Note 4 Income Taxes

For the years ended December 31, income before income taxes consisted of the following:


In millions	2013		2012		2011
Income before income taxes
United States	$	362	$	388	$	309
Foreign		146		190		172

Total income before income taxes	$	508	$	578	$	481

For the years ended December 31, income tax expense consisted of the following:


In millions	2013			2012			2011
Income tax expense
Current
Federal	$	78		$	50		$	26
State and local		10			9			3
Foreign		26			23			29
Deferred
Federal		18			72			64
State and local		2			7			8
Foreign		(3	)		(2	)		(2	)

Total income tax expense	$	131		$	159		$	128

The following table presents the principal components of the difference between the effective tax rate and the U.S. federal statutory income tax rate for the years ended December 31:


In millions	2013			2012			2011
Income tax expense at the U.S. federal tax rate		35.0	%		35.0	%		35.0	%
Foreign income tax differential		(7.3	%)		(8.1	%)		(7.4	%)
State and local income taxes		0.4	%		0.7	%		1.3	%
U.S. permanent book/tax differences		(1.6	%)		(0.5	%)		(1.8	%)
Other, net		(0.7	%)		0.4	%		(0.5	%)

Total income tax expense		25.8	%		27.5	%		26.6	%

The tax rate for the twelve months ended December 31, 2013 included a discrete $4 million tax benefit associated with the U.S. Federal Research and Development (“R&D) tax credit for 2012, which was retroactively reinstated with the enactment of the American Taxpayer Relief Act of 2012 in January 2013. There were no material discrete tax items, nor any tax benefits associated with the 2012 U.S. Federal R&D Tax credit due to its expiration, reflected in the tax rate for the twelve months ended December 31, 2012. The tax rate for the twelve months ended December 31, 2011 included a $4 million tax benefit recorded in the second quarter of 2011 related to the book gain recorded on the Company’s previous equity investment in Aster Data, which was reflected as a permanent non-taxable item. The provision for income taxes is based on the pre-tax earnings mix by jurisdiction of Teradata and its subsidiaries under the Company’s current structure.

Deferred income tax assets and liabilities included in the balance sheets at December 31 were as follows:


In millions	2013			2012
Deferred income tax assets
Employee pensions and other liabilities	$	57		$	54
Other balance sheet reserves and allowances		22			27
Deferred revenue		2			4
Tax loss and credit carryforwards		41			41
Capitalized research and development		5			16
Other		1			0

Total deferred income tax assets		128			142
Valuation allowance		(13	)		(9	)

Net deferred income tax assets		115			133


Deferred income tax liabilities
Intangibles and capitalized software		117			123
Property and equipment		29			26
Other		0			5

Total deferred income tax liabilities		146			154

Total net deferred income tax liabilities	($	31	)	($	21	)

As of December 31, 2013, Teradata had total net operating loss carryforwards in the United States and certain foreign jurisdictions of approximately $33 million (tax effected), some of which begin to expire in 2014. In addition, Teradata has Research and Development Tax Credit carryforwards of $22 million, some of which begin to expire in 2014. As of December 31, 2013, the Company has recorded $41 million (net of a $11 million valuation allowance related to California Research and Development tax credits) of these tax attributes on its balance sheet as deferred tax assets; the remaining $14 million of deferred tax assets are associated with certain tax attributes which were both generated by the Company and acquired from various acquisitions, which do not meet the recognition criteria for uncertain tax positions and therefore are not recorded for financial reporting purposes.

The Company’s intention is to permanently reinvest its foreign earnings outside of the United States. As a result, the effective tax rates in the periods presented are largely based upon the pre-tax earnings mix and allocation of certain expenses in various taxing jurisdictions where the Company conducts its business; these jurisdictions apply a broad range of statutory income tax rates. At December 31, 2013 the Company had not provided for federal income taxes on earnings of approximately $1 billion from its foreign subsidiaries. Should these earnings be distributed in the form of dividends or otherwise, the Company would be subject to U.S. income taxes and potential withholding taxes in various international jurisdictions. The U.S. taxes would be partially offset by U.S. foreign tax credits. Determination of the amount of unrecognized deferred U.S. tax liability is not practical because of the complexities associated with this hypothetical calculation.

The Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The Company reflects any interest and penalties recorded in connection with its uncertain tax positions as a component of income tax expense.

As of December 31, 2013, the Company’s uncertain tax positions totaled approximately $34 million, of which $20 million is reflected in the “Other liabilities” section of the Company’s balance sheet as a non-current liability. The remaining balance of $14 million of uncertain tax positions relates to certain tax attributes which were both generated by the Company and acquired in various acquisitions, which are netted against the underlying deferred tax assets recorded on the balance sheet. The entire balance of $34 million in uncertain tax positions would cause a decrease in the effective income tax rate upon recognition. Teradata has recorded $1 million of interest accruals related to its uncertain tax liabilities as of December 31, 2013.

Below is a rollforward of the Company’s liability related to uncertain tax positions at December 31:


In millions	2013			2012
Balance at January 1	$	31		$	28
Gross increases for prior period tax positions		1			0
Gross decreases for prior period tax positions		(3	)		(1	)
Gross increases for current period tax positions		5			4

Balance at December 31	$	34		$	31

The Company and its subsidiaries file income tax returns in the U.S. federal and various state jurisdictions, as well as numerous foreign jurisdictions. As of December 31, 2013, the Company has ongoing tax audits for its U.S. Federal tax filing for tax year 2011, as well as in a limited number of state and foreign jurisdictions; however, no material adjustments have been proposed or made in any of these examinations to date.