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Income Taxes | 12 Months Ended
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Dec. 31, 2012
Income Taxes | T. Income Taxes The components of income from continuing operations before income taxes were as follows:
|  | 2012 |  |  | 2011 |  |  | 2010 |
U.S. |  | $ | 394 |  |  | $ | (98 | ) |  | $ | (403 | )
Foreign |  |  | (70 | ) |  |  | 1,161 |  |  |  | 951 |
|  | $ | 324 |  |  | $ | 1,063 |  |  | $ | 548 |
The provision for income taxes on income from continuing operations consisted of the following:
|  | 2012 |  |  | 2011 |  |  | 2010 |
Current: |  |  |  |  |  |  |  |  |  |  |  |
Federal* |  | $ | 85 |  |  | $ | 10 |  |  | $ | 33 |
Foreign |  |  | 167 |  |  |  | 427 |  |  |  | 409 |
State and local |  |  | 9 |  |  |  | (1 | ) |  |  | (7 | )
|  |  | 261 |  |  |  | 436 |  |  |  | 435 |
Deferred: |  |  |  |  |  |  |  |  |  |  |  |
Federal* |  |  | 129 |  |  |  | 28 |  |  |  | 37 |
Foreign |  |  | (227 | ) |  |  | (211 | ) |  |  | (320 | )
State and local |  |  | (1 | ) |  |  | 2 |  |  |  | (4 | )
|  |  | (99 | ) |  |  | (181 | ) |  |  | (287 | )
Total |  | $ | 162 |  |  | $ | 255 |  |  | $ | 148 |
* | Includes U.S. taxes related to foreign income
Included in discontinued operations is a tax benefit of $1 in 2011 and $3 in 2010. The exercise of employee stock options generated a tax charge of $1 in 2012 and a tax benefit of $6 in 2011 and $2 in 2010, representing only the difference between compensation expense recognized for financial reporting and tax purposes. These amounts decreased or increased equity and increased or reduced current taxes payable in their respective periods. Alcoa has unamortized tax-deductible goodwill of $97 resulting from intercompany stock sales and reorganizations. Alcoa recognizes the tax benefits (generally at a 30% to 34% rate) associated with this tax-deductible goodwill as it is being amortized for local income tax purposes rather than in the period in which the transaction is consummated. A reconciliation of the U.S. federal statutory rate to Alcoa’s effective tax rate for continuing operations was as follows:
|  | 2012 |  |  | 2011 |  |  | 2010 |
U.S. federal statutory rate |  |  | 35.0 | % |  |  | 35.0 | % |  |  | 35.0 | %
Taxes on foreign operations |  |  | (0.1 | ) |  |  | (11.0 | ) |  |  | (5.4 | )
Permanent differences on restructuring charges and asset disposals |  |  | 10.8 |  |  |  | - |  |  |  | 0.7 |
Audit and other adjustments to prior years’ accruals |  |  | 3.5 |  |  |  | (1.1 | ) |  |  | 1.2 |
Noncontrolling interests |  |  | 3.8 |  |  |  | 0.8 |  |  |  | 2.6 |
Statutory tax rate and law changes |  |  | (0.4 | ) |  |  | 0.8 |  |  |  | (5.1 | )
Tax law change related to Medicare Part D |  |  | - |  |  |  | - |  |  |  | 14.4 |
Changes in valuation allowances |  |  | 15.2 |  |  |  | 2.3 |  |  |  | (8.7 | )
Amortization of goodwill related to intercompany stock sales/reorganizations |  |  | (7.7 | ) |  |  | (2.8 | ) |  |  | (5.2 | )
Change in legal structure of investment |  |  | (4.1 | ) |  |  | - |  |  |  | - |
Interest income related to income tax positions |  |  | (1.3 | ) |  |  | (0.2 | ) |  |  | - |
Company-owned life insurance/split-dollar net premiums |  |  | (3.9 | ) |  |  | (0.2 | ) |  |  | (1.8 | )
Other |  |  | (0.8 | ) |  |  | 0.4 |  |  |  | (0.8 | )
Effective tax rate |  |  | 50.0 | % |  |  | 24.0 | % |  |  | 26.9 | %
