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Income Taxes | 12 Months Ended
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Dec. 31, 2013
Income Tax Disclosure [Abstract] |
INCOME TAXES | INCOME TAXES Eaton Corporation plc is domiciled in Ireland. Income before income taxes and income tax expense are summarized below based on the geographic location of the operation to which such earnings and income taxes are attributable. Certain Eaton operations which are located outside the United States are subject to both United States as well as the income tax regulations of the country in which the operations are located. As a result, income before tax by location and the components of income tax expense by taxing jurisdiction are not directly related. For purposes of this note, Puerto Rico is classified in Foreign - other since Puerto Rico is not part of the United States corporate tax system.
| Income before income taxes
| 2013 |  | 2012 |  | 2011
Ireland | $ | 184 |  |  | $ | — |  |  | $ | — |
Foreign | 1,700 |  |  | 1,251 |  |  | 1,553 |
Total income before income taxes | $ | 1,884 |  |  | $ | 1,251 |  |  | $ | 1,553 |
| Income tax expense (benefit)
| 2013 |  | 2012 |  | 2011
Current |  |  |  |  |
Ireland | $ | 17 |  |  | $ | — |  |  | $ | — |
United States |  |  |  |  |
Federal | 89 |  |  | 1 |  |  | 85 |
State and local | 7 |  |  | 5 |  |  | 2 |
Foreign - other | 244 |  |  | 130 |  |  | 186 |
Total current income tax expense | 357 |  |  | 136 |  |  | 273 |
Deferred |  |  |  |  |
Ireland | — |  |  | — |  |  | — |
United States |  |  |  |  |
Federal | (295 | ) |  | 39 |  |  | (2 | )
State and local | (23 | ) |  | 2 |  |  | 8 |
Foreign - other | (28 | ) |  | (146 | ) |  | (78 | )
Total deferred income tax benefit | (346 | ) |  | (105 | ) |  | (72 | )
Total income tax expense | $ | 11 |  |  | $ | 31 |  |  | $ | 201 |
Reconciliations of income taxes from the Ireland national statutory rate of 25% in 2013, and the United States federal statutory rate of 35% in 2012 and 2011, to the consolidated effective income tax rate follow:
| 2013 |  | 2012 |  | 2011
Income taxes at the applicable statutory rate | 25.0 | % |  | 35.0 | % |  | 35.0 | %
Ireland tax on trading income | (1.4 | )% |  | — | % |  | — | %
United States operations |  |  |  |  |
United States income (loss) | (2.8 | )% |  | — | % |  | — | %
State and local income taxes | (0.5 | )% |  | 0.6 | % |  | 0.2 | %
Deductible dividends | — | % |  | (0.7 | )% |  | (0.5 | )%
Deductible interest | (0.3 | )% |  | (0.8 | )% |  | (0.5 | )%
Credit for research activities | (2.0 | )% |  | — | % |  | (1.0 | )%
Impact of U.S. Health Care Reform and Education Reconciliation Act and pre-funding on taxation associated with Medicare Part D | — | % |  | — | % |  | (0.9 | )%
Other - net | 2.1 | % |  | 2.7 | % |  | 0.5 | %
Other foreign operations |  |  |  |  |
United States foreign tax credit | (1.8 | )% |  | (12.4 | )% |  | (2.3 | )%
Other foreign operations (earnings taxed at other than the applicable statutory tax rate) | (17.6 | )% |  | (14.9 | )% |  | (15.5 | )%
Other foreign operations - other items | 0.2 | % |  | — | % |  | — | %
Worldwide operations |  |  |  |  |
Adjustments to tax liabilities | (1.1 | )% |  | (5.7 | )% |  | (0.8 | )%
Adjustments to valuation allowances | 0.8 | % |  | (1.3 | )% |  | (1.3 | )%
Effective income tax expense rate | 0.6 | % |  | 2.5 | % |  | 12.9 | %
During 2013, income tax expense of $11 was recognized (an effective tax rate of 0.6%) compared to $31 for 2012 (an effective tax rate of 2.5%) and $201 for 2011 (an effective tax rate of 12.9%). The lower effective tax rate for 2013, compared to 2012, was primarily attributable to the effects associated with the acquisition of Cooper, along with greater levels of income in lower tax jurisdictions, additional foreign tax credit utilization, and double credit for U.S. research and experimentation activities. On January 2, 2013, the President of the United States signed the American Taxpayer Relief Act of 2012 (the Act) into law. The Act extended certain tax benefits retroactively to January 1, 2012. The extension of the credit for research activities permitted the Company to recognize a total benefit of $39 related to the 2012 and 2013 tax years. No provision has been made for income taxes on undistributed earnings of U.S. and other foreign subsidiaries of approximately $10.5 billion at December 31, 2013, since it is the Company's intention to indefinitely reinvest undistributed earnings of its foreign subsidiaries. It is not