INCOME TAXES
The income tax expense (benefit) for the years ended December 31 consists of the following (in millions):
|
| | | | | | | | | | | |
| 2013 | | 2012 | | 2011 |
Current: | | | | | |
U.S. Federal | $ | 2,181 |
| | $ | 1,901 |
| | $ | 1,371 |
|
U.S. State and Local | 205 |
| | 182 |
| | 121 |
|
Non-U.S. | 162 |
| | 167 |
| | 166 |
|
Total Current | 2,548 |
| | 2,250 |
| | 1,658 |
|
Deferred: | | | | | |
U.S. Federal | (242 | ) | | (1,871 | ) | | 262 |
|
U.S. State and Local | (22 | ) | | (201 | ) | | 44 |
|
Non-U.S. | 18 |
| | (11 | ) | | 8 |
|
Total Deferred | (246 | ) | | (2,083 | ) | | 314 |
|
Total | $ | 2,302 |
| | $ | 167 |
| | $ | 1,972 |
|
Income before income taxes includes the following components (in millions):
|
| | | | | | | | | | | |
| 2013 | | 2012 | | 2011 |
United States | $ | 6,040 |
| | $ | 384 |
| | $ | 5,309 |
|
Non-U.S. | 634 |
| | 590 |
| | 467 |
|
| $ | 6,674 |
| | $ | 974 |
| | $ | 5,776 |
|
A reconciliation of the statutory federal income tax rate to the effective income tax rate for the years ended December 31 consists of the following:
|
| | | | | | | | |
| 2013 | | 2012 | | 2011 |
Statutory U.S. federal income tax rate | 35.0 | % | | 35.0 | % | | 35.0 | % |
U.S. state and local income taxes (net of federal benefit) | 2.1 |
| | — |
| | 2.0 |
|
Non-U.S. tax rate differential | (1.3 | ) | | (6.1 | ) | | (0.4 | ) |
Nondeductible/nontaxable items | (0.2 | ) | | (0.4 | ) | | (0.1 | ) |
U.S. federal tax credits | (1.2 | ) | | (7.4 | ) | | (1.7 | ) |
Other | 0.1 |
| | (4.0 | ) | | (0.7 | ) |
Effective income tax rate | 34.5 | % | | 17.1 | % | | 34.1 | % |
Our effective tax rate increased to 34.5% in 2013, compared with 17.1% in 2012, primarily due to an increase in total pre-tax income and the decrease in U.S. Federal and state tax credits relative to total pre-tax income. The impact of these factors was partially offset by a portion of the gain from liquidating a foreign subsidiary in early 2013 not being taxable (see note 15).
Beginning in 2012, we were granted a tax incentive for certain of our non-U.S. operations, which is effective through December 31, 2017 and may be extended through December 31, 2022 if additional requirements are satisfied. The tax incentive is conditional upon our meeting specific employment and investment thresholds. The impact of this tax incentive decreased non-U.S. tax expense by $20 million ($0.02 per share) and $22 million ($0.02 per share) for 2013 and 2012, respectively.
Deferred tax liabilities and assets are comprised of the following at December 31 (in millions):
|
| | | | | | | |
| 2013 | | 2012 |
Property, plant and equipment | $ | (3,613 | ) | | $ | (3,624 | ) |
Goodwill and intangible assets | (1,116 | ) | | (1,035 | ) |
Other | (651 | ) | | (617 | ) |
Deferred tax liabilities | (5,380 | ) | | (5,276 | ) |
Pension and postretirement benefits | 3,086 |
| | 4,608 |
|
Loss and credit carryforwards (non-U.S. and state) | 279 |
| | 258 |
|
Insurance reserves | 765 |
| | 737 |
|
Vacation pay accrual | 224 |
| | 209 |
|
Stock compensation | 70 |
| | 159 |
|
Other | 709 |
| | 708 |
|
Deferred tax assets | 5,133 |
| | 6,679 |
|
Deferred tax assets valuation allowance | (251 | ) | | (220 | ) |
Deferred tax asset (net of valuation allowance) | 4,882 |
| | 6,459 |
|
Net deferred tax asset (liability) | $ | (498 | ) | | $ | 1,183 |
|
| | | |
Amounts recognized in the consolidated balance sheets: | | | |
Current deferred tax assets | $ | 684 |
| | $ | 583 |
|
Current deferred tax liabilities (included in other current liabilities) | (48 | ) | | (36 | ) |
Non-current deferred tax assets | 110 |
| | 684 |
|
Non-current deferred tax liabilities | (1,244 | ) | | (48 | ) |
Net deferred tax asset (liability) | $ | (498 | ) | | $ | 1,183 |
|
The valuation allowance increased by $31, $15 and $2 million during the years ended December 31, 2013, 2012 and 2011, respectively.
We have U.S. state and local operating loss and credit carryforwards as follows (in millions):
|
| | | | | | | |
| 2013 | | 2012 |
U.S. state and local operating loss carryforwards | $ | 546 |
| | $ | 608 |
|
U.S. state and local credit carryforwards | $ | 42 |
| | $ | 61 |
|
The operating loss carryforwards expire at varying dates through 2033. The state credits can be carried forward for periods ranging from three years to indefinitely.
