Note 13: Income Taxes

The components of income from continuing operations before income taxes were as follows:

	Year Ended December 31,
(dollars in millions)	2014		2013		2012

U.S. operations	$	294	$	219	$	664
Foreign operations		786		636		178

Income from continuing operations before income taxes	$	1,080	$	855	$	842

The provisions for income taxes were as follows:

	Year Ended December 31,
(dollars in millions)	2014			2013			2012

Current:
U.S. federal	$	70		$	–		$	97
U.S. state and local		4			11			7
Foreign		231			166			137
		305			177			241

Deferred:
U.S. federal		–			31			(37	)
U.S. state and local		(3	)		2			(2	)
Foreign		(44	)		(14	)		(45	)
		(47	)		19			(84	)

Income tax provision	$	258		$	196		$	157

The reasons for the differences between the provision for income taxes and income taxes using the U.S. federal income tax rate were as follows:

	Year Ended December 31,
	2014			2013			2012

U.S. federal statutory rate		35.0	%		35.0	%		35.0	%
State and local income taxes		–			1.0			0.4
Foreign statutory rate differential		(10.7	)		(11.6	)		(10.2	)
Change in valuation allowance on deferred tax assets		3.4			(1.7	)		6.6
Nondeductible expenses		(0.1	)		1.1			0.9
Net U.S. tax on foreign source income		(2.9	)		(3.2	)		(12.2	)
All other		(0.8	)		2.3			(1.9	)

Total		23.9	%		22.9	%		18.6	%

Total income taxes paid (dollars in millions)	$	353		$	329		$	240

Components of deferred tax assets (liabilities) were as follows:

	December 31,
(dollars in millions)	2014			2013

Deferred tax liabilities:
Plant and equipment	$	(190	)	$	(171	)
Intangible assets		(221	)		(251	)
Other		(9	)		(16	)
Total deferred tax liabilities		(420	)		(438	)

Deferred tax assets:
Inventory		48			20
Postretirement benefits other than pensions		3			12
Reserves and accruals		160			93
Net operating losses and tax credits		259			246
Pensions		38			16
Other		27			17

Total deferred tax assets		535			404

Valuation allowance		(79	)		(59	)

Net deferred tax assets (liabilities)	$	36		$	(93	)

Changes in the Company’s accruals for unrecognized tax benefits were as follows:

	Year Ended December 31,
(dollars in millions)	2014			2013			2012

Balance at beginning of year	$	103		$	121		$	148
Decreases in estimates for tax positions taken prior to the current year		–			–			(11	)
Increases due to tax positions taken during the current year		6			3			–
Decreases relating to settlements with tax authorities		(10	)		(19	)		(10	)
Decreases resulting from the lapse of applicable statutes of limitation		–			–			(7	)
Net increases (decreases) due to translation and interest		(2	)		(2	)		1

Balance at end of year	$	97		$	103		$	121

The Company has a $97 million accrual for unrecognized tax benefits at December 31, 2014, for which the majority of the uncertainties surrounding the benefits are expected to be settled during the next twelve-month period as a result of the conclusion of various income tax audits or due to the expiration of the applicable statute of limitations. The Company is not currently aware of any material amounts included as unrecognized tax benefits at December 31, 2014 that, if recognized, would not impact the Company’s future effective income tax rate.

There were no material payments for interest or penalties for the years ended December 31, 2014, 2013 or 2012. Also, there were no material accruals for unpaid interest or penalties at December 31, 2014 or 2013.

The Company and its subsidiaries file income tax returns in the United States, various domestic states and localities and in many foreign jurisdictions. The earliest years’ tax returns filed by the Company that are still subject to examination by authorities in the major tax jurisdictions are as follows:

United States		United Kingdom		Canada		France		Germany		Norway		Singapore		Italy
2011		2012		2006		2012		2008		2010		2010		2008

At December 31, 2014, the Company had net operating loss and credit carryforwards in numerous jurisdictions with various expiration periods, including certain jurisdictions which have no expiration period. Changes in the Company’s valuation allowances against these net operating loss and credit carryforwards and other deferred tax assets were as follows:

	Year Ended December 31,
(dollars in millions)	2014			2013			2012

Balance at beginning of year	$	59		$	84		$	30
Valuation allowances for unutilized net operating losses and excess foreign tax credits generated in the current year		25			11			36
Change in valuation allowances related to prior years		(2	)		(16	)		19
Write-off of valuation allowances and associated deferred tax assets for certain losses that have no possibility of being utilized		–			(19	)		–
Effect of translation		(3	)		(1	)		(1	)

Balance at end of year	$	79		$	59		$	84

The Company has considered all available evidence in assessing the need for the valuation allowance, including future taxable income, future foreign source income, and ongoing prudent and feasible tax planning strategies. In the event the Company were to determine that it would not be able to realize all or part of its net deferred tax assets in the future, an adjustment to the net deferred tax assets would be charged to income in the period such determination was made.

Tax attribute carryforwards which are available for use on future income tax returns at December 31, 2014 are as follows:

(dollars in millions)	Domestic		Foreign		Expiration

Net operating losses - regular income tax	$	–	$	381	2018 - Indefinite
Net operating losses – state income tax	$	6	$	–		2018 – 2034
Foreign tax credits	$	93	$	–		2016 – 2024

The tax benefit that the Company receives with respect to certain stock compensation plan transactions is credited to capital in excess of par value and does not reduce income tax expense. This benefit amounted to $6 million, $10 million and $12 million in 2014, 2013 and 2012, respectively.

The Company considers all unremitted earnings of its foreign subsidiaries, except certain amounts primarily earned before 2003, certain amounts earned during 2009, certain amounts earned by NATCO, and amounts previously subjected to tax in the U.S., to be permanently reinvested. An estimate of the amounts considered permanently reinvested is $5.1 billion. It is not practical for the Company to compute the amount of additional U.S. tax that would be due on this amount. The Company has provided deferred income taxes on the earnings that the Company anticipates will be remitted.

The Company operates in jurisdictions, primarily Singapore and Malaysia, in which it has been granted tax holidays. The benefit of these holidays for 2014, 2013 and 2012 was approximately $11 million, $3 million and $2 million, respectively.