INCOME TAXES
In accordance with GAAP, we have elected to recognize accrued interest related to unrecognized tax benefits and tax-related penalties in the Provision for/(Benefit from) income taxes on our consolidated income statement.
Valuation of Deferred Tax Assets and Liabilities
Deferred tax assets and liabilities are recognized based on the future tax consequences attributable to temporary differences that exist between the financial statement carrying value of assets and liabilities and their respective tax bases, and operating loss and tax credit carryforwards on a taxing jurisdiction basis. We measure deferred tax assets and liabilities using enacted tax rates that will apply in the years in which we expect the temporary differences to be recovered or paid.
Our accounting for deferred tax consequences represents our best estimate of the likely future tax consequences of events that have been recognized on our financial statements or tax returns and their future probability. In assessing the need for a valuation allowance, we consider both positive and negative evidence related to the likelihood of realization of the deferred tax assets. If, based on the weight of available evidence, it is more likely than not that the deferred tax assets will not be realized, we record a valuation allowance.
NOTE 22. INCOME TAXES (Continued)
Components of Income Taxes
Components of income taxes excluding discontinued operations, cumulative effects of changes in accounting principles, other comprehensive income, and equity in net results of affiliated companies accounted for after-tax, were as follows:
|
| | | | | | | | | | | |
| 2013 | | 2012 | | 2011 |
Income before income taxes, excluding equity in net results of affiliated companies accounted for after-tax (in millions) | | | | | |
U.S. | $ | 6,523 |
| | $ | 6,639 |
| | $ | 6,043 |
|
Non-U.S. | (591 | ) | | 493 |
| | 2,138 |
|
Total | $ | 5,932 |
| | $ | 7,132 |
| | $ | 8,181 |
|
Provision for/(Benefit from) income taxes (in millions) | |
| | |
| | |
|
Current | |
| | |
| | |
|
Federal | $ | (19 | ) | | $ | 4 |
| | $ | (4 | ) |
Non-U.S. | 302 |
| | 270 |
| | 298 |
|
State and local | (40 | ) | | 3 |
| | (24 | ) |
Total current | 243 |
| | 277 |
| | 270 |
|
Deferred | |
| | |
| | |
|
Federal | (200 | ) | | 2,076 |
| | (9,785 | ) |
Non-U.S. | 321 |
| | (126 | ) | | (1,590 | ) |
State and local | (511 | ) | | (171 | ) | | (436 | ) |
Total deferred | (390 | ) | | 1,779 |
| | (11,811 | ) |
Total | $ | (147 | ) | | $ | 2,056 |
| | $ | (11,541 | ) |
Reconciliation of effective tax rate | |
| | |
| | |
|
U.S. statutory rate | 35.0 | % | | 35.0 | % | | 35.0 | % |
Non-U.S. tax rates under U.S. rates | (1.5 | ) | | (1.6 | ) | | (1.5 | ) |
State and local income taxes | 1.0 |
| | 0.2 |
| | 1.1 |
|
General business credits | (5.9 | ) | | 0.3 |
| | (1.9 | ) |
Dispositions and restructurings | (26.0 | ) | | (1.7 | ) | | 6.8 |
|
U.S. tax on non-U.S. earnings | (2.0 | ) | | (1.0 | ) | | (0.8 | ) |
Prior year settlements and claims | (0.2 | ) | | (1.8 | ) | | (0.2 | ) |
Tax-related interest | (0.2 | ) | | — |
| | (0.9 | ) |
Tax-exempt income | (5.9 | ) | | (3.9 | ) | | (3.9 | ) |
Enacted change in tax rates | 3.0 |
| | 1.7 |
| | (0.1 | ) |
Valuation allowances | (0.8 | ) | | 1.6 |
| | (172.3 | ) |
Other | 1.0 |
| | — |
| | (2.4 | ) |
Effective rate | (2.5 | )% | | 28.8 | % | | (141.1 | )% |
Included in “Dispositions and restructurings” is the recognition of deferred tax assets for investments in our European operations. Under GAAP, we do not recognize deferred tax assets related to stock investment in affiliates until it becomes apparent they will be realized in the foreseeable future. In the fourth quarter of 2013, we restructured certain of our European affiliates. We have made tax elections to include the operating results of these affiliates in our U.S. tax returns. As a result, we anticipate the realization of tax benefits related to stock investments in these European affiliates and have recorded deferred tax assets of $1.5 billion.
The American Taxpayer Relief Act of 2012 reinstated the U.S. federal research and development tax credit and U.S. tax deferral of certain foreign source income, retroactive to January 1, 2012. As a result, the tax provision for the period ended December 31, 2013 reflects a $233 million tax benefit related to the retroactive provisions of the Act.
