The components of International Paper’s earnings from continuing operations before income taxes and equity earnings by taxing jurisdiction were as follows:
|
| | | | | | | | | |
In millions | 2013 |
| 2012 |
| 2011 |
|
Earnings (loss) | | | |
U.S. | $ | 394 |
| $ | 478 |
| $ | 874 |
|
Non-U.S. | 455 |
| 546 |
| 584 |
|
Earnings (loss) from continuing operations before income taxes and equity earnings | $ | 849 |
| $ | 1,024 |
| $ | 1,458 |
|
The provision (benefit) for income taxes (excluding noncontrolling interests) by taxing jurisdiction was as follows:
|
| | | | | | | | | |
In millions | 2013 |
| 2012 |
| 2011 |
|
Current tax provision (benefit) | | | |
U.S. federal | $ | (697 | ) | $ | 14 |
| $ | (78 | ) |
U.S. state and local | (95 | ) | 11 |
| (19 | ) |
Non-U.S. | 123 |
| 102 |
| 91 |
|
| $ | (669 | ) | $ | 127 |
| $ | (6 | ) |
Deferred tax provision (benefit) | | | |
U.S. federal | $ | 186 |
| $ | 226 |
| $ | 207 |
|
U.S. state and local | (21 | ) | 6 |
| 46 |
|
Non-U.S. | (19 | ) | (28 | ) | 64 |
|
| $ | 146 |
| $ | 204 |
| $ | 317 |
|
Income tax provision | $ | (523 | ) | $ | 331 |
| $ | 311 |
|
The Company’s deferred income tax provision (benefit) includes a $7 million provision, a $25 million provision and a $8 million benefit for 2013, 2012 and 2011, respectively, for the effect of changes in non-U.S. and U.S. state tax rates.
International Paper made income tax payments, net of refunds, of $291 million, $95 million and $44 million in 2013, 2012 and 2011, respectively.
A reconciliation of income tax expense using the statutory U.S. income tax rate compared with the actual income tax provision follows:
|
| | | | | | | | | |
In millions | 2013 |
| 2012 |
| 2011 |
|
Earnings (loss) from continuing
operations before income taxes
and equity earnings | $ | 849 |
| $ | 1,024 |
| $ | 1,458 |
|
Statutory U.S. income tax rate | 35 | % | 35 | % | 35 | % |
Tax expense (benefit) using statutory U.S. income tax rate | 297 |
| 358 |
| 510 |
|
State and local income taxes | (4 | ) | 11 |
| 16 |
|
Tax rate and permanent differences on non-U.S. earnings | (90 | ) | (116 | ) | (34 | ) |
Net U.S. tax on non-U.S. dividends | (15 | ) | 48 |
| 23 |
|
Tax benefit on manufacturing activities | (27 | ) | (15 | ) | (8 | ) |
Non-deductible business expenses | 4 |
| 7 |
| 6 |
|
Non-deductible goodwill | 147 |
| 34 |
| — |
|
Tax Audits | (770 | ) | — |
| — |
|
Sales of non-strategic businesses | — |
| — |
| (195 | ) |
Retirement plan dividends | (5 | ) | (5 | ) | (5 | ) |
Tax basis adjustments | (33 | ) | — |
| — |
|
Tax credits | (23 | ) | — |
| (7 | ) |
Medicare subsidy | — |
| 5 |
| — |
|
Other, net | (4 | ) | 4 |
| 5 |
|
Income tax provision | $ | (523 | ) | $ | 331 |
| $ | 311 |
|
Effective income tax rate | (62 | )% | 32 | % | 21 | % |
The tax effects of significant temporary differences, representing deferred income tax assets and liabilities at December 31, 2013 and 2012, were as follows:
|
| | | | | | |
In millions | 2013 |
| 2012 |
|
Deferred income tax assets: | | |
Postretirement benefit accruals | $ | 193 |
| $ | 229 |
|
Pension obligations | 725 |
| 1,620 |
|
Alternative minimum and other tax credits | 515 |
| 752 |
|
Net operating loss carryforwards | 610 |
| 579 |
|
Compensation reserves | 281 |
| 242 |
|
Other | 284 |
| 406 |
|
Gross deferred income tax assets | 2,608 |
| 3,828 |
|
Less: valuation allowance | (413 | ) | (400 | ) |
Net deferred income tax asset | $ | 2,195 |
| $ | 3,428 |
|
Deferred income tax liabilities: | | |
Intangibles | $ | (304 | ) | $ | (378 | ) |
Plants, properties and equipment | (2,919 | ) | (3,126 | ) |
Forestlands and related installment sales | (2,307 | ) | (2,511 | ) |
Gross deferred income tax liabilities | $ | (5,530 | ) | $ | (6,015 | ) |
Net deferred income tax liability | $ | (3,335 | ) | $ | (2,587 | ) |
Deferred income tax assets and liabilities are recorded in the accompanying consolidated balance sheet under the captions Deferred income tax assets, Deferred charges and other assets, Other accrued liabilities, and Deferred income taxes. The acquisition of Temple-Inland in 2012 resulted in additional deferred tax assets of $600 million and deferred income tax liabilities of $1.8 billion. In addition, there is a decrease in deferred income tax assets principally relating to the tax impact of changes in qualified pension liabilities. Deferred tax liabilities decreased primarily due to the recognition of an installment sale and book depreciation in excess of tax depreciation. Certain tax attributes reflected on our tax returns as filed differ significantly from those reflected in the deferred income tax accounts due to uncertain tax benefits.
