INCOME TAXES

Geographic sources of income before income taxes and equity in affiliated companies’ net earnings for the years ended December 31 consist of the following:



	2012		2011		2010
United States	$	1,539	$	2,112	$	1,307
Foreign	3,948		6,706		7,205
Total	$	5,487	$	8,818	$	8,512

FCX’s provision for income taxes for the years ended December 31 consists of the following:



	2012				2011				2010
Current income taxes:
Federal	$	238			$	394			$	207
State	7				21				27
Foreign	1,002				1,934				2,500
Total current	1,247				2,349				2,734

Deferred income taxes (benefits):
Federal	87				82				20
State	18				(19		)		(10		)
Foreign	363				622				239
Total deferred	468				685				249

Changes in Peruvian taxes	(205		)	^a,b	53			^c	—

Provision for income taxes	$	1,510			$	3,087			$	2,983

In July 2012, Sociedad Minera Cerro Verde S.A.A. (Cerro Verde) signed a new 15-year mining stability agreement with the Peruvian government, which is expected to become effective when the current mining stability agreement expires on December 31, 2013. In connection with the new mining stability agreement, Cerro Verde's income tax rate will increase from 30 percent to 32 percent. As a result of the change in the income tax rate, FCX recognized additional deferred tax expense of $29 million ($25 million net of noncontrolling interests) in 2012, which relates primarily to the assets recorded in connection with the 2007 acquisition of FMC.

With the exception of TFM, FCX has not elected to permanently reinvest earnings from its foreign subsidiaries and has recorded deferred tax liabilities for foreign earnings that are available to be repatriated to the U.S. Cerro Verde previously recorded deferred Peruvian income tax liabilities for income taxes that would become payable if the reinvested profits used to fund the initial Cerro Verde sulfide expansion are distributed prior to the expiration of Cerro Verde's current stability agreement on December 31, 2013. Because reinvested profits at Cerro Verde are not expected to be distributed prior to December 31, 2013, a net deferred income tax liability of $234 million ($123 million net of noncontrolling interests) was reversed and recognized as an income tax benefit in 2012.

In September 2011, Peru enacted a new mining tax and royalty regime and also created a special mining burden that companies with stability agreements can elect to pay. Cerro Verde elected to pay this special mining burden during the remaining term of its stability agreement. As a result, Cerro Verde recognized additional current ($14 million) and deferred ($39 million) tax expense totaling $53 million ($49 million net of noncontrolling interests) for the year 2011. The deferred portion of this accrual related primarily to the assets recorded in connection with the 2007 acquisition of FMC.

A reconciliation of the U.S. federal statutory tax rate to FCX’s effective income tax rate for the years ended December 31 follows:



	2012						2011					2010
	Amount				Percent		Amount			Percent		Amount			Percent
U.S. federal statutory tax rate	$	1,920			35	%	$	3,086		35	%	$	2,979		35	%
Foreign tax credit limitation	110				2		163			2		93			1
Percentage depletion	(263		)		(5	)	(283		)	(3	)	(263		)	(3	)
Withholding and other impacts on
foreign earnings	(221		)	^a	(4	)	170			2		174			2
Valuation allowance on minimum
tax credits	(9		)		—		(47		)	(1	)	18			—
State income taxes	17				—		—			—		17			—
Other items, net	(44		)		—		(2		)	—		(35		)	—
Provision for income taxes	$	1,510			28	%	$	3,087		35	%	$	2,983		35	%


a.	Included the reversal of Cerro Verde's deferred income tax liability of $234 million.

FCX paid federal, state, local and foreign income taxes totaling $1.8 billion in 2012, $3.4 billion in 2011 and $2.6 billion in 2010. FCX received refunds of federal, state, local and foreign income taxes of $69 million in 2012, $15 million in 2011 and $26 million in 2010.