practicable to estimate the additional income taxes and applicable withholding taxes that would be payable on the remittance of such undistributed earnings. The Company's largest growth areas that require capital are in developing markets. The cash that is permanently reinvested is typically used to expand operations either organically or through acquisitions in such developing markets as well as other mature markets where the Company targets increased market share. Beginning in 2013, the Company's public dividends are funded by the Ireland parent primarily from Non-U.S. operations. The Company's United States operations normally generate cash flow sufficient to satisfy United States operating requirements and service its debt. Worldwide income tax payments follow:
2013 | $ | 272 |
2012 | 254 |
2011 | 191 |
Deferred Income Tax Assets and Liabilities Components of current and long-term deferred income taxes follow:
| 2013 |  | 2012
| Current assets and liabilities |  | Long-term assets and liabilities |  | Current assets and liabilities |  | Long-term assets and liabilities
Accruals and other adjustments |  |  |  |  |  |  |
Employee benefits | $ | 116 |  |  | $ | 657 |  |  | $ | 92 |  |  | $ | 857 |
Depreciation and amortization | (2 | ) |  | (2,294 | ) |  | (3 | ) |  | (2,793 | )
Other accruals and adjustments | 497 |  |  | 368 |  |  | 495 |  |  | 297 |
Other items | — |  |  | — |  |  | — |  |  | 145 |
United States federal income tax loss carryforwards | — |  |  | — |  |  | — |  |  | 6 |
United States federal income tax credit carryforwards | — |  |  | 161 |  |  | — |  |  | 156 |
United States state and local tax loss carryforwards and tax credit carryforwards | — |  |  | 73 |  |  | — |  |  | 71 |
Other foreign tax loss carryforwards | — |  |  | 1,708 |  |  | — |  |  | 1,591 |
Other foreign income tax credit carryforwards | — |  |  | 63 |  |  | — |  |  | 67 |
Valuation allowance for income tax loss and income tax credit carryforwards | — |  |  | (1,738 | ) |  | (61 | ) |  | (1,521 | )
Other valuation allowances | (34 | ) |  | (71 | ) |  | (7 | ) |  | (71 | )
Total deferred income taxes | $ | 577 |  |  | $ | (1,073 | ) |  | $ | 516 |  |  | $ | (1,195 | )
At December 31, 2012, deferred tax liabilities of $49 were included within Other current liabilities. At the end of 2013, United States federal income tax loss carryforwards and income tax credit carryforwards were available to reduce future United States federal income tax liabilities. These carryforwards and their expiration dates are summarized below:
| 2014 through 2018 |  | 2019 through 2023 |  | 2024 through 2028 |  | 2029 through 2033 |  | Not subject to expiration |  | Valuation allowance
United States federal income tax loss carryforwards | $ | 1 |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
United States federal income tax credit carryforwards | 3 |  |  | 70 |  |  | — |  |  | 69 |  |  | 19 |  |  | (51 | )
United States state and local tax loss carryforwards and tax credit carryforwards with a future tax benefit are also available at the end of 2013. These carryforwards and their expiration dates are summarized below:
| 2014 through 2018 |  | 2019 through 2023 |  | 2024 through 2028 |  | 2029 through 2033 |  | Not subject to expiration |  | Valuation allowance
United States state and local assets for income tax loss carryforwards - net of federal tax effect | $ | 4 |  |  | $ | 15 |  |  | $ | 13 |  |  | $ | 5 |  |  | $ | — |  |  | $ | (15 | )
United States state and local income tax credit carryforwards - net of federal tax effect | 11 |  |  | 9 |  |  | 7 |  |  | 3 |  |  | 6 |  |  | (16 | )
At December 31, 2013, certain other foreign subsidiaries had tax loss carryforwards and income tax credit carryforwards that are available to offset future taxable income. These carryforwards and their expiration dates are summarized below:
| 2014 through 2018 |  | 2019 through 2023 |  | 2024 through 2028 |  | 2029 through 2033 |  | Not subject to expiration |  | Valuation allowance
Other foreign income tax loss carryforwards | $ | 136 |  |  | $ | 130 |  |  | $ | 48 |  |  | $ | 18 |  |  | $ | 7,654 |  |  | $ | — |
Other foreign deferred income tax assets for income tax loss carryforwards | 35 |  |  | 32 |  |  | 14 |  |  | 5 |  |  | 1,622 |  |  | (1,646 | )
Other foreign income tax credit carryforwards | 39 |  |  | 13 |  |  | 2 |  |  | — |  |  | 9 |  |  | (10 | )
