Alcoa 2012 Annual Report Download - page 148

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.
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