Income Taxes

Our provision (benefit) for income taxes consists of (table in millions):



	2013			2012			2011
Federal:
Current	$	698		$	792		$	488
Deferred	(163		)	(80		)	14
	535			712			502
State:
Current	84			74			70
Deferred	(23		)	(12		)	(45		)
	61			62			25
Foreign:
Current	192			169			101
Deferred	(16		)	(25		)	12
	176			144			113
Total provision for income taxes	$	772		$	918		$	640

In 2013, 2012 and 2011, we were able to utilize net operating loss carryforwards and tax credit carryforwards to reduce the current portion of our tax provision by $54 million, $59 million and $20 million, respectively.

The effective income tax rate is based upon income for the year, composition of the income in different countries, effect of tax law changes and adjustments, if any, for potential tax consequences, benefits and/or resolutions of tax audits or other tax contingencies. A reconciliation of our income tax provision to the statutory federal tax rate is as follows:



	2013		2012		2011
Statutory federal tax rate	35.0	%	35.0	%	35.0	%
State taxes, net of federal taxes	1.6	%	1.3	%	0.7	%
Resolution of uncertain tax positions	(0.9	)%	(0.5	)%	(1.7	)%
Tax rate differential for international jurisdictions and other international related tax items	(15.2	)%	(13.6	)%	(14.4	)%
U.S. tax credits	(3.8	)%	(0.2	)%	(2.8	)%
International reorganization of acquired companies	0.6	%	0.3	%	—	%
Permanent items	2.3	%	1.5	%	2.5	%
Other	0.4	%	0.3	%	0.4	%
	20.0	%	24.1	%	19.7	%

Substantially all the tax rate differential for international jurisdictions was driven by earnings of our Irish subsidiaries.

On January 2, 2013, the American Taxpayer Relief Act of 2012 was signed into law. Some of the provisions were retroactive to January 1, 2012 including an extension of the U.S. federal tax credit for increasing research activities through December 31, 2013. Because the extension was enacted after December 31, 2012, our 2012 effective income tax rate did not reflect our 2012 federal tax credit for increasing research activities even though it was reported on our 2012 federal income tax returns. Our 2013 income tax provision included the federal tax credit for increasing research activities for 2012 as well as for 2013, which reduced our 2013 effective income tax rate by 3.5%.

The components of the current and non-current deferred tax assets and liabilities are as follows (table in millions):



	December 31, 2013						December 31, 2012
	Deferred Tax Asset			Deferred Tax Liability			Deferred Tax Asset			Deferred Tax Liability
Current:
Accounts and notes receivable	$	96		$	—		$	68		$	—
Inventory	73			—			64			—
Accrued expenses	311			—			281			—
Deferred revenue	365			—			281			—
Equity	83			—			98			—
Credit carryforwards	4			—			5			—
Net operating losses	28			—			29			—
Total current	960			—			826			—
Property, plant and equipment, net	—			(291		)	—			(286		)
Intangible and other assets, net	—			(680		)	—			(663		)
Equity	139			—			144			—
Deferred revenue	253			—			177			—
Other non-current liabilities	—			(13		)	—			(43		)
Credit carryforward	280			—			242			—
Net operating losses	78			—			98			—
Other comprehensive loss	109			—			120			—
Total non-current	859			(984		)	781			(992		)
Gross deferred tax assets and liabilities	1,819			(984		)	1,607			(992		)
Valuation allowance	(211		)	—			(183		)	—
Total deferred tax assets and liabilities	$	1,608		$	(984	)	$	1,424		$	(992	)

At December 31, 2013 and 2012, net non-current state and foreign deferred tax assets of $133 million and $116 million, respectively, were included in other non-current assets on the consolidated balance sheets. We made minor revisions of certain amounts related to the classification of 2012 deferred tax balances related to deferred revenues and state tax carryforwards and related valuation allowance to conform to the 2013 presentation.

We have gross federal, state and foreign net operating loss carryforwards of $219 million, $277 million and $45 million, respectively, at December 31, 2013. Portions of these carryforwards are subject to annual limitations, including Section 382 of the Internal Revenue Code of 1986 (“Code”), as amended, for U.S. tax purposes and similar provisions under other countries’ tax laws. Certain of these net operating loss carryforwards will begin to expire in 2014 if not utilized, while others have an unlimited carryforward period.