On March 23, 2010, the Patient Protection and Affordable Care Act (the “PPACA”) was signed into law, and, on March 30, 2010, the Health Care and Education Reconciliation Act of 2010 (the “HCERA” and, together with PPACA, the “Acts”), which makes various amendments to certain aspects of the PPACA, was signed into law. The Acts effectively change the tax treatment of federal subsidies paid to sponsors of retiree health benefit plans that provide prescription drug benefits that are at least actuarially equivalent to the corresponding benefits provided under Medicare Part D. Alcoa pays a portion of the prescription drug cost for eligible retirees under certain postretirement benefit plans. These benefits were determined to be actuarially equivalent to the Medicare Part D prescription drug benefit of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “MPDIMA”). Alcoa has been receiving the federal subsidy since the 2006 tax year related to the aforementioned postretirement benefit plans. Under the MPDIMA, the federal subsidy did not reduce an employer’s income tax deduction for the costs of providing such prescription drug plans nor was it subject to income tax individually. Under the Acts, beginning in 2013, an employer’s income tax deduction for the costs of providing Medicare Part D-equivalent prescription drug benefits to retirees will be reduced by the amount of the federal subsidy. Under GAAP, any impact from a change in tax law must be recognized in earnings in the period enacted regardless of the effective date. As a result, Alcoa recognized a noncash charge of $79 in 2010 for the elimination of a related deferred tax asset to reflect the change in the tax treatment of the federal subsidy. The components of net deferred tax assets and liabilities were as follows:
|  | 2012 |  |  | 2011 |
December 31, |  | Deferred tax assets |  |  | Deferred tax liabilities |  |  | Deferred tax assets |  |  | Deferred tax liabilities |
Depreciation |  | $ | 104 |  |  | $ | 1,015 |  |  | $ | 74 |  |  | $ | 933 |
Employee benefits |  |  | 2,742 |  |  |  | 46 |  |  |  | 2,668 |  |  |  | 51 |
Loss provisions |  |  | 368 |  |  |  | 17 |  |  |  | 325 |  |  |  | 9 |
Deferred income/expense |  |  | 53 |  |  |  | 203 |  |  |  | 45 |  |  |  | 181 |
Tax loss carryforwards |  |  | 2,186 |  |  |  | - |  |  |  | 2,035 |  |  |  | - |
Tax credit carryforwards |  |  | 508 |  |  |  | - |  |  |  | 477 |  |  |  | - |
Derivatives and hedging activities |  |  | 117 |  |  |  | 16 |  |  |  | 109 |  |  |  | 43 |
Other |  |  | 324 |  |  |  | 297 |  |  |  | 315 |  |  |  | 288 |
|  |  | 6,402 |  |  |  | 1,594 |  |  |  | 6,048 |  |  |  | 1,505 |
Valuation allowance |  |  | (1,400 | ) |  |  | - |  |  |  | (1,398 | ) |  |  | - |
|  | $ | 5,002 |  |  | $ | 1,594 |  |  | $ | 4,650 |  |  | $ | 1,505 |
The following table details the expiration periods of the deferred tax assets presented above:
December 31, 2012 |  | Expires within 10 years |  |  | Expires within 11-20 years |  |  | No expiration* |  |  | Other* |  |  | Total |
Tax loss carryforwards |  | $ | 332 |  |  | $ | 886 |  |  | $ | 968 |  |  | $ | - |  |  | $ | 2,186 |
Tax credit carryforwards |  |  | 370 |  |  |  | 73 |  |  |  | 65 |  |  |  | - |  |  |  | 508 |
Other |  |  | - |  |  |  | - |  |  |  | 762 |  |  |  | 2,946 |  |  |  | 3,708 |
Valuation allowance |  |  | (212 | ) |  |  | (659 | ) |  |  | (244 | ) |  |  | (285 | ) |  |  | (1,400 | )
|  | $ | 490 |  |  | $ | 300 |  |  | $ | 1,551 |  |  | $ | 2,661 |  |  | $ | 5,002 |
* | Deferred tax assets with no expiration may still have annual limitations on utilization. Other represents deferred tax assets whose expiration is dependent upon the reversal of the underlying temporary difference. A substantial amount of Other relates to employee benefits that will become deductible for tax purposes over an extended period of time as contributions are made to employee benefit plans and payments are made to retirees.
