Prudential 2012 Annual Report Download - page 183

PRUDENTIAL FINANCIAL, INC.
Notes to Consolidated Financial Statements
19. INCOME TAXES (continued)
The application of U.S. GAAP requires the Company to evaluate the recoverability of deferred tax assets and establish a valuation
allowance if necessary to reduce the deferred tax asset to an amount that is more likely than not expected to be realized. Considerable
judgment is required in determining whether a valuation allowance is necessary, and if so, the amount of such valuation allowance. In
evaluating the need for a valuation allowance the Company considers many factors, including: (1) the nature of the deferred tax assets and
liabilities; (2) whether they are ordinary or capital; (3) in which tax jurisdictions they were generated and the timing of their reversal;
(4) taxable income in prior carryback years as well as projected taxable earnings exclusive of reversing temporary differences and
carryforwards; (5) the length of time that carryovers can be utilized in the various taxing jurisdictions; (6) any unique tax rules that would
impact the utilization of the deferred tax assets; and (7) any tax planning strategies that the Company would employ to avoid a tax benefit
from expiring unused. Although realization is not assured, management believes it is more likely than not that the deferred tax assets, net of
valuation allowances, will be realized.
A valuation allowance has been recorded related to tax benefits associated with state and local and foreign deferred tax assets.
Adjustments to the valuation allowance are made to reflect changes in management’s assessment of the amount of the deferred tax asset
that is realizable. The valuation allowance includes amounts recorded in connection with deferred tax assets at December 31, as follows:
2012 2011
(in millions)
Valuation allowance related to state and local deferred tax assets ............................................................ $250 $356
Valuation allowance related to foreign operations deferred tax assets ......................................................... $ 30 $ 36
The following table sets forth the federal, state and foreign operating and capital loss carryforwards for tax purposes, at December 31:
2012 2011
(in millions)
Federal net operating and capital loss carryforwards(1) .................................................................. $ 274 $1,112
State net operating and capital loss carryforwards(2) .................................................................... $4,574 $6,106
Foreign operating loss carryforwards(3) .............................................................................. $1,731 $1,241
(1) Expires between 2017 and 2031.
(2) Expires between 2013 and 2032.
(3) $1,689 million expires between 2014 and 2021 and $42 million has an unlimited carryforward.
The Company provides for U.S. income taxes on unremitted foreign earnings of its operations in Japan, and certain operations in
India, Germany, and Taiwan. In addition, beginning in 2012, the Company provides for U.S. income taxes on a portion of current year
foreign earnings for its insurance operations in Korea. Unremitted foreign earnings from operations in other foreign jurisdictions are
considered to be permanently reinvested. During 2010, the Company made no material changes with respect to its repatriation assumptions.
In 2011 the Company sold various foreign entities that were a part of the global commodities group and the relocation business.
Consequently, their earnings were no longer considered permanently reinvested and the Company recognized an income tax expense of $6
million related to the sale of global commodities group in “Income from discontinued operations, net of taxes” and income tax benefit of
$11 million related to the sale of the relocation business. Except for the change in repatriation assumption with respect to a portion of
current year foreign earnings for insurance operations in Korea, the Company made no material changes with respect to its repatriation
assumptions during 2012.
The following table sets forth the undistributed earnings of foreign subsidiaries, where the Company assumes permanent reinvestment,
for which U.S. deferred taxes have not been provided, as of the periods indicated. Determining the tax liability that would arise if these
earnings were remitted is not practicable.
At December 31,
2012 2011 2010
(in millions)
Undistributed earnings of foreign subsidiaries (assuming permanent reinvestment) .................................... $1,747 $2,145 $2,050
The Company’s unrecognized tax benefits for the years ended December 31 are as follows:
2012 2011 2010
(in millions)
Balance at January 1, ....................................................................................... $90 $552 $510
Increases in unrecognized tax benefits .......................................................................... 16 96 44
(Decreases) in unrecognized tax benefits ........................................................................ (4) (152) (2)
Settlements with taxing authorities ............................................................................. (83) (406) 0
Balance at December 31, .................................................................................... $19 $ 90 $552
Unrecognized tax benefits that, if recognized, would favorably impact the effective rate .................................. $19 $ 38 $261
The Company classifies all interest and penalties related to tax uncertainties as income tax expense (benefit). The amounts recognized
in the consolidated financial statements for tax-related interest and penalties for the years ended December 31, are as follows:
2012 2011 2010
(in millions)
Interest and penalties recognized in the consolidated statements of operations ........................................... $4 $13 $ 7
Interest and penalties recognized in liabilities in the consolidated statements of financial position ........................... $8 $28 $72
Prudential Financial, Inc. 2012 Annual Report 181