Note 15. Income Taxes

Earnings / (losses) from continuing operations before income taxes and the provision for income taxes consisted of the following:


	For the Years Ended December 31,
	2014			2013			2012
				(in millions)
Earnings / (losses) from continuing operations before income taxes:
United States	$	(135	)	$	(799	)	$	(1,822	)
Outside United States		2,689			3,191			3,596

Total	$	2,554		$	2,392		$	1,774


Provision for income taxes:
United States federal:
Current	$	(125	)	$	(489	)	$	(420	)
Deferred		28			103			(43	)

		(97	)		(386	)		(463	)
State and local:
Current		20			(35	)		(17	)
Deferred		11			22			(40	)

		31			(13	)		(57	)

Total United States		(66	)		(399	)		(520	)

Outside United States:
Current		644			648			896
Deferred		(225	)		(189	)		(208	)

Total outside United States		419			459			688

Total provision for income taxes	$	353		$	60		$	168

See Note 2, Divestitures and Acquisitions, for information on taxes presented as part of discontinued operations related to the resolution of the Starbucks arbitration and the Spin-Off of Kraft Foods Group.

During 2014, we recorded out-of-period adjustments of $31 million net expense that had an immaterial impact on the annual provision for income taxes. In addition, during the fourth quarter of 2014, we recorded a tax benefit of $43 million associated with the lapse of a statute of limitations that related to the third quarter of 2014. The out-of-period adjustments were not material to the consolidated financial statements for any prior period.

The effective income tax rate on pre-tax earnings differed from the U.S. federal statutory rate for the following reasons:


	For the Years Ended December 31,
	2014			2013			2012

U.S. federal statutory rate		35.0%			35.0%			35.0%
Increase / (decrease) resulting from:
State and local income taxes, net of federal tax benefit excluding IRS audit impacts		0.3%			(0.5%	)		(1.6%	)
Foreign rate differences		(14.5%	)		(16.3%	)		(20.6%	)
Reversal of other tax accruals no longer required		(10.5%	)		(9.6%	)		(4.3%	)
Indemnification resolution		–			(4.7%	)		–
Tax legislation		–			(2.2%	)		(3.9%	)
Divestitures		–			(2.1%	)		0.6%
Venezuela devaluation		1.7%			1.0%			–
Non-deductible expenses		1.5%			1.1%			3.6%
Other		0.3%			0.8%			0.7%

Effective tax rate		13.8%			2.5%			9.5%

Our 2014 effective tax rate of 13.8% was favorably impacted by the mix of pre-tax income in various non-U.S. tax jurisdictions and net tax benefits from $206 million of discrete one-time events. The discrete net tax benefits primarily related to favorable tax audit settlements and expirations of statues of limitations in several jurisdictions.

Our 2013 effective tax rate of 2.5% was favorably impacted by the mix of pre-tax income in various non-U.S. tax jurisdictions, net tax benefits from discrete one-time events and the non-taxable portion of the Cadbury acquisition related indemnification resolution, partially offset by an unfavorable tax law change. The $299 million of discrete one-time events primarily related to favorable tax audit settlements and expirations of statutes of limitations in several jurisdictions and the net reduction of U.K. deferred tax liabilities resulting from tax legislation enacted during 2013 that reduced U.K. corporate income tax rates.

Our 2012 revised effective tax rate of 9.5% was favorably impacted by the mix of pre-tax income in various non-U.S. tax jurisdictions and net tax benefits from discrete one-time tax events, partially offset by non-deductible expenses. The $140 million of discrete one-time events primarily related to the net reduction of U.K. deferred tax liabilities resulting from tax legislation enacted during 2012 that reduced U.K. corporate income tax rates and net favorable tax audit settlements.