Recoverability of Deferred Income Tax Assets Eaton is subject to the income tax laws in the jurisdictions in which it operates. In order to determine its income tax provision for financial statement purposes, Eaton must make significant estimates and judgments about its business operations in these jurisdictions. These estimates and judgments are also used in determining the deferred income tax assets and liabilities that have been recognized for differences between the financial statement and income tax basis of assets and liabilities, and income tax loss carryforwards and income tax credit carryforwards. Management evaluates the realizability of deferred income tax assets for each of the jurisdictions in which it operates. If the Company experiences cumulative pretax income in a particular jurisdiction in the three-year period including the current and prior two years, management normally concludes that the deferred income tax assets will more likely than not be realizable and no valuation allowance is recognized, unless known or planned operating developments would lead management to conclude otherwise. However, if the Company experiences cumulative pretax losses in a particular jurisdiction in the three-year period including the current and prior two years, management then considers a series of factors in the determination of whether the deferred income tax assets can be realized. These factors include historical operating results, known or planned operating developments, the period of time over which certain temporary differences will reverse, consideration of the utilization of certain deferred income tax liabilities, tax law carryback capability in the particular country, prudent and feasible tax planning strategies, and estimates of future earnings and taxable income using the same assumptions as the Company's goodwill and other impairment testing. After evaluation of these factors, if the deferred income tax assets are expected to be realized within the tax carryforward period allowed for that specific country, management would conclude that no valuation allowance would be required. To the extent that the deferred income tax assets exceed the amount that is expected to be realized within the tax carryforward period for a particular jurisdiction, management would establish a valuation allowance. Applying the above methodology, valuation allowances have been established for certain deferred income tax assets to the extent they are not expected to be realized within the particular tax carryforward period. Unrecognized Income Tax Benefits A summary of gross unrecognized income tax benefits follows:
| 2013 |  | 2012 |  | 2011
Balance at January 1 | $ | 444 |  |  | $ | 236 |  |  | $ | 224 |
Increases and decreases as a result of positions taken during prior years |  |  |  |  |
Transfers from valuation allowances | 13 |  |  | — |  |  | — |
Other increases | 7 |  |  | 1 |  |  | 3 |
Other decreases, including currency translation | (7 | ) |  | — |  |  | (14 | )
Balances related to acquired businesses | 2 |  |  | 177 |  |  | 2 |
Increases as a result of positions taken during the current year | 35 |  |  | 36 |  |  | 31 |
Decreases relating to settlements with tax authorities | (6 | ) |  | — |  |  | (2 | )
Decreases as a result of a lapse of the applicable statute of limitations | (9 | ) |  | (6 | ) |  | (8 | )
Balance at December 31 | $ | 479 |  |  | $ | 444 |  |  | $ | 236 |
Eaton's long-term policy has been to enter into tax planning strategies only if it is more likely than not that the benefit would be sustained upon audit. For example, the Company does not enter into any of the United States Internal Revenue Service (IRS) Listed Transactions as set forth in Treasury Regulation 1.6011-4. If all unrecognized tax benefits were recognized, the net impact on the provision for income tax expense would be $371. As of December 31, 2013 and 2012, Eaton had accrued approximately $114 and $99, respectively, for the payment of worldwide interest and penalties. Eaton recognizes interest and penalties related to unrecognized income tax benefits in the provision for income tax expense. The Company has accrued penalties in jurisdictions where they are automatically applied to any deficiency, regardless of the merit of the position. The resolution of the majority of Eaton's unrecognized income tax benefits is dependent upon uncontrollable factors such as law changes; the prospect of retroactive regulations; new case law; the willingness of the income tax authority to settle the issue, including the timing thereof; and other factors. Therefore, for the majority of unrecognized income tax