Alcoa 2012 Annual Report Download - page 69

Other (Income) Expenses, net—Other income, net was $341 in 2012 compared with $87 in 2011. The increase of
$254 was mostly due to a gain on the sale of U.S. hydroelectric power assets ($320: see Primary Metals in Segment
Information below) and net favorable foreign currency movements ($21). These two items were somewhat offset by
lower equity income ($43), largely attributable to Alcoa’s share of expenses of the joint venture in Saudi Arabia and
the absence of a discrete income tax benefit recognized by the consortium related to an investment in a natural gas
pipeline in Australia (see below); the absence of a gain on the sale of land (see below); and a net unfavorable change in
mark-to-market derivative contracts ($39), principally driven by the absence of a favorable change in an energy
contract that expired in September 2011.
Other income, net was $87 in 2011 compared with Other expenses, net of $5 in 2010. The change of $92 was mainly the
result of a net favorable change of $89 in mark-to-market derivative contracts, a gain of $43 from the sale of land in
Australia, and higher equity income from an investment in a natural gas pipeline in Australia due to the recognition of a
discrete income tax benefit by the consortium (Alcoa World Alumina and Chemicals’ share of the benefit was $24),
slightly offset by a decrease in the cash surrender value of company-owned life insurance.
Income Taxes—Alcoa’s effective tax rate was 50.0% in 2012 compared with the U.S. federal statutory rate of 35%.
The effective tax rate differs from the U.S. federal statutory rate principally due to the tax impact from the gain
recognized on the sale of U.S. hydroelectric power assets (see Primary Metals in Segment Information below) and an
$8 discrete income tax charge related to prior year U.S. taxes on certain depletable assets, slightly offset by a $13
discrete income tax benefit related to a change in the legal structure of an investment.
Alcoa’s effective tax rate was 24.0% in 2011 compared with the U.S. federal statutory rate of 35%. The effective tax
rate differs from the U.S. federal statutory rate mainly due to foreign income taxed in lower rate jurisdictions.
Alcoa’s effective tax rate was 26.9% in 2010 compared with the U.S. federal statutory rate of 35%. The effective tax
rate differs from the U.S. federal statutory rate primarily due to foreign income taxed in lower rate jurisdictions, a $57
discrete income tax benefit for the reversal of a valuation allowance as a result of previously restricted net operating
losses of a foreign subsidiary now available, a $24 discrete income tax benefit related to a Canadian provincial tax law
change permitting a tax return to be filed in U.S. dollars, and a $13 net discrete income tax benefit for various other
items, partially offset by a $79 discrete income tax charge as a result of a change in the tax treatment of federal
subsidies received related to prescription drug benefits provided under certain retiree health care benefit plans that were
determined to be actuarially equivalent to Medicare Part D and a $19 discrete income tax charge based on settlement
discussions of several matters with international taxing authorities (this amount represents a decrease to Alcoa’s
unrecognized tax benefits).
Management anticipates that the effective tax rate in 2013 will be approximately 30%. However, changes in the current
economic environment, tax legislation or rate changes, currency fluctuations, ability to realize deferred tax assets, and
the results of operations in certain taxing jurisdictions may cause this estimated rate to fluctuate.
On January 2, 2013, the American Taxpayer Relief Act of 2012 was signed into law and extended through 2013
various expired or expiring temporary business tax provisions. Two specific temporary business tax provisions that
expired in 2011 and impacted Alcoa are the look-through rule for payments between related controlled foreign
corporations and the research and experimentation credit. The expiration of these two provisions resulted in Alcoa
recognizing a higher income tax provision of $18 in 2012. As tax law changes are accounted for in the period of
enactment, Alcoa will recognize an $18 discrete income tax benefit in 2013 related to the 2012 tax year to reflect the
extension of these provisions.
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.
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