Domestic and foreign income (loss) before income taxes and details of the income tax expense (benefit) are as follows (amounts in millions):

			For the Years Ended December 31,
			2014		2013		2012
Income before income tax expense:
	Domestic		$	325	$	626	$	668
	Foreign			656		693		790
			$	981	$	1,319	$	1,458

Income tax expense (benefit):
	Current:
		Federal	$	118	$	100	$	256
		State		11		6		14
		Foreign		37		31		49
		Total current		166		137		319
	Deferred:
		Federal		26		134		12
		State		(18)		(12)		(11)
		Foreign		(58)		39		(11)
		Total deferred		(50)		161		(10)
Add back tax benefit credited to additional paid-in capital:
	Excess tax benefit associated with stock options			30		11		---
Income tax expense			$	146	$	309	$	309

The items accounting for the difference between income taxes computed at the U.S. federal statutory income tax rate and the income tax expense (benefit) (the effective tax rate) for each of the years are as follows (amounts in millions):

		For the Years Ended December 31,
		2014				2013				2012
Federal income tax provision at statutory rate		$	343	35	%	$	462	35	%	$	510	35	%
State taxes, net of federal benefit			5	---			6	---			31	2
Research and development credits			(24)	(2)			(49)	(4)			(10)	(1)
Domestic production activity deduction			---	---			(9)	(1)			(17)	(1)
Foreign rate differential			(245)	(25)			(174)	(13)			(241)	(17)
Change in tax reserves			128	13			89	7			53	4
Shortfall from employee stock option exercises			---	---			---	---			8	---
Return to provision adjustment			(7)	(1)			(3)	---			(4)	---
Net Operating Loss tax attribute received
	from Internal Revenue Service audit		---	---			---	---			(46)	(3)
Net Operating Loss tax attribute assumed
	from Purchase Transaction		(52)	(5)			(16)	(1)			---	---
Other			(2)	---			3	---			25	2
Income tax expense		$	146	15	%	$	309	23	%	$	309	21	%

The Company's tax rate is affected by the tax rates in the jurisdictions in which the Company operates, the relative amount of income earned by jurisdiction, and the jurisdictions with a statutory tax rate less than the U.S. rate of 35%.

For 2014, the Company's income before income tax expense was $981 million. Our income tax expense of $146 million resulted in an effective tax rate of 15%. The difference between our effective tax rate and the U.S. statutory tax rate of 35% is due to earnings taxed at relatively lower rates in foreign jurisdictions, recognition of the California research and development (“R&D”) credits, and recognition of the retroactive reinstatement of the 2014 federal R&D tax credit described below, offset by changes in the Company's liability for uncertain tax positions.

On December 19, 2014, the Tax Increase Prevention Act of 2014 (H.R. 5771) was signed into law, which retroactively extended the federal R&D tax credit from January 1, 2014 through December 31, 2014. As a result, the Company recognized the retroactive benefit of the 2014 federal R&D tax credit of approximately $9 million as a discrete item in the fourth quarter of 2014, the period in which the legislation was enacted.

For 2013, the Company's income before income tax expense was $1,319 million. Our income tax expense of $309 million resulted in an effective tax rate of 23%. The difference between our effective tax rate and the U.S. statutory tax rate of 35% was due to earnings taxed at relatively lower rates in foreign jurisdictions, recognition of federal and California R&D credits, recognition of the retroactive reinstatement of the 2012 federal R&D tax credit, and the federal domestic production deduction.

On January 2, 2013, the American Taxpayer Relief Act of 2012 was signed into law by the president of the United States. Under the provisions of the American Taxpayer Relief Act of 2012, the R&D tax credit that had expired December 31, 2011, was reinstated retroactively to January 1, 2012, and expired on December 31, 2013. The Company recorded the impact of the extension of the R&D tax credit related to the tax year ended December 31, 2012, as a discrete item the first quarter of 2013. The impact of the extension of the R&D tax credit resulted in a net tax benefit of approximately $12 million related to the tax year ended December 31, 2012.

For 2012, the Company's income before income tax expense was $1,458 million. Our income tax expense of $309 million resulted in an effective tax rate of 21%. The difference between our effective tax rate and the U.S. statutory tax rate of 35% was due to earnings taxed at relatively lower rates in foreign jurisdictions, recognition of California R&D credits, the federal domestic production deduction, and a tax benefit resulting from a federal income tax audit settlement allocated to us by a subsidiary of Vivendi, as further discussed below.

