INCOME TAXES

Income taxes are recognized for the amount of taxes payable for the current year and for the impact of deferred tax assets and liabilities, which represent future tax consequences of events that have been recognized differently in the financial statements than for tax purposes. Deferred tax assets and liabilities are established using the enacted statutory tax rates and are adjusted for any changes in such rates in the period of change.

Earnings from continuing operations before income taxes consisted of the following:



Years ended June 30	2012		2011		2010
United States	$	7,584	$	8,858	$	8,258
International	5,201		6,139		6,610
TOTAL	12,785		14,997		14,868

Income taxes on continuing operations consisted of the following:



Years ended June 30	2012			2011			2010
CURRENT TAX EXPENSE
U.S. federal	$	1,913		$	1,770		$	2,118
International	1,374			1,149			1,581
U.S. state and local	246			256			285
	3,533			3,175			3,984
DEFERRED TAX EXPENSE
U.S. federal	83			200			250
International and other	(148		)	(76		)	(217		)
	(65		)	124			33
TOTAL TAX EXPENSE	3,468			3,299			4,017

A reconciliation of the U.S. federal statutory income tax rate to our actual income tax rate on continuing operations is provided below:



Years ended June 30	2012		2011		2010
U.S. federal statutory income tax rate	35.0	%	35.0	%	35.0	%
Country mix impacts of foreign operations	(8.1	)%	(8.2	)%	(7.7	)%
Changes in uncertain tax positions	(1.3	)%	(3.6	)%	(0.4	)%
Patient Protection and Affordable Care Act	—	%	—	%	1.0	%
Impairment Adjustments	3.7	%	—	%	—	%
Other	(2.2	)%	(1.2	)%	(0.9	)%
EFFECTIVE INCOME TAX RATE	27.1	%	22.0	%	27.0	%

Changes in uncertain tax positions represent changes in our net liability related to prior year tax positions.

In March 2010, the Patient Protection and Affordable Care Act (PPACA) was signed into law. One of the provisions of the PPACA changed the taxability of federal subsidies received by plan sponsors that provide retiree prescription drug benefits at least equivalent to Medicare Part D coverage. As a result of the change in taxability of the federal subsidy, we were required to make adjustments to deferred tax asset balances, resulting in a $152 charge to income tax expense in 2010.

Tax benefits credited to shareholders' equity totaled $661 and $510 for the years ended June 30, 2012 and 2011, respectively. These primarily relate to the tax effects of net investment hedges, excess tax benefits from the exercise of stock options and the impacts of certain adjustments to pension and other retiree benefit obligations recorded in shareholders' equity.

We have undistributed earnings of foreign subsidiaries of approximately $39 billion at June 30, 2012, for which deferred taxes have not been provided. Such earnings are considered indefinitely invested in the foreign subsidiaries. If such earnings were repatriated, additional tax expense may result, although the calculation of such additional taxes is not practicable.

A reconciliation of the beginning and ending liability for uncertain tax positions is as follows:



	2012			2011			2010
BEGINNING OF YEAR	$	1,848		$	1,797		$	2,003
Increases in tax positions for prior years	166			323			128
Decreases in tax positions for prior years	(188		)	(388		)	(146		)
Increases in tax positions for current year	178			222			193
Settlements with taxing authorities	(49		)	(168		)	(216		)
Lapse in statute of limitations	(81		)	(94		)	(45		)
Currency translation	(101		)	156			(120		)
END OF YEAR	1,773			1,848			1,797

The Company is present in over 150 taxable jurisdictions and, at any point in time, has 40-50 jurisdictional audits underway at various stages of completion. We evaluate our tax positions and establish liabilities for uncertain tax positions that may be challenged by local authorities and may not be fully sustained, despite our belief that the underlying tax positions are fully supportable. Uncertain tax positions are reviewed on an ongoing basis and are adjusted in light of changing facts and circumstances, including progress of tax audits, developments in case law and closing of statute of limitations. Such adjustments are reflected in the tax provision as appropriate. The Company is making a concerted effort to bring its audit inventory to a more current position. We have done this by working with tax authorities to conduct audits for several open years at once. We have tax years open ranging from 2002 and forward. We are generally not able to reliably estimate the ultimate settlement amounts until the close of the audit. While we do not expect material changes, it is possible that the amount of unrecognized benefit with respect to our uncertain tax positions will significantly increase or decrease within the next 12 months related to the audits described above. At this time, we are not able to make a reasonable estimate of the range of impact on the balance of uncertain tax positions or the impact on the effective tax rate related to these items.

Included in the total liability for uncertain tax positions at June 30, 2012, is $1.4 billion that, depending on the ultimate resolution, could impact the effective tax rate in future periods.

We recognize accrued interest and penalties related to uncertain tax positions in income tax expense. As of June 30, 2012, 2011 and 2010, we had accrued interest of $439, $475 and $622 and penalties of $66, $80 and $89, respectively, that are not included in the above table. During the fiscal years ended June 30, 2012, 2011 and 2010, we recognized $(2), $(197) and $38 in interest expense/(benefit) and $(10) , $(16) and $(8) in penalties expense/(benefit), respectively.

Deferred income tax assets and liabilities were comprised of the following:



June 30	2012			2011
DEFERRED TAX ASSETS
Pension and postretirement benefits	$	2,366		$	1,406
Stock-based compensation	1,304			1,284
Loss and other carryforwards	853			874
Goodwill and other intangible assets	78			298
Accrued marketing and promotion	238			217
Fixed assets	165			111
Unrealized loss on financial and foreign exchange transactions	363			770
Accrued interest and taxes	28			28
Inventory	58			52
Other	761			834
Valuation allowances	(375		)	(293		)
TOTAL	5,839			5,581

DEFERRED TAX LIABILITIES
Goodwill and other intangible assets	$	11,816		$	12,206
Fixed assets	1,719			1,742
Other	286			211
TOTAL	13,821			14,159

Net operating loss carryforwards were $2.8 billion and $2.7 billion at June 30, 2012 and 2011, respectively. If unused, $1.2 billion will expire between 2013 and 2032. The remainder, totaling $1.6 billion at June 30, 2012, may be carried forward indefinitely.