NOTE 22. INCOME TAXES (Continued)
We historically have provided deferred taxes for the presumed repatriation to the United States of earnings from nearly all non-U.S. subsidiaries. During 2011, we determined that $6.9 billion of these non-U.S. subsidiaries’ undistributed earnings are now indefinitely reinvested outside the United States. As management has determined that the earnings of these subsidiaries are not required as a source of funding for U.S. operations, such earnings are not planned to be distributed to the United States in the foreseeable future. As a result of this change in assertion, deferred tax liabilities related to undistributed foreign earnings decreased by $63 million.
As of December 31, 2013, $7.5 billion of non-U.S. earnings are considered indefinitely reinvested in operations outside the United States, for which deferred taxes have not been provided. These earnings have been subject to significant non-U.S. taxes; repatriation in their entirety would result in a residual U.S. tax liability of about $1 billion.
At the end of 2011, our U.S. operations had returned to a position of cumulative profits for the most recent 3-year period. We concluded that this record of cumulative profitability in recent years, our ten consecutive quarters of pre-tax operating profits, our successful completion of labor negotiations with the UAW, and our business plan showing continued profitability provided assurance that our future tax benefits more likely than not would be realized. Accordingly, at year-end 2011, we released almost all of our valuation allowance against net deferred tax assets for entities in the United States, Canada, and Spain.
Components of Deferred Tax Assets and Liabilities
The components of deferred tax assets and liabilities were as follows (in millions):
|
| | | | | | | |
| December 31,
2013 | | December 31,
2012 |
Deferred tax assets | | | |
Employee benefit plans | $ | 4,907 |
| | $ | 8,079 |
|
Net operating loss carryforwards | 2,364 |
| | 2,417 |
|
Tax credit carryforwards | 5,675 |
| | 4,973 |
|
Research expenditures | 2,236 |
| | 2,321 |
|
Dealer and dealers’ customer allowances and claims | 2,106 |
| | 1,820 |
|
Other foreign deferred tax assets | 1,567 |
| | 1,790 |
|
Allowance for credit losses | 143 |
| | 146 |
|
All other | 2,736 |
| | 1,176 |
|
Total gross deferred tax assets | 21,734 |
| | 22,722 |
|
Less: valuation allowances | (1,633 | ) | | (1,923 | ) |
Total net deferred tax assets | 20,101 |
| | 20,799 |
|
Deferred tax liabilities | |
| | |
|
Leasing transactions | 1,138 |
| | 1,145 |
|
Deferred income | 2,075 |
| | 2,094 |
|
Depreciation and amortization (excluding leasing transactions) | 2,430 |
| | 1,561 |
|
Finance receivables | 723 |
| | 616 |
|
Other foreign deferred tax liabilities | 311 |
| | 379 |
|
All other | 707 |
| | 289 |
|
Total deferred tax liabilities | 7,384 |
| | 6,084 |
|
Net deferred tax assets/(liabilities) | $ | 12,717 |
| | $ | 14,715 |
|
At December 31, 2013, we have a valuation allowance of $1.6 billion primarily for deferred tax assets related to our South America operations.
Operating loss carryforwards for tax purposes were $7.6 billion at December 31, 2013, resulting in a deferred tax asset of $2.4 billion. There is no expiration date for $4.2 billion of these losses. The remaining losses begin to expire in 2016, though a substantial portion expire beyond 2020. Tax credits available to offset future tax liabilities are $5.7 billion. A substantial portion of these credits have a remaining carryforward period of 10 years or more. Tax benefits of operating loss and tax credit carryforwards are evaluated on an ongoing basis, including a review of historical and projected future operating results, the eligible carryforward period, and other circumstances.
NOTE 22. INCOME TAXES (Continued)
Other
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows for the years listed (in millions):
|
| | | | | | | |
| 2013 | | 2012 |
Beginning balance | $ | 1,547 |
| | $ | 1,721 |
|
Increase – tax positions in prior periods | 128 |
| | 84 |
|
Increase – tax positions in current period | 45 |
| | 19 |
|
Decrease – tax positions in prior periods | (24 | ) | | (246 | ) |
Settlements | (79 | ) | | (31 | ) |
Lapse of statute of limitations | (54 | ) | | (14 | ) |
Foreign currency translation adjustment | 1 |
| | 14 |
|
Ending balance | $ | 1,564 |
| | $ | 1,547 |
|
The amount of unrecognized tax benefits at December 31, 2013 and 2012 that would affect the effective tax rate if recognized was $1.2 billion and $1.2 billion, respectively.
Examinations by tax authorities have been completed through 2004 in Germany, and through 2007 in Canada, the United States, and the United Kingdom. Although examinations have been completed in these jurisdictions, limited transfer pricing disputes exist for years dating back to 1996.
We recorded on our consolidated income statement approximately $11 million, $9 million, and $77 million in tax-related interest income for the years ended December 31, 2013, 2012, and 2011. As of December 31, 2013 and 2012, we had recorded a net payable of $83 million and $137 million, respectively, for tax-related interest.