In connection with the Purchase Transaction, we assumed certain tax attributes of New VH, which generally consist of New VH's net operating loss (“NOL”) carryforwards of approximately $760 million, which represent a potential future tax benefit of approximately $266 million. The utilization of such NOL carryforwards will be subject to certain annual limitations and will begin to expire in 2021. The Company also obtained indemnification from Vivendi against losses attributable to the disallowance of claimed utilization of such NOL carryforwards of up to $200 million in unrealized tax benefits in the aggregate, limited to taxable years ending on or prior to December 31, 2016. No benefit for these tax attributes or indemnification was recorded upon the close of the Purchase Transaction, as the benefit from these tax attributes did not meet the “more-likely-than-not” standard. For the twelve months ended December 31, 2014 and 2013, we utilized $148 million and $45 million, respectively, of the NOL, which resulted in benefits of $52 million and $16 million, respectively, and a corresponding reserve was established as the position did not meet the “more-likely-than-not” standard. As of December 31, 2014, an indemnification asset of $68 million has been recorded in “Other Assets”, and, correspondingly, the same amount has been recorded as a reduction to the consideration paid for the shares repurchased in “Treasury Stock” (see Note 1 of the Notes to Consolidated Financial Statements for details about the share repurchase).

As previously disclosed, on July 9, 2008, the Business Combination occurred amongst Vivendi, the Company and certain of their respective subsidiaries, pursuant to which Vivendi Games, then a member of the consolidated U.S. tax group of Vivendi's subsidiary, Vivendi Holdings I Corp. (“VHI”), became a subsidiary of the Company. As a result of the Business Combination, the favorable tax attributes of Vivendi Games carried forward to the Company. In late August 2012, VHI settled a federal income tax audit with the Internal Revenue Service (“IRS”) for the tax years ended December 31, 2002, 2003, and 2004. In connection with the settlement agreement, VHI's consolidated federal NOL carryovers were adjusted and allocated to various companies that were part of its consolidated group during the relevant periods. This allocation resulted in a $132 million federal NOL allocation to Vivendi Games. In September 2012, the Company filed an amended tax return for its December 31, 2008 tax year to utilize these additional federal net operating losses allocated as a result of the aforementioned settlement, resulting in the recording of a one-time tax benefit of $46 million. Prior to the settlement, and given the uncertainty of the VHI audit, the Company had insufficient information to allow it to record or disclose any information related to the audit until the quarter ended September 30, 2012, as disclosed in the Company's Form 10-Q for that period.

Deferred income taxes reflect the net tax effects of temporary differences between the amounts of assets and liabilities for accounting purposes and the amounts used for income tax purposes. The components of the net deferred tax assets (liabilities) are as follows (amounts in millions):

		As of December 31,
		2014		2013
Deferred tax assets:
	Allowance for sales returns and price protection		74		63
	Inventory reserve		9		8
	Accrued expenses		38		48
	Deferred revenue		291		273
	Tax credit carryforwards		50		35
	Net operating loss carryforwards		10		11
	Stock-based compensation		69		91
	Transaction costs		9		11
	Other		13		25
Deferred tax assets			563		565
Valuation allowance			---		---
Deferred tax assets, net of valuation allowance			563		565
Deferred tax liabilities:
	Intangibles		(169)		(152)
	Prepaid royalties		(22)		(71)
	Capitalized software development expenses		(84)		(60)
	State taxes		(34)		(27)
Deferred tax liabilities			(309)		(310)
Net deferred tax assets		$	254	$	255

As of December 31, 2014 we have gross tax credit carryforwards of $18 million and $97 million for federal and state purposes, respectively, which begin to expire in fiscal 2029. The tax credit carryforwards are presented in “Deferred tax assets” net of unrealized tax benefits that would apply upon the realization of uncertain tax positions. Through our foreign operations, we have approximately $36 million in NOL carryforwards at December 31, 2014, attributed mainly to losses in France and Ireland, the majority of which can be carried forward indefinitely.

We evaluate our deferred tax assets, including net operating losses and tax credits, to determine if a valuation allowance is required. We assess whether a valuation allowance should be established or released based on the consideration of all available evidence using a “more-likely-than-not” standard. Realization of the U.S. deferred tax assets is dependent upon the continued generation of sufficient taxable income. In making such judgments, significant weight is given to evidence that can be objectively verified. Although realization is not assured, management believes it is more likely than not that the net carrying value of the U.S. deferred tax assets will be realized. At December 31, 2014 and 2013, there are no valuation allowances on deferred tax assets.

