect of reorganizations		—			—			(31.1	)%

Effective tax rate		17.7	%		2.9	%		(9.1	)%

Valuation Allowance

A valuation allowance is provided when it is more likely than not that some portion or all of the deferred tax assets will not be realized. At December 31, 2011, a valuation allowance has been applied to certain foreign and state deferred tax assets in the amount of $231.4 million. The valuation allowance decreased by $0.7 million during 2011.

Net Operating Losses

As of December 31, 2011, the Company has net operating loss carryforwards for international, and U.S. state income tax purposes of approximately $2.4 billion, some of which will expire in fiscal years 2013 through 2030, while others can be carried forward indefinitely. Of these loss carryforwards, $1.9 billion is related to state losses. A majority of the state net operating losses are attributable to Pennsylvania, where a taxpayer's use is limited to the greater of 20.0% of taxable income or $3.0 million each taxable year. In addition, the Company has foreign net operating loss carryforwards of approximately $500 million, of which $350 million can be carried forward indefinitely, with the remainder expiring in years 2013 through 2030. Most of the net operating losses (foreign and state) have a full valuation allowance.

The Company has $19.1 million state tax credit carryforwards expiring in various amounts in the years 2012 through 2021. No valuation allowance is recorded against these credits.

The Company has a $59.5 million foreign capital loss carryforward expiring in 2017. A full valuation allowance is recorded against this loss.

Tax Examinations

Mylan is subject to ongoing IRS examinations and is a voluntary participant in the IRS Compliance Assurance Process ("CAP"). The years 2011, 2010 and 2009 are the open years under examination. The year 2008 has one issue still open in the IRS Appeals process. Tax and interest continue to be accrued related to certain tax positions.

The Company's major state taxing jurisdictions remain open from fiscal year 2007 through 2011, with several state audits currently in progress. The Company's major international taxing jurisdictions remain open from 2005 through 2011, some of which are indemnified by Merck KGaA for tax assessments.

Accounting for Uncertainty in Income Taxes

The impact of an uncertain tax position that is more likely than not of being sustained upon audit by the relevant taxing authority must be recognized at the largest amount that is more likely than not to be sustained. No portion of an uncertain tax position will be recognized if the position has less than a 50% likelihood of being sustained.

As of December 31, 2011 and December 31, 2010, the Company's Consolidated Balance Sheets reflect liabilities for unrecognized tax benefits of $162.9 million and $203.4 million, of which $148.4 million and $188.0 million, respectively, would affect the Company's effective tax rate if recognized. Accrued interest and penalties included in the Consolidated Balance Sheets were $23.9 million and $27.0 million as of December 31, 2011 and December 31, 2010. For the years ended December 31, 2011, 2010 and 2009, Mylan recognized $(0.7) million, $9.1 million and $6.6 million respectively, for interest (income) expense related to uncertain tax positions. Interest expense and penalties related to income taxes are included in the tax provision.

A reconciliation of the unrecognized tax benefits is as follows:


	Year Ended December 31,
	2011			2010			2009
(In thousands)
Unrecognized tax benefit — beginning of year	$	203,350		$	237,541		$	166,513
Additions for current year tax positions		964			5,166			109,786
Additions for prior year tax positions		5,048			5,079			5,143
Reductions for prior year tax positions		(7,878	)		(11,432	)		(18,742	)
Settlements		(7,434	)		(24,868	)		(2,521	)
Reductions due to expirations of statute of limitations		(22,293	)		(21,508	)		(22,638	)
Foreign currency translation		(8,872	)		8,872			—
Addition due to acquisition		—			4,500			—

Unrecognized tax benefit — end of year	$	162,885		$	203,350		$	237,541

The Company believes that it is reasonably possible that the amount of unrecognized tax benefits will decrease in the next twelve months in the range of $29 million to $110 million, involving federal and state tax audits and settlements, and expirations of certain state and foreign statutes of limitations. The Company does not anticipate significant increases to the reserve within the next twelve months.