The components of deferred taxes follow:



	December 31,
	2012			2011
Deferred tax assets:
Foreign tax credits	$	2,022		$	2,011
Accrued expenses	910			962
Minimum tax credits	474			406
Net operating loss carryforwards	343			356
Employee benefit plans	315			245
Inventory	118			161
Other	256			276
Deferred tax assets	4,438			4,417
Valuation allowances	(2,443		)	(2,393		)
Net deferred tax assets	1,995			2,024

Deferred tax liabilities:
Property, plant, equipment and development costs	(4,563		)	(4,227		)
Undistributed earnings	(884		)	(1,010		)
Other	(60		)	(72		)
Total deferred tax liabilities	(5,507		)	(5,309		)
Net deferred tax liabilities	$	(3,512	)	$	(3,285	)

At December 31, 2012, FCX had U.S. foreign tax credit carryforwards of $2.0 billion that will expire between 2013 and 2022, and U.S. minimum tax credits carryforwards of $474 million that can be carried forward indefinitely, but may be used only to the extent that regular tax exceeds the alternative minimum tax in any given year.

At December 31, 2012, FCX had (i) DRC net operating loss carryforwards of $468 million that can be carried forward indefinitely, (ii) U.S. net state operating loss carryforwards of $508 million that expire between 2013 and 2032, and (iii) Spanish net operating loss carryforwards of $578 million that expire between 2015 and 2029.

On the basis of available information at December 31, 2012, FCX has provided valuation allowances for certain of its deferred tax assets where FCX believes it is more likely than not that some portion or all of such assets will not be realized. Valuation allowances totaled $2.4 billion at December 31, 2012 and 2011, and covered all of FCX’s U.S. foreign tax credit carryforwards, and a portion of its foreign net operating loss carryforwards, U.S. state net operating loss carryforwards, U.S. state deferred tax assets, U.S. capital loss carryforwards and U.S. minimum tax credit carryforwards. These valuation allowances include $82 million at December 31, 2012, for tax benefits that, if recognized, would be credited directly to other comprehensive income.

The $50 million increase in the valuation allowance during 2012 was primarily a result of an increase in FCX's U.S. foreign tax credit carryforwards, U.S. state deferred tax assets, U.S. capital loss carryforwards and U.S. state net operating loss carryforwards.

In 2010, the Chilean legislature approved an increase in mining royalty taxes to help fund earthquake reconstruction activities, education and health programs. Mining royalty taxes at FCX’s El Abra and Candelaria mines were stabilized through 2017 at a rate of 4 percent. However, under the legislation, FCX opted to transfer from its stabilized rate to the sliding scale of 4 to 9 percent (depending on a defined operational margin) for the years 2010 through 2012 and will return to its 4 percent rate for the years 2013 through 2017. Beginning in 2018 and through 2023, rates will move to a sliding scale of 5 to 14 percent.

A summary of the activities associated with FCX’s reserve for unrecognized tax benefits, interest and penalties follows:



	Unrecognized Tax Benefits			Interest			Penalties
Balance at January 1, 2011	$	200		$	33		$	—
Additions:
Prior year tax positions	25			*			*
Current year tax positions	16			*			*
Interest and penalties	—			7			—
Decreases:
Prior year tax positions	(34		)	*			*
Current year tax positions	(8		)	*			*
Lapse of statute of limitations	(53		)	*			*
Interest and penalties	—			(6		)	—
Balance at December 31, 2011	146			34			—
Additions:
Prior year tax positions	17			*			*
Current year tax positions	24			*			*
Interest and penalties	—			3			—
Decreases:
Prior year tax positions	(37		)	*			*
Current year tax positions	—			*			*
Settlements with tax authorities	(11		)	*			*
Lapse of statute of limitations	(1		)	*			*
Interest and penalties	—			(6		)	—
Balance at December 31, 2012	$	138		$	31		$	—

* Amounts not allocated.

The reserve for unrecognized tax benefits of $138 million at December 31, 2012, included $119 million ($63 million net of income tax benefits) that, if recognized, would reduce FCX’s provision for income taxes.

Changes to the reserve for unrecognized tax benefits associated with current year tax positions were primarily related to uncertainties associated with FCX's cost recovery methods and deductibility of contributions. Changes in the reserve for unrecognized tax benefits associated with prior year tax positions were primarily related to uncertainties associated with cost recovery methods. There continues to be uncertainty related to the timing of settlements with taxing authorities, but if additional settlements are agreed upon during the year 2013, FCX could experience a change in its reserve for unrecognized tax benefits.

FCX or its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. The tax years for FCX's major tax jurisdictions that remain subject to examination are as follows:



Jurisdiction	Years Under Examination	Additional Open Years
U.S. Federal	2007-2010	2011-2012
Indonesia	2005-2008, 2011	2009-2010, 2012
Peru	2002-2010	2011-2012
Chile	2010-2011	2012