We also have non-U.S. loss carryforwards of approximately $956 million as of December 31, 2013, the majority of which may be carried forward indefinitely. As indicated in the table above, we have established a valuation allowance for certain non-U.S. and state carryforwards, due to the uncertainty resulting from a lack of previous taxable income within the applicable tax jurisdictions.
Undistributed earnings of foreign subsidiaries amounted to approximately $4.130 billion at December 31, 2013. Those earnings are considered to be indefinitely reinvested and, accordingly, no deferred income taxes have been provided thereon. Upon distribution of those earnings in the form of dividends or otherwise, we would be subject to income taxes and withholding taxes payable in various jurisdictions, which could potentially be offset by foreign tax credits. Determination of the amount of unrecognized deferred income tax liability is not practicable because of the complexities associated with its hypothetical calculation.
The following table summarizes the activity related to our unrecognized tax benefits (in millions):
|
| | | | | | | | | | | |
| Tax | | Interest | | Penalties |
Balance at January 1, 2011 | $ | 284 |
| | $ | 95 |
| | $ | 7 |
|
Additions for tax positions of the current year | 13 |
| | — |
| | — |
|
Additions for tax positions of prior years | 17 |
| | 6 |
| | — |
|
Reductions for tax positions of prior years for: | | | | | |
Changes based on facts and circumstances | (50 | ) | | (9 | ) | | (2 | ) |
Settlements during the period | (11 | ) | | (19 | ) | | (1 | ) |
Lapses of applicable statute of limitations | (1 | ) | | — |
| | (1 | ) |
Balance at December 31, 2011 | 252 |
| | 73 |
| | 3 |
|
Additions for tax positions of the current year | 13 |
| | — |
| | — |
|
Additions for tax positions of prior years | 7 |
| | 9 |
| | 1 |
|
Reductions for tax positions of prior years for: | | | | | |
Changes based on facts and circumstances | (22 | ) | | (18 | ) | | — |
|
Settlements during the period | (3 | ) | | (7 | ) | | — |
|
Lapses of applicable statute of limitations | (15 | ) | | (4 | ) | | — |
|
Balance at December 31, 2012 | 232 |
| | 53 |
| | 4 |
|
Additions for tax positions of the current year | 15 |
| | — |
| | — |
|
Additions for tax positions of prior years | 20 |
| | 9 |
| | 2 |
|
Reductions for tax positions of prior years for: | | | | | |
Changes based on facts and circumstances | (67 | ) | | (23 | ) | | (1 | ) |
Settlements during the period | (8 | ) | | 1 |
| | — |
|
Lapses of applicable statute of limitations | (1 | ) | | — |
| | (1 | ) |
Balance at December 31, 2013 | $ | 191 |
| | $ | 40 |
| | $ | 4 |
|
The total amount of gross unrecognized tax benefits as of December 31, 2013, 2012 and 2011 that, if recognized, would affect the effective tax rate was $185, $224 and $247 million, respectively. We also had gross recognized tax benefits of $281, $280 and $291 million recorded as of December 31, 2013, 2012 and 2011, respectively, associated with outstanding refund claims for prior tax years. Therefore, we had a net receivable recorded with respect to prior years’ income tax matters in the accompanying consolidated balance sheets. Additionally, we have recognized a receivable for interest of $25, $23 and $27 million for the recognized tax benefits associated with outstanding refund claims as of December 31, 2013, 2012 and 2011, respectively. Our continuing practice is to recognize interest and penalties associated with income tax matters as a component of income tax expense.
We file income tax returns in the U.S. federal jurisdiction, most U.S. state and local jurisdictions, and many non-U.S. jurisdictions. We have substantially resolved all U.S. federal income tax matters for tax years prior to 2005.
In June 2011, we received an IRS Revenue Agent Report (RAR) covering income taxes for tax years 2005 through 2007, in addition to the excise tax matters described in note 8. The income tax RAR proposed adjustments related to the value of acquired software and intangibles, research credit expenditures, and the amount of deductible costs associated with our British Pound Sterling Notes exchange offer completed in May 2007. Receipt of the RAR represents only the conclusion of the examination process. We disagree with some of the proposed adjustments related to these matters. Therefore, we filed protests and, in the third quarter of 2011, the IRS responded to our protests and forwarded the case to IRS Appeals.
In July 2013, we began resolution discussions with IRS Appeals on the income tax matters. We expect the resolution discussions to be concluded within the next twelve months. It should be noted, however, that the ultimate resolution of these matters will result in a refund to UPS, even according to the adjustments proposed by the IRS.
At this time, we do not believe the ultimate resolution of these income tax matters will have a material effect on our financial condition, results of operations, or liquidity.
A number of years may elapse before an uncertain tax position is audited and ultimately settled. It is difficult to predict the ultimate outcome or the timing of resolution for uncertain tax positions. It is reasonably possible that the amount of unrecognized tax benefits could significantly increase or decrease within the next twelve months. Items that may cause changes to unrecognized tax benefits include the timing of interest deductions and the allocation of income and expense between tax jurisdictions. These changes could result from the settlement of ongoing litigation, the completion of ongoing examinations, the expiration of the statute of limitations or other unforeseen circumstances. At this time, an estimate of the range of the reasonably possible change cannot be made.