The tax effects of temporary differences that gave rise to deferred income tax assets and liabilities consisted of the following:


	As of December 31,
	2014			2013
	(in millions)

Deferred income tax assets:
Accrued postretirement and postemployment benefits	$	227		$	176
Accrued pension costs		588			417
Other employee benefits		272			259
Accrued expenses		410			364
Loss carryforwards		656			553
Other		431			428

Total deferred income tax assets		2,584			2,197

Valuation allowance		(345	)		(335	)

Net deferred income tax assets	$	2,239		$	1,862

Deferred income tax liabilities:
Intangible assets	$	(5,843	)	$	(6,094	)
Property, plant and equipment		(784	)		(876	)
Other		(439	)		(468	)

Total deferred income tax liabilities		(7,066	)		(7,438	)

Net deferred income tax liabilities	$	(4,827	)	$	(5,576	)

At December 31, 2014, the company has pre-tax loss carryforwards of $3,432 million, of which $1,430 million will expire at various dates between 2015 and 2033 and the remaining $2,002 million can be carried forward indefinitely.

Our significant valuation allowances reside within our operating subsidiaries in Mexico, Ireland and various other jurisdictions.

At December 31, 2014, applicable U.S. federal income taxes and foreign withholding taxes had not been provided on approximately $13.2 billion of accumulated earnings of non-U.S. subsidiaries that are expected to be indefinitely reinvested. It is impractical for us to determine the amount of unrecognized deferred tax liabilities on these indefinitely reinvested earnings. Future tax law changes or changes in the needs of our non-U.S. subsidiaries could require us to recognize deferred tax liabilities on a portion, or all, of our accumulated earnings that were previously expected to be indefinitely reinvested.

The changes in our unrecognized tax benefits were:


	For the Years Ended December 31,
	2014			2013			2012
				(in millions)

January 1	$	1,189		$	1,164		$	1,522
Increases from positions taken during prior periods		143			94			119
Decreases from positions taken during prior periods		(247	)		(132	)		(198	)
Increases from positions taken during the current period		147			131			264
Decreases relating to settlements with taxing authorities		(203	)		(7	)		(257	)
Reductions resulting from the lapse of the applicable statute of limitations		(64	)		(55	)		(23	)
Impact of Spin-Off		–			–			(261	)
Currency / other		(113	)		(6	)		(2	)

December 31	$	852		$	1,189		$	1,164

As of January 1, 2014, our unrecognized tax benefits were $1,189 million. If we had recognized all of these benefits, the net impact on our income tax provision would have been $1,110 million. Our unrecognized tax benefits were $852 million at December 31, 2014, and if we had recognized all of these benefits, the net impact on our income tax provision would have been $744 million. Within the next 12 months, our unrecognized tax benefits could increase by approximately $60 million due to unfavorable audit developments or decrease by approximately $145 million due to audit settlements and the expiration of statutes of limitations in various jurisdictions. We include accrued interest and penalties related to uncertain tax positions in our tax provision. We had accrued interest and penalties of $228 million as of January 1, 2014 and $184 million as of December 31, 2014. Our 2014 provision for income taxes included $2 million for interest and penalties.

Under the Tax Sharing and Indemnity Agreements between us and Kraft Foods Group, Kraft Foods Group generally assumes liability for all U.S. state income taxes and Canadian federal and provincial income taxes and we generally assume responsibility for all U.S. federal income taxes and substantially all non-U.S. income taxes, excluding Canadian income taxes, for all tax periods prior to the Spin-Off. In addition, we transferred to Kraft Foods Group all of its deferred tax assets and liabilities as of the Distribution Date. See Note 2, Divestitures and Acquisitions.

Our income tax filings are regularly examined by federal, state and non-U.S. tax authorities. Our 2010-2012 U.S. federal income tax filings are currently under examination by the IRS. U.S. state and non-U.S. jurisdictions have statutes of limitations generally ranging from three to five years; however, these statutes are often extended by mutual agreement with the tax authorities. Years still open to examination by non-U.S. tax authorities in major jurisdictions include (earliest open tax year in parentheses): Brazil (2009), France (2010), Germany (2005), India (2003), Italy (2009), United Kingdom (2012) and Russia (2011).