The valuation allowance for deferred income tax assets as of December 31, 2013 was $413 million. The net change in the total valuation allowance for the year ended December 31, 2013 was an increase of $13 million. The increase is primarily attributable to non-U.S. net operating losses that the Company currently does not foresee utilizing within the statutory carryforward period.
A reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended December 31, 2013, 2012 and 2011 is as follows:
|
| | | | | | | | | |
In millions | 2013 |
| 2012 |
| 2011 |
|
Balance at January 1 | $ | (972 | ) | $ | (857 | ) | $ | (199 | ) |
(Additions) reductions based on tax positions related to current year | (22 | ) | 12 |
| (2 | ) |
Additions for tax positions of prior years | (29 | ) | (140 | ) | (719 | ) |
Reductions for tax positions of prior years | 824 |
| 6 |
| 29 |
|
Settlements | 26 |
| 2 |
| 2 |
|
Expiration of statutes of
limitations | 11 |
| 7 |
| 25 |
|
Currency translation adjustment | 1 |
| (2 | ) | 7 |
|
Balance at December 31 | $ | (161 | ) | $ | (972 | ) | $ | (857 | ) |
Included in the balance at December 31, 2013, 2012 and 2011 are $1 million, $14 million and $9 million, respectively, for tax positions for which the ultimate benefits are highly certain, but for which there is uncertainty about the timing of such benefits. However, except for the possible effect of any penalties, any disallowance that would change the timing of these benefits would not affect the annual effective tax rate, but would accelerate the payment of cash to the taxing authority to an earlier period.
The Company accrues interest on unrecognized tax benefits as a component of interest expense. Penalties, if incurred, are recognized as a component of income tax expense. The Company had approximately $54 million and $104 million accrued for the payment of estimated interest and penalties associated with unrecognized tax benefits at December 31, 2013 and 2012, respectively.
The major jurisdictions where the Company files income tax returns are the United States, Brazil, France, Poland and Russia. Generally, tax years 2002 through 2012 remain open and subject to examination by the relevant tax authorities. The Company is typically engaged in various tax examinations at any given time, both in the United States and overseas. In 2013, the Company concluded its examination with the U.S. Internal Revenue Service for the tax years 2006 through 2009 for both International Paper Company and Temple-Inland. As a result of the completion of the examinations, the Company reduced its unrecognized tax benefits by approximately $844 million. Other pending audit settlements and the expiration of statute of limitations could further reduce the uncertain tax positions by $4 million during the next twelve months. While the Company believes that it is adequately accrued for possible audit adjustments, the final resolution of these examinations cannot be determined at this time and could result in final settlements that differ from current estimates.
Included in the Company’s 2013, 2012 and 2011 income tax provision (benefit) are $(924) million, $(85) million and $(266) million, respectively, related to special items. The components of the net provisions related to special items were as follows:
|
| | | | | | | | | |
In millions | 2013 |
| 2012 |
| 2011 |
|
Special items | $ | (151 | ) | $ | (104 | ) | $ | (293 | ) |
Tax-related adjustments: | | | |
Internal restructurings | (4 | ) | 14 |
| 24 |
|
India deal costs | — |
| — |
| 9 |
|
IP UK valuation allowance release | — |
| — |
| (13 | ) |
Settlement of tax audits and legislative changes | (770 | ) | — |
| 5 |
|
Medicare D deferred income tax write-off | — |
| 5 |
| — |
|
Other tax adjustments | 1 |
| — |
| 2 |
|
Income tax provision (benefit) related to special items | $ | (924 | ) | $ | (85 | ) | $ | (266 | ) |
Excluding the impact of special items and nonoperating pension expense, the 2013, 2012 and 2011 income tax provisions were $527 million, $456 million and $591 million, respectively, or 27%, 29% and 32%, respectively, of pre-tax earnings before equity earnings.
The following details the scheduled expiration dates of the Company’s net operating loss and income tax credit carryforwards:
|
| | | | | | | | | | | | |
In millions | 2014
Through
2023 |
| 2024
Through
2033 |
| Indefinite |
| Total |
|
U.S. federal and non-U.S. NOLs | $ | 21 |
| $ | 3 |
| $ | 400 |
| $ | 424 |
|
State taxing jurisdiction NOLs | 152 |
| 120 |
| — |
| 272 |
|
U.S. federal, non-
U.S. and state tax credit carryforwards | 117 |
| 31 |
| 454 |
| 602 |
|
State capital loss carryforwards | 23 |
| — |
| — |
| 23 |
|
Total | $ | 313 |
| $ | 154 |
| $ | 854 |
| $ | 1,321 |
|
Deferred income taxes are not provided for temporary differences of approximately $5.1 billion, $4.7 billion and $4.5 billion as of December 31, 2013, 2012 and 2011, respectively, representing earnings of non-U.S. subsidiaries intended to be permanently reinvested. Computation of the potential deferred tax liability associated with these undistributed earnings and other basis differences is not practicable.
The American Taxpayer Relief Act of 2012 (the “Act”) was signed into law on January 2, 2013. The Act retroactively restored several expired business tax provisions, including the research and experimentation credit and the Subpart F controlled foreign corporation look-through exception. Because a change in tax law is accounted for in the period of enactment, the retroactive effect of the Act on the Company's U.S. federal taxes for 2012 of a benefit of approximately $32 million was recognized in the first quarter of 2013.
