United Technologies 2012 Annual Report Download - page 80

78 UNITED TECHNOLOGIES CORPORATION
intention is to reinvest these earnings permanently outside the U.S.
or to repatriate the earnings only when it is tax effective to do so.
Differences between effective income tax rates and the
statutory U.S. federal income tax rate are as follows:
2012 2011 2010
Statutory U.S. federal income tax rate 35.0 % 35.0 % 35.0 %
Tax on international activities (6.4)% (4.4)% (7.8)%
Tax audit settlements (3.4)% (0.9)% –
Other (0.4)% (0.7)% 0.4 %
Effective income tax rate 24.8 % 29.0 % 27.6 %
The 2012 effective tax rate decreased as compared to
2011. The 2012 effective tax rate reflects a favorable non-cash
income tax adjustment of approximately $203 million related to the
conclusion of the IRS’s examination of UTC’s 2006 – 2008 tax
years, as well as a reduction in tax expense of $34 million related to
the favorable resolution of disputed tax matters with the Appeals
Division of the IRS for the tax years 2004 – 2005. Also included in
the 2012 effective tax rate is the favorable income tax impact of
$225 million related to the release of non-U.S. valuation allowances
resulting from internal legal entity reorganizations. This is reported in
the table above in tax on international activities.
The 2011 effective tax rate reflects approximately $63 mil-
lion of favorable income tax adjustments related to the settlement of
two refund claims for years prior to 2004, as well as a favorable tax
impact of $17 million related to a U.K. tax rate reduction enacted in
2011. These favorable tax adjustments are partially offset by non-
deductible charges accrued in 2011.
The 2010 effective income tax rate reflects a non-recurring
tax expense reduction associated with management’s decision to
repatriate additional high tax dividends from 2010 earnings to the
U.S. as a result of U.S. tax legislation enacted in 2010. This was
partially offset by the non-deductibility of impairment charges, the
adverse impact from the health care legislation related to the Medi-
care Part D program and other increases to UTC’s effective income
tax rate.
At December 31, 2012, tax credit carryforwards, principally
state and foreign, and tax loss carryforwards, principally state and
foreign, were as follows:
(DOLLARS IN MILLIONS)
Tax Credit
Carryforwards
Tax Loss
Carryforwards
Expiration period:
2013-2017 $ 52 $ 626
2018-2022 17 378
2023-2032 310 1,053
Indefinite 808 2,115
Total $ 1,187 $ 4,172
At December 31, 2012, we had gross tax-effected unrecog-
nized tax benefits of $1,073 million, all of which, if recognized,
would impact the effective tax rate. The table below includes both
additional unrecognized tax benefits and related interest attributable
to the acquisition of Goodrich in 2012. A reconciliation of the
beginning and ending amounts of unrecognized tax benefits and
interest expense related to unrecognized tax benefits for the years
ended December 31, 2012, 2011, and 2010 is as follows:
(DOLLARS IN MILLIONS) 2012 2011 2010
Balance at January 1 $ 946 $ 891 $ 793
Additions for tax positions related to the
current year 232 71 115
Additions for tax positions of prior years 221 71 80
Reductions for tax positions of prior years (21) (24) (81)
Settlements (305) (63) (16)
Balance at December 31 $ 1,073 $ 946 $ 891
Gross interest expense related to
unrecognized tax benefits $40$23 $27
Total accrued interest balance at
December 31 $ 270 $ 165 $ 144
We conduct business globally and, as a result, UTC or one
or more of our subsidiaries files income tax returns in the U.S.
federal jurisdiction and various state and foreign jurisdictions. In the
normal course of business we are subject to examination by taxing
authorities throughout the world, including such major jurisdictions
as Australia, Belgium, Canada, China, France, Germany, Hong
Kong, Italy, Japan, South Korea, Singapore, Spain, the United
Kingdom and the United States. With few exceptions, we are no
longer subject to U.S. federal, state and local, or non-U.S. income
tax examinations for years before 1998.
During the first quarter of 2012, the IRS completed exami-
nation fieldwork for our 2006 through 2008 tax years and issued its
audit report. Based on the IRS audit report, we filed a protest with
respect to certain IRS-proposed adjustments with which we do not
agree. Resolution discussions with the Appeals Division of the IRS
will commence on the unagreed items in 2013. However, the timing
of any resolution is currently uncertain. During the third quarter of
2012, we reached final resolution with the Appeals Division of the
IRS for our 2004 and 2005 tax years regarding certain proposed
adjustments with which we did not agree. As a result of the above
described events with respect to our 2004 – 2005 and 2006 – 2008
tax years, we recorded reductions in tax expense in the first and
third quarters of 2012 in the aggregate amount of $237 million. IRS
audit fieldwork for tax years 2009 and 2010 commenced in the first
quarter of 2012 and is currently expected to continue into 2014.
UTC completed the Goodrich acquisition during 2012.
Goodrich pre-acquisition tax years are also the subject of certain
IRS audit, appeals and litigation activity. Goodrich tax years 2001
and 2002 are currently the subject of litigation involving the proper
timing of certain deductions, which litigation is expected to continue
through 2013. Goodrich tax years 2005 and 2006 are the subject
of litigation with respect to a separate issue involving the proper