benefits, it is not reasonably possible to estimate the increase or decrease in the next 12 months. For each of the unrecognized income tax benefits where it is possible to estimate the increase or decrease in the balance within the next 12 months, the Company estimates tax settlements in the range of $35 to $43. Eaton or its subsidiaries file income tax returns in Ireland and many countries around the world. The IRS has completed its examination of Eaton Corporation and Includible Subsidiaries United States income tax returns for 2005 and 2006 and has issued a Statutory Notice of Deficiency (Notice) as discussed below. The statute of limitations on these tax years remains open to the extent of the tax assessment until the matter is resolved. The IRS is currently examining the Eaton Corporation and Includible Subsidiaries United States income tax returns for 2007 through 2010. Tax years 2011 through 2013 are still subject to examination by the IRS. With respect to the pre-acquisition years of Cooper Industries and Includible Subsidiaries, the IRS examination of the United States income tax return for 2010 was completed and settled during 2012 without significant effect on the consolidated financial statements. The statute of limitations remains open for tax year 2010 until September 15, 2014. During 2012, the IRS began its formal examination of the Cooper Industries and Includible Subsidiaries United States income tax return for 2011. The audit was completed and settled during 2013 without significant effect on the consolidated financial statements. The United States statute of limitations remains open for tax year 2011 until September 15, 2015. The final United States income tax return of Cooper Industries and Includible Subsidiaries for the period ended December 21, 2012 is currently under IRS examination. The United States statute of limitations on the final return will be open until September 15, 2016. On December 22, 2012, Cooper Industries and Includible Subsidiaries joined Eaton Corporation and Includible Subsidiaries consolidated United States income tax return for 2012. Eaton is also under examination for the income tax filings in various states of the United States and in many other foreign jurisdictions. With only a few exceptions, Eaton Corporation and Includible Subsidiaries are no longer subject to income tax examinations from states and localities within the United States for years before 2009. Income tax returns of states and localities within the United States will be reopened to the extent of United States federal income tax adjustments, if any, going back to 2005 when those audit years are finalized. Some states and localities may not limit their assessment to the United States federal adjustments, and may require the opening of the entire tax year. In addition, with only a few exceptions, Cooper Industries and Includible Subsidiaries are no longer subject to United States state and local income tax examinations for years before 2009. With only a few exceptions, the other foreign subsidiaries of both Eaton and Cooper are no longer subject to examinations for years before 2008. At the end of the fourth quarter of 2011, the IRS issued a Notice for Eaton Corporation and Includible Subsidiaries 2005 and 2006 tax years. The Notice proposes assessments of $75 in additional taxes plus $52 in penalties related primarily to transfer pricing adjustments for products manufactured in the Company's facilities in Puerto Rico and the Dominican Republic and sold to affiliated companies located in the U.S., net of agreed credits and deductions. The Company has set its transfer prices for products sold between these affiliates at the same prices that the Company sells such products to third parties. The Notice was issued despite the IRS having previously recognized the validity of the Company's transfer pricing methodology by entering into two successive Advance Pricing Agreements (APAs) that approved and, in fact, required the application of the Company's transfer pricing methodology for the ten year period of 2001 through 2010. For the years 2001 through 2004, the IRS had previously accepted the transfer pricing methodology related to these APAs after a comprehensive review conducted in two separate audit cycles. On December 16, 2011, immediately prior to the Notice being issued, the IRS sent a letter stating that it was retrospectively canceling the APAs, even though their respective APA terms had already expired. The Company firmly believes