Note 15. Income Taxes

The following table sets forth the geographic split of earnings before income taxes:



	2012		2011		2010
	(In millions)

United States	$	1,035	$	2,035	$	1,453
Foreign		730		980		1,132
	$	1,765	$	3,015	$	2,585

Significant components of income tax are as follows:



	2012		2011		2010
	(In millions)
Current
Federal	$	300	$	251	$	422
State		21		10		18
Foreign		118		222		195
Deferred
Federal		66		483		107
State		9		43		(4)
Foreign		9		(12)		(72)
	$	523	$	997	$	666

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



	2012		2011
	(In millions)
Deferred tax liabilities
Property, plant, and equipment	$	1,085	$	1,016
Equity in earnings of affiliates		334		255
Inventories		81		324
Other		150		104
	$	1,650	$	1,699

Deferred tax assets
Pension and postretirement benefits	$	487	$	307
Stock compensation		63		58
Foreign tax credit carryforwards		31		46
Foreign tax loss carryforwards		241		220
State tax attributes		67		57
Other		126		129
Gross deferred tax assets		1,015		817
Valuation allowances		(145)		(95)
Net deferred tax assets	$	870	$	722

Net deferred tax liabilities	$	780	$	977
Current deferred tax assets (liabilities) included in other assets (accrued expenses and other payables)		(60)		(118)
Non-current deferred tax liabilities	$	720	$	859

Reconciliation of the statutory federal income tax rate to the Company’s effective tax rate on earnings is as follows:



	2012		2011		2010

Statutory rate	35.0	%	35.0	%	35.0	%
State income taxes, net of
federal tax benefit	1.4		1.1		0.3
Foreign earnings taxed at rates
other than the U.S. statutory rate	(4.2)		(4.9)		(8.2)
Foreign currency remeasurement	(3.3)		0.9		(0.7)
Other	0.7		1.0		(0.6)
Effective rate	29.6	%	33.1	%	25.8	%

The Company has $241 million and $220 million of tax assets related to net operating loss carry-forwards of certain international subsidiaries at June 30, 2012 and 2011, respectively. As of June 30, 2012, approximately $231 million of these assets have no expiration date, and the remaining $10 million expire at various times through fiscal 2025. The annual usage of certain of these assets is limited to a percentage of taxable income of the respective international subsidiary for the year. The Company has recorded a valuation allowance of $96 million and $52 million against these tax assets at June 30, 2012 and 2011, respectively, due to the uncertainty of their realization.

The Company has $31 million and $46 million of tax assets related to excess foreign tax credits at June 30, 2012 and 2011, respectively, which begin to expire in fiscal 2013. The Company has $67 million and $57 million of tax assets related to state income tax attributes (incentive credits and net operating loss carryforwards), net of federal tax benefit, at June 30, 2012 and 2011, respectively, which will expire at various times through fiscal 2018. The Company has recorded a valuation allowance of $4 million against the excess foreign tax credits at June 30, 2012, due to the uncertainty of realization. The Company has recorded a valuation allowance against the state income tax assets of $45 million, net of federal tax benefit, as of June 30, 2012. As of June 30, 2011, the Company had a $7 million valuation allowance recorded related to the excess foreign tax credits and a $36 million valuation allowance related to state income tax attributes, due to the uncertainty of realization.

The Company remains subject to federal examination in the U.S. for the calendar tax year 2011.

Undistributed earnings of the Company’s foreign subsidiaries and the Company’s share of the undistributed earnings of affiliated corporate joint venture companies accounted for on the equity method amounting to approximately $7.2 billion at June 30, 2012, are considered to be permanently reinvested, and accordingly, no provision for U.S. income taxes has been provided thereon. It is not practicable to determine the deferred tax liability for temporary differences related to these undistributed earnings.