The total deferred tax asset (net of valuation allowance) is supported by taxable temporary differences that reverse within the carryforward period (approximately 25%), tax planning strategies (approximately 5%), and projections of future taxable income exclusive of reversing temporary differences (approximately 70%). Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. In evaluating the need for a valuation allowance, management considers all potential sources of taxable income, including income available in carryback periods, future reversals of taxable temporary differences, projections of taxable income, and income from tax planning strategies, as well as all available positive and negative evidence. Positive evidence includes factors such as a history of profitable operations, projections of future profitability within the carryforward period, including from tax planning strategies, and the Company’s experience with similar operations. Existing favorable contracts and the ability to sell product into established markets are additional positive evidence. Negative evidence includes items such as cumulative losses, projections of future losses, or carryforward periods that are not long enough to allow the utilization of the deferred tax asset based on existing projections of income. In certain jurisdictions, deferred tax assets related to cumulative losses exist without a valuation allowance where in management’s judgment the weight of the positive evidence more than offsets the negative evidence of the cumulative losses. Upon changes in facts and circumstances, management may conclude that deferred tax assets for which no valuation allowance is currently recorded may not be realizable in future periods, resulting in a future charge to record a valuation allowance. Existing valuation allowances are re-examined under the same standards of positive and negative evidence. If it is determined that it is more likely than not that a deferred tax asset will be realized, the appropriate amount of the valuation allowance, if any, is released. Deferred tax assets and liabilities are also re-measured to reflect changes in underlying tax rates due to law changes and the granting and lapse of tax holidays. In December 2011, one of the Company’s subsidiaries in Brazil applied for a tax holiday related to its expanded mining and refining operations. If approved, the tax rate for this subsidiary will decrease significantly, resulting in future cash tax savings over the 10-year holiday period (would be effective as of January 1, 2013). Additionally, the net deferred tax asset of the subsidiary would be remeasured at the lower rate in the period the holiday is approved. This remeasurement would result in a decrease to the net deferred tax asset and a noncash charge to earnings of approximately $60 to $120. As of December 31, 2012, Alcoa’s subsidiary’s application is still pending. The following table details the changes in the valuation allowance:
December 31, |  | 2012 |  |  | 2011 |
Balance at beginning of year |  | $ | 1,398 |  |  | $ | 1,268 |
Increase to allowance |  |  | 45 |  |  |  | 157 |
Release of allowance |  |  | (48 | ) |  |  | (25 | )
Foreign currency translation |  |  | 5 |  |  |  | (2 | )
Balance at end of year |  | $ | 1,400 |  |  | $ | 1,398 |
The cumulative amount of Alcoa’s foreign undistributed net earnings for which no deferred taxes have been provided was approximately $8,000 at December 31, 2012. Alcoa has a number of commitments and obligations related to the Company’s growth strategy in foreign jurisdictions. As such, management has no plans to distribute such earnings in the foreseeable future, and, therefore, has determined it is not practicable to determine the related deferred tax liability. Alcoa and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions. With a few minor exceptions, Alcoa is no longer subject to income tax examinations by tax authorities for years prior to 2002. All U.S. tax years prior to 2012 have been audited by the Internal Revenue Service. Various state and foreign jurisdiction tax authorities are in the process of examining Alcoa’s income tax returns for various tax years through 2010. A reconciliation of the beginning and ending amount of unrecognized tax benefits (excluding interest and penalties) was as follows:
December 31, |  | 2012 |  |  | 2011 |  |  | 2010 |
Balance at beginning of year |  | $ | 51 |  |  | $ | 46 |  |  | $ | 48 |
Additions for tax positions of the current year |  |  | - |  |  |  | - |  |  |  | - |
Additions for tax positions of prior years |  |  | 39 |  |  |  | 13 |  |  |  | 30 |
Reductions for tax positions of prior years |  |  | (7 | ) |  |  | (3 | ) |  |  | (5 | )
Settlements with tax authorities |  |  | (18 | ) |  |  | (4 | ) |  |  | (22 | )
Expiration of the statute of limitations |  |  | - |  |  |  | - |  |  |  | (5 | )
Foreign currency translation |  |  | 1 |  |  |  | (1 | ) |  |  | - |
Balance at end of year |  | $ | 66 |  |  | $ | 51 |  |  | $ | 46 |
For all periods presented, a portion of the balance at end of year pertains to state tax liabilities, which are presented before any offset for federal tax benefits. The effect of unrecognized tax benefits, if recorded, that would impact the annual effective tax rate for 2012, 2011, and 2010 would be approximately 6%, 2%, and 4%, respectively, of pretax book income. Alcoa does not anticipate that changes in its unrecognized tax benefits will have a material impact on the Statement of Consolidated Operations during 2013. It is Alcoa’s policy to recognize interest and penalties related to income taxes as a component of the Provision for income taxes on the accompanying Statement of Consolidated Operations. In 2012, 2011, and 2010, Alcoa recognized $3, $2, and $1, respectively, in interest and penalties. Due to the expiration of the statute of limitations, settlements with tax authorities, and refunded overpayments, Alcoa also recognized interest income of $7, $2, and $4 in 2012, 2011, and 2010, respectively. As of December 31, 2012 and 2011, the amount accrued for the payment of interest and penalties was $15 and $12, respectively.

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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 Statement of Financial Accounting Standard (FAS) -Number 109 -Paragraph 136, 172 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. 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=6881521&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 15 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32718-109319 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 109 -Paragraph 43, 44, 45, 46, 47, 48, 49 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 6: 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 7: 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 8: 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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