Note 13 – Income Tax Provision

The provision for income taxes consisted of the following:

	Years ended March 31,
(Dollars in millions)	2015			2014			2013
Current
Federal	$	(25	)	$	(24	)	$	(15	)
State		(15	)		(3	)		41
Foreign		9			8			6
Total current		(31	)		(19	)		32
Deferred
Federal		644			460			721
State		117			54			69
Foreign		(1	)		2			2
Total deferred		760			516			792
Provision for income taxes	$	729		$	497		$	824

A reconciliation between the U.S. federal statutory tax rate and the effective tax rate is as follows:

	Years ended March 31,
	2015			2014			2013
Provision for income taxes at U.S. federal statutory tax rate		35.0	%		35.0	%		35.0	%
State and local taxes (net of federal tax benefit)		3.2	%		3.1	%		3.2	%
Other		(0.3	)%		(1.4	)%		-	%
Effective tax rate		37.9	%		36.7	%		38.2	%

For fiscal 2015, 2014, and 2013 the amounts in Other in the table above include benefits from federal plug-in and electric vehicle credits offset by adjustments for the differences between the income tax accrued in the prior year as compared with the actual liability on the income tax returns as filed.

The net deferred income tax liabilities, by tax jurisdiction, are as follows:

	March 31,
(Dollars in millions)	2015		2014
Federal	$	6,873	$	6,217
State		646		529
Foreign		-		1
Net deferred income tax liability	$	7,519	$	6,747

Note 13 – Income Tax Provision (Continued)

Our net deferred income tax liability consists of the following deferred tax liabilities and assets:

	March 31,
(Dollars in millions)	2015			2014¹
Liabilities:
Lease transactions	$	8,576		$	7,115
State taxes		570			482
Mark-to-market of investments in marketable securities and derivatives		292			138
Other		329			295
Deferred tax liabilities	$	9,767		$	8,030

Assets:
Provision for credit and residual value losses		328			292
Deferred costs and fees		258			211
Net operating loss and tax credit carryforwards		1,615			742
Other		67			56
Deferred tax assets		2,268			1,301
Valuation allowance		(20	)		(18	)
Net deferred tax assets	$	2,248		$	1,283
Net deferred income tax liability²	$	7,519		$	6,747

¹ Certain prior period amounts have been reclassified to conform to the current period presentation.

² Balance includes deferred tax liabilities attributable to unrealized gain or loss included in accumulated other comprehensive income or loss, net of $136 million and $124 million at March 31, 2015 and 2014, respectively. The change in this deferred liability is not included in total deferred tax expense.

We have deferred tax assets related to our cumulative federal net operating loss carryforwards of $1,435 million and $591 million available at March 31, 2015 and 2014, respectively. The federal net operating loss carryforwards will expire beginning in fiscal 2029 through fiscal 2035. At March 31, 2015, we have a deferred tax asset of $71 million for state tax net operating loss carryforwards which will expire in fiscal 2016 through fiscal 2035. At March 31, 2014, we had deferred tax assets of $56 million for state tax net operating loss carryforwards which will expire in fiscal 2015 through fiscal 2034. For fiscal 2014, we reclassified lease-related charge-offs of $18 million from Provision for credit and residual value losses to Lease transactions for comparative purposes to these items for fiscal 2015.

On December 19, 2014, the Tax Increase Prevention Act of 2014 (the “Act”) was enacted which extended bonus depreciation. The impact of the Act is reflected in our federal tax loss carryforwards. Realization with respect to the federal tax loss carryforwards is dependent on generating sufficient income prior to expiration of the loss carryforwards. Although realization is not assured, management believes it is more likely than not that the deferred tax assets will be realized. The amount of the deferred tax assets considered realizable could be reduced if management’s estimates change.

Note 13 – Income Tax Provision (Continued)

In addition, at March 31, 2015 and 2014, we have deferred tax assets for federal and state hybrid credits of $96 million and $80 million, respectively. The deferred tax assets related to state tax net operating losses and state hybrid credits are reduced by a valuation allowance of $20 million at March 31, 2015. The deferred tax assets related to state tax net operating losses and charitable contributions were reduced by a valuation allowance of $18 million at March 31, 2014. The determination of the valuation allowance is based on Management’s estimate of future taxable income during the respective carryforward periods. Apart from the valuation allowance, we believe that the remaining deferred tax assets will be realized in full. We made net tax payments of $143 million for fiscal 2015 and received a net tax refund of $30 million in fiscal 2014.

We have made an assertion of permanent reinvestment of earnings from our foreign subsidiary; as a result, U.S. taxes have not been provided for unremitted earnings of our foreign subsidiary. At March 31, 2015, these unremitted earnings totaled $196 million. Determination of the amount of the deferred tax liability is not practicable, and accordingly no estimate of the unrecorded deferred tax liability is provided. Although there are no foreseeable events causing repatriation of earnings, possible examples may include but not be limited to parent company capital needs or exiting the business in the foreign country.

At March 31, 2015, we had a receivable of $13 million for our share of the income tax in those states where we filed consolidated or combined returns with TMNA and its subsidiaries. At March 31, 2014, the payable for our share of the income tax in those states where we filed consolidated or combined returns with TMNA and its subsidiaries was $11 million. At March 31, 2015 we had a receivable of $5 million for federal and state income tax from TMCC affiliated companies. At March 31, 2014, we had a receivable of less than $1 million for federal and state income tax from TMCC affiliated companies. Such TMCC affiliated companies include TFSA, Toyota Financial Savings Bank (“TFSB”), and Toyota Financial Services Securities USA Corporation.

The guidance for the accounting and reporting for income taxes requires us to assess tax positions in cases where the interpretation of the tax law may be uncertain.

The change in unrecognized tax benefits in fiscal 2015, 2014 and 2013 are as follows:

	March 31,
(Dollars in millions)	2015			2014			2013
Balance at beginning of the year	$	6		$	7		$	8
Increases related to positions taken during the current year		-			-			1
Decreases related to positions taken during the prior years		-			(1	)		-
Settlements		(6	)		-			(2	)
Balance at end of year	$	-		$	6		$	7

At March 31, 2015, less than $1 million of the respective unrecognized tax benefits would, if recognized, have an effect on the effective tax rate. At March 31, 2014 and 2013, approximately $1 million of the respective unrecognized tax benefits at each year end would, if recognized, have an effect on the effective tax rate. There are no amounts remaining in the respective unrecognized tax benefits at March 31, 2015 and 2014 that are related to the timing of deductibility. During fiscal 2015, $1 million of the decrease in unrecognized tax benefits had an effect on the effective tax rate. We do not have any positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase or decrease within 12 months.

Note 13 – Income Tax Provision (Continued)

We accrue interest, if applicable, related to uncertain income tax positions in interest expense. Statutory penalties, if applicable, accrued with respect to uncertain income tax positions are recognized as an addition to the income tax liability. For each of fiscal 2015, 2014, and 2013, less than $1 million was accrued for interest and no penalties were accrued.

Tax-related Contingencies

As of March 31, 2015, we remain under IRS examination for fiscal 2015 and 2014. The IRS examinations for fiscal 2013 and 2012 were concluded in the first quarter of fiscal 2015.

On August 1, 2014, the New Jersey Tax Court issued its opinion in a case involving TMCC which was favorable to TMCC. While it is possible that the State of New Jersey may appeal this decision, the FIN 48 liability and related accrued interest were released in the second quarter. This decision did not have a significant impact on the effective tax rate or on our Consolidated Statement of Income and our Consolidated Balance Sheet.