that the proposed assessments are without merit. The Company also believes that it was in full compliance with the terms of the two APAs, and that the IRS's unilateral attempt to retroactively cancel these two APAs is also without merit, and represents a breach of the two agreements. On February 29, 2012, the Company filed a Petition with the U.S. Tax Court in which it asserted that the transfer pricing established in the two APA contracts meets the arms-length standard set by the U.S. income tax laws, and accordingly, that the two APA contracts should be enforced in accordance with their terms. On June 11, 2012, the Company filed a motion for partial summary judgment with the U.S. Tax Court, asking the U.S. Tax Court to find that the APAs are binding contracts and that the IRS has the burden of proof to substantiate cancellation of the APAs. On June 26, 2013, the U.S. Tax Court ruled that the IRS has the discretion to unilaterally cancel an APA and that the taxpayer bears the burden of proving that the IRS abused that discretion. While the Company disagrees with the Tax Court's ruling, the Company remains confident that it will be able to demonstrate that it was in full compliance with the APAs and that the IRS abused its discretion in canceling the APAs after their terms expired. In addition, the Company continues to believe the transfer pricing methodology contained in the APAs is correct and that the ultimate resolution of this matter will not have a material impact on the consolidated financial statements. During 2013, the U.S. Tax Court approved the Company’s motion to depose the outside expert hired by the IRS, whose report was the sole basis underlying the Notice. As a result of statements made by the expert during the deposition, the Company determined that the IRS expert either failed to consider or improperly applied the principles of Internal Revenue Code Section 482, including four Treasury Regulations that impacted the expert’s analysis. As a result, the Company filed a motion for partial summary judgment asking the U.S. Tax Court to invalidate the Notice. This motion is currently pending before the U.S. Tax Court. In addition, the IRS filed a separate motion asking the U.S. Tax Court to divide the overall matter into two separate trials, one involving the APA issue and the other involving the transfer pricing issue. The Company is opposed to separating the trials. This motion is also pending before the U.S. Tax Court. During 2010, Eaton Corporation received a significant tax assessment in Brazil for the tax years 2005 through 2008 that relates to the amortization of certain goodwill generated from the acquisition of third-party businesses and corporate reorganizations. In this jurisdiction, the Company had previously filed and received a favorable tax ruling on the key aspects of the transaction not specifically covered by the plain meaning of the local tax statutes. The ruling request fully disclosed all steps of the transaction. The tax assessment is under review at the second of three administrative appeals levels. The first administrative appeal level made a 50% reduction in assessed penalties. The Company disagrees with the assessment and intends to litigate the matter if it is not resolved at the administrative appeals levels. Multiple outside advisors have stated that Brazilian tax authorities are raising the issue for most clients with similar facts and that the matter is expected to require at least 10 years to resolve. During 2013, the Brazilian tax authorities began an audit of tax years 2009 through 2012. At this time, management believes that final resolution of the assessment will not have a material impact on the consolidated financial statements.

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- Definition The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 15 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32718-109319 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SX 210.4-08.(h)) -URI http://asc.fasb.org/extlink&oid=26873400&loc=d3e23780-122690 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher SEC -Name Regulation S-X (SX) -Number 210 -Section 08 -Paragraph h -Article 4 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 9 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32639-109319 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32537-109319 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32559-109319 + Details
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