We have federal and state credit carryforwards of $2 million and $283 million, respectively, at December 31, 2013. Portions of these carryforwards are subject to annual limitations, including Section 382 of the Code, as amended, for U.S. tax purposes and similar provisions under other countries’ tax laws. Certain of these credit carryforwards will begin to expire in 2016 if not utilized, while others have an unlimited carryforward period. The valuation allowance at December 31, 2013 mainly relates to state tax credit carryforwards.

Deferred income taxes have not been provided on basis differences related to investments in foreign subsidiaries. These basis differences were approximately $10.2 billion and $8.1 billion at December 31, 2013 and 2012, respectively, and consisted primarily of undistributed earnings permanently invested in these entities. The change in the basis difference in 2013 was mainly attributable to income earned in the current year. At December 31, 2013, our total cash, cash equivalents, and short-term and long-term investments were $17.6 billion. This balance includes approximately $6.2 billion held by VMware, of which $4.1 billion is held outside of the U.S., and $4.3 billion held by EMC in entities outside of the U.S. If these overseas funds are needed for our operations in the U.S., we would be required to accrue and pay U.S. taxes to repatriate these funds. However, our intent is to permanently reinvest these funds outside of the U.S. and our current plans do not demonstrate a need to repatriate them to fund our U.S. operations. Determination of the amount of unrecognized deferred income tax liability related to these earnings is not practicable. Income before income taxes from foreign operations for 2013, 2012 and 2011 was $2.3 billion, $1.9 billion and $1.8 billion, respectively. Income before income taxes from domestic operations for 2013, 2012 and 2011 was $1.6 billion, $1.9 billion and $1.5 billion, respectively.

The following is a rollforward of our gross consolidated liability for unrecognized income tax benefits for the three years ended December 31 (table in millions):



	2013			2012			2011
Unrecognized tax benefits, beginning of year	$	270		$	197		$	230
Tax positions related to current year:
Additions	37			25			42
Reductions	—			(1		)	(2		)
Tax positions related to prior years:
Additions	10			64			14
Reductions	(33		)	(4		)	(71		)
Settlements	(5		)	—			(3		)
Lapses in statutes of limitations	(13		)	(11		)	(13		)
Unrecognized tax benefits, end of year	$	266		$	270		$	197

As of December 31, 2013, 2012 and 2011, $261 million, $255 million and $187 million, respectively, of the unrecognized tax benefits, if recognized, would have been recorded as a reduction to income tax expense. The remainder would be an adjustment to shareholders’ equity.

We are routinely under audit by the Internal Revenue Service (the “IRS”). We have concluded all U.S. federal income tax matters for years through 2008. The IRS commenced a federal income tax audit for the tax years 2009 and 2010 in the third quarter of 2012. The current federal income tax audit is in the early stage for information gathering and it is not expected to be completed until 2015. We also have income tax audits in process in numerous state, local and international jurisdictions. In our international jurisdictions that comprise a significant portion of our operations, the years that may be examined vary, with the earliest year being 2004. Based on the timing and outcome of examinations of EMC, the result of the expiration of statutes of limitations for specific jurisdictions or the timing and result of ruling requests from taxing authorities, it is reasonably possible that the related unrecognized tax benefits could change from those recorded in our statement of financial position. We anticipate that several of these audits may be finalized within the next twelve months. While we expect the amount of unrecognized tax benefits to change in the next twelve months, we do not expect the change to have a significant impact on our results of operations or financial position.

The $71 million reduction during 2011 for tax positions related to prior years is principally due to the resolution of certain transfer pricing matters, inclusive of the completion of audits in certain foreign jurisdictions and the completion of the 2007 and 2008 U.S. federal income tax audits.

We recognize interest expense and penalties related to income tax matters in income tax expense. For 2013, 2012 and 2011, $9 million, $4 million and $1 million, respectively, in interest expense was recognized. In addition to the unrecognized tax benefits noted above, the gross balance of the accrued interest and penalties were $42 million, $35 million and $32 million as of December 31, 2013, 2012 and 2011, respectively.