Cumulative undistributed earnings of foreign subsidiaries for which no deferred taxes have been provided approximated $3,262 million at December 31, 2014. Deferred income taxes on these earnings have not been provided as these amounts are considered to be permanent in duration. Determination of the unrecognized deferred tax liability on unremitted foreign earnings is not practicable because of the complexity of the hypothetical calculation. In the event of a distribution of these earnings to the U.S. in the form of a dividend, we may be subject to both foreign withholding taxes and U.S. income taxes net of allowable foreign tax credits.

Vivendi Games results for the period January 1, 2008 through July 9, 2008 are included in the consolidated federal and certain foreign, state and local income tax returns filed by Vivendi or its affiliates while Vivendi Games results for the period July 10, 2008 through December 31, 2008 are included in the consolidated federal and certain foreign, state and local income tax returns filed by Activision Blizzard. Vivendi Games tax years 2005 through 2010 remain open to examination by the major taxing authorities. The IRS is currently examining Vivendi Games tax returns for the 2005 through 2008 tax years. Although the final resolution of the examination is uncertain, based on current information, in the opinion of the Company's management, the ultimate resolution of these matters will not have a material adverse effect on the Company's consolidated financial position, liquidity or results of operations.

Activision Blizzard's tax years 2008 through 2013 remain open to examination by the major taxing jurisdictions to which we are subject. The IRS is currently examining the Company's federal tax returns for the 2008 through 2011 tax years. Additionally, the IRS is currently reviewing the Company's application for an advanced pricing agreement (“APA”) with respect to the transfer pricing methodology that would be used by the Company for tax years 2010 through 2024. If ongoing discussions with the IRS result in an APA, this could result in a different allocation of profits and losses under the Company's transfer pricing agreements. Such allocation could have a positive or negative impact on the Company's provision for uncertain tax positions for the period in which such an agreement is reached and the relevant periods thereafter. The Company also has several state and non-U.S. audits pending. Although the final resolution of the Company's global tax disputes is uncertain, based on current information, in the opinion of the Company's management, the ultimate resolution of these matters will not have a material adverse effect on the Company's consolidated financial position, liquidity or results of operations. However, an unfavorable resolution of the Company's global tax disputes could have a material adverse effect on our business and results of operations in the period in which the matters are ultimately resolved.

As of December 31, 2014, we had approximately $405 million of unrecognized tax benefits that would affect our effective tax rate if recognized. A reconciliation of total gross unrecognized tax benefits for the years ended December 31, 2014, 2013, and 2012 is as follows (amounts in millions):

	For the Years Ended December 31,
	2014		2013		2012
Unrecognized tax benefits balance at January 1	$	294	$	207	$	154
Gross increase for tax positions of prior years		2		1		3
Gross increase for tax positions of current year		125		91		59
Settlement with taxing authorities		(2)		---		(8)
Lapse of statute of limitations		---		(5)		(1)
Unrecognized tax benefits balance at December 31	$	419	$	294	$	207

We recognize interest and penalties related to uncertain tax positions in “Income tax expense”. As of December 31, 2014 and 2013, we had approximately $18 million and $13 million, respectively, of accrued interest and penalties related to uncertain tax positions. For the year ended December 31, 2014 and 2013, we recorded $5 million and $2 million, respectively, of interest expense related to uncertain tax positions. For the year ended December 31, 2012, we did not have any material interest expense and penalties related to uncertain tax positions.

Based on the current status with the IRS, there is insufficient information to identify any significant changes in unrecognized tax benefits in the next twelve months. However, the Company may recognize a benefit of up to approximately $24 million related to the settlement of tax audits and/or the expiration of statutes of limitations in the next twelve months.

Although the final resolution of the Company's global tax disputes, audits, or any particular issue with the applicable taxing authority is uncertain, based on current information, in the opinion of the Company's management, the ultimate resolution of these matters will not have a material adverse effect on the Company's consolidated financial position, liquidity or results of operations. However, any settlement or resolution of the Company's global tax disputes, audits, or any particular issue with the applicable taxing authority could have a material favorable or unfavorable effect on our business and results of operations in the period in which the matters are ultimately resolved.