The Company accounts for its income tax positions under the provisions of ASC Topic 740, Income Taxes. ASC Topic 740 prescribes a minimum threshold a tax position is required to meet before being recognized in the consolidated financial statements. This interpretation requires the Company to recognize in the consolidated financial statements tax positions determined more likely than not to be sustained upon examination, based on the technical merits of the position. A rollforward of activity of unrecognized tax benefits for the year ended June 30, 2012 and 2011 are as follows:



	Unrecognized Tax Benefits
	2012		2011
	(In millions)

Beginning balance	$	79	$	84
Additions related to current year’s tax positions		-		4
Additions related to prior years’ tax positions		26		–
Reductions related to prior years’ tax positions		(21)		(7)
Settlements with tax authorities		(4)		(2)
Ending balance	$	80	$	79

The additions and reductions in unrecognized tax benefits shown in the table include effects related to net income and shareholders’ equity. The 2012 changes in unrecognized tax benefits did not have a material effect on the Company’s net income or cash flow.

The Company classifies interest on income tax-related balances as interest expense and classifies tax-related penalties as selling, general and administrative expenses. At June 30, 2012 and 2011, the Company had accrued interest and penalties on unrecognized tax benefits of $16 million and $27 million, respectively.

The Company is subject to income taxation in many jurisdictions around the world. Resolution of the related tax positions, through negotiations with relevant tax authorities or through litigation, may take years to complete. Therefore, it is difficult to predict the timing for resolution of tax positions. However, the Company does not anticipate that the total amount of unrecognized tax benefits will increase or decrease significantly in the next twelve months. Given the long periods of time involved in resolving tax positions, the Company does not expect that the recognition of unrecognized tax benefits will have a material impact on the Company’s effective income tax rate in any given period. If the total amount of unrecognized tax benefits were recognized by the Company at one time, there would be a reduction of $53 million on the tax expense for that period.

The Company’s wholly-owned subsidiary, ADM do Brasil Ltda. (ADM do Brasil), received three separate tax assessments from the Brazilian Federal Revenue Service (BFRS) challenging the tax deductibility of commodity hedging losses and related expenses for the tax years 2004, 2006 and 2007 in the amounts of $468 million, $20 million, and $82 million, respectively (inclusive of interest and adjusted for variation in currency exchange rates). ADM do Brasil’s tax return for 2005 was also audited and no assessment was received. The statute of limitations for 2005 has expired. If the BFRS were to challenge commodity hedging deductions in tax years after 2007, the Company estimates it could receive additional claims of approximately $100 million (as of June 30, 2012 and subject to variation in currency exchange rates).

ADM do Brasil enters into commodity hedging transactions that can result in gains, which are included in ADM do Brasil’s calculations of taxable income in Brazil, and losses, which ADM do Brasil deducts from its taxable income in Brazil. The Company has evaluated its tax position regarding these hedging transactions and concluded, based upon advice from Brazilian legal counsel, that it was appropriate to recognize both gains and losses resulting from hedging transactions when determining its Brazilian income tax expense. Therefore, the Company has continued to recognize the tax benefit from hedging losses in its financial statements and has not recorded any tax liability for the amounts assessed by the BFRS.

ADM do Brasil filed an administrative appeal for each of the assessments. During the second quarter of fiscal 2011, a decision in favor of the BFRS on the 2004 assessment was received and a second level administrative appeal has been filed. In January of 2012, a decision in favor of the BFRS on the 2006 and 2007 assessments was received and a second level administrative appeal has been filed. If ADM do Brasil continues to be unsuccessful in the administrative appellate process, further appeals are available in the Brazilian federal courts. While the Company believes its consolidated financial statements properly reflect the tax deductibility of these hedging losses, the ultimate resolution of this matter could result in the future recognition of additional payments of, and expense for, income tax and the associated interest and penalties. The Company intends to vigorously defend its position against the current assessments and any similar assessments that may be issued for years subsequent to 2007.

The Company’s subsidiaries in Argentina have received tax assessments challenging transfer prices used to price grain exports totaling $10 million before interest for the tax years 2004 and 2005. The Argentine tax authorities have been conducting a review of income and other taxes paid by large exporters and processors of cereals and other agricultural commodities resulting in allegations of income tax evasion. ADM’s subsidiaries are subject to continuous tax audits and it is possible that further assessments may be made. The Company believes that it has complied with all Argentine tax laws and intends to vigorously defend its position. The Company has not recorded a tax liability for these assessments.