14. Income Taxes

The domestic and foreign components of income before income taxes were as follows (in millions):


	Years Ended December 31,
	2014		2013		2012
Domestic	$	1,415	$	1,362	$	1,697
Foreign		2,079		1,762		1,643

	$	3,494	$	3,124	$	3,340

The components of the provision for income taxes consisted of (in millions):


	Years Ended December 31,
	2014			2013			2012
Current:
Federal	$	681		$	632		$	654
State		43			55			44
Foreign		615			592			357

Total current income tax provision		1,339			1,279			1,055

Deferred:
Federal		(309	)		(157	)		(147	)
State		(5	)		(12	)		(1	)
Foreign		14			(167	)		58

Total deferred income tax provision		(300	)		(336	)		(90	)

Total income tax provision	$	1,039		$	943		$	965

The difference between the effective tax rate reflected in the provision for income taxes and the U.S. federal statutory rate was as follows (in millions):


	Years Ended December 31,
	2014			2013			2012
Federal income tax at U.S. statutory rate	$	1,223		$	1,093		$	1,169
Foreign income tax rate differential		(261	)		(216	)		(149	)
State income tax, net of federal benefit		25			27			29
Nondeductible expenses		24			26			29
Tax benefit of manufacturing deduction		(37	)		(33	)		(29	)
Foreign dividends, net of foreign tax credits		132			32			(116	)
Change in deferred tax valuation allowance		(83	)		40			80
Other		16			(26	)		(48	)

Total income tax provision	$	1,039		$	943		$	965

Significant components of our deferred tax assets and liabilities were as follows (in millions):


	December 31,
	2014			2013			2012
Deferred tax assets:
Allowances and operating liabilities	$	542		$	439		$	368
Net operating loss carryforwards		118			51			25
Postretirement benefits		79			49			54
Foreign tax credit carryforwards		244			300			259
Other		15			39			149

		998			878			855
Valuation allowance for deferred tax assets		(48	)		(133	)		(93	)

Total deferred tax assets		950			745			762

Deferred tax liabilities:
Tax over book depreciation		236			306			268
Intangible assets		1,304			1,757			1,448
Deferred income		257			285			314
Accrued U.S. tax on unremitted earnings		107			92			92
Other		377			164			208

Total deferred tax liabilities		2,281			2,604			2,330

Net deferred tax liability	$	1,331		$	1,859		$	1,568

The balance of unrecognized tax benefits at December 31, 2014 and 2013 was $115 million and $127 million, respectively. Included in the change in the balance of unrecognized tax benefits for the period ended December 31, 2014 was an increase of $3 million of unrecognized tax benefits associated with potential transfer pricing adjustments between foreign jurisdictions and certain operating expenses that may not be deductible in foreign jurisdictions. A $15 million reduction in the balance of unrecognized tax benefits resulted from the lapse of applicable statutes of limitations in the U.S. and foreign jurisdictions, as well as the completion of audits in the U.S. Of the net decrease of $12 million in the balance of unrecognized tax benefits, the entire $12 million was recorded as a decrease of income tax expense in the current year and is reflected in the “other” category in the income tax rate schedule above. These unrecognized tax benefits are included in the balance of other liabilities in the Consolidated Balance Sheet at December 31, 2014. If the $115 million of unrecognized tax benefits accrued at December 31, 2014 are ultimately realized, $42 million would be recorded as a reduction of income tax expense.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in millions):


	2014			2013			2012
Unrecognized tax benefit at beginning of year	$	127		$	128		$	131
Additions based on tax positions related to the current year		3			—			2
Reductions for lapse of applicable statutes of limitations		(15	)		(1	)		(5	)

Unrecognized tax benefit at end of year	$	115		$	127		$	128

The Company does not anticipate that the total unrecognized tax benefits will significantly change due to the settlement of audits or the expiration of statutes of limitation within 12 months of this reporting date.

To the extent penalties and interest would be assessed on any underpayment of income tax, such accrued amounts have been classified as a component of income tax expense in the financial statements consistent with the Company’s policy. During the year ended December 31, 2014, the Company recorded as an increase of income tax expense a $0.5 million net increase of accrued interest and penalties related to uncertain tax positions. At December 31, 2014, the Company has accrued approximately $8.5 million of interest and penalties relating to unrecognized tax benefits. These interest and penalties are included in the balance of other liabilities in the Consolidated Balance Sheet at December 31, 2014.

The Company is subject to taxation in the United States, various states and foreign jurisdictions. The Company has significant operations in the United States, Norway, Canada, the United Kingdom, the Netherlands, France and Denmark. Tax years that remain subject to examination by major tax jurisdictions vary by legal entity, but are generally open in the U.S. for the tax years ending after 2009 and outside the U.S. for the tax years ending after 2007.

In the United States, the Company has $20 million of net operating loss carryforwards as of December 31, 2014, of which $4 million will expire in 2025, $13 million will expire in 2026, $1 million will expire in 2027, $1 million will expire in 2029 and $1 million will expire in 2030. The potential benefit of $7 million has been reduced by a $7 million valuation allowance. Future income tax payments will be reduced in the event the Company ultimately realizes the benefit of these net operating losses. If the Company ultimately realizes the benefit of these net operating loss carryforwards, the valuation allowance of $7 million would reduce future income tax expense.

Outside the United States, the Company has $381 million of net operating loss carryforwards as of December 31, 2014, of which $5 million will expire in 2015, $4 million will expire in 2016, $34 million will expire in 2017, $16 million will expire in 2018, $4 million will expire in 2019, $6 million will expire in 2020, $20 million will expire in 2021, $10 million will expire in 2022, $9 million will expire in 2023, $41 million will expire in 2024, $4 million will expire in 2034 and $228 million will carry forward indefinitely. The potential benefit of $98 million has been reduced by a $41 million valuation allowance. Future income tax payments will be reduced in the event the Company ultimately realizes the benefit of these net operating losses. If the Company ultimately realizes the benefit of these net operating loss carryforwards, the valuation allowance of $41 million would reduce future income tax expense.

Also in the United States, the Company has $243 million of excess foreign tax credits as of December 31, 2014, of which $73 million will expire in 2018, $28 million will expire in 2020, and $142 million will expire in 2022. A valuation allowance of $101 million was reversed in 2014, as it is more likely than not these excess foreign tax credits will be utilized before they expire. There is a reserve for uncertain tax positions of $73 million against a portion of these credits.

Undistributed earnings of certain of the Company’s foreign subsidiaries amounted to $5,874 million and $6,045 million at December 31, 2014 and 2013, respectively. Those earnings are considered to be permanently reinvested and no provision for U.S. federal and state income taxes has been made. Distribution of these earnings in the form of dividends or otherwise could result in U.S. federal taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable in various foreign countries. Determination of the amount of unrecognized deferred U.S. income tax liability is not practical; however, unrecognized foreign tax credit carryforwards would be available to reduce some portion of the U.S. liability.

Because of the number of tax jurisdictions in which the Company operates, its effective tax rate can fluctuate as operations and the local country tax rates fluctuate. The Company is also subject to audits by federal, state and foreign jurisdictions which may result in proposed assessments. The Company’s future tax provision will reflect any favorable or unfavorable adjustments to its estimated tax liabilities when resolved. The Company is unable to predict the outcome of these matters. However, the Company believes that none of these matters will have a material adverse effect on the results of operations or financial condition of the Company.