Alcoa 2014 Annual Report Download - page 164

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 2013, Alcoa recognized a $372 discrete income tax charge for valuation allowances on certain deferred tax assets in
Spain and the United States. Of this amount, a $237 valuation allowance was established on the full value of the
deferred tax assets related to a Spanish consolidated tax group. These deferred tax assets have an expiration period
ranging from 2016 (for certain credits) to an unlimited life (for operating losses). After weighing all available positive
and negative evidence, as described above, management determined that it was no longer more likely than not that
Alcoa will realize the tax benefit of these deferred tax assets. This was mainly driven by a decline in the outlook of the
Primary Metals business (2013 realized prices were the lowest since 2009) combined with prior year cumulative losses
of the Spanish consolidated tax group. During 2014, the underlying value of the deferred tax assets decreased due to a
remeasurement as a result of the enactment of new tax rates in Spain beginning in 2015, the sale of a member of the
Spanish consolidated tax group, and a change in foreign currency exchange rates. As a result the valuation allowance
decreased by the same amount. At December 31, 2014, the amount of the valuation allowance was $163. This valuation
allowance was reevaluated as of December 31, 2014, and no change to the allowance was deemed necessary based on
all available evidence. The need for this valuation allowance will be assessed on a continuous basis in future periods
and, as a result, a portion or all of the allowance may be reversed based on changes in facts and circumstances.
The remaining $135 relates to a valuation allowance established on a portion of available foreign tax credits in the
United States. These credits can be carried forward for 10 years, and have an expiration period ranging from 2016 to
2023 as of December 31, 2013 (2015 to 2019 as of December 31, 2014). After weighing all available positive and
negative evidence, as described above, management determined that it was no longer more likely than not that Alcoa
will realize the full tax benefit of these foreign tax credits. This was primarily due to lower foreign sourced taxable
income after consideration of tax planning strategies and after the inclusion of earnings from foreign subsidiaries
projected to be distributable as taxable foreign dividends. This valuation allowance was reevaluated as of
December 31, 2014, and no change to the allowance was deemed necessary based on all available evidence. The need
for this valuation allowance will be assessed on a continuous basis in future periods and, as a result, an increase or
decrease to this allowance may result based on changes in facts and circumstances.
In December 2011, one of Alcoa’s subsidiaries in Brazil applied for a tax holiday related to its expanded mining and
refining operations. During 2013, the application was amended and re-filed and, separately, a similar application was filed
for another one of the Company’s subsidiaries in Brazil. The deadline for the Brazilian government to deny the
application was July 11, 2014. Since Alcoa did not receive notice that its applications were denied, the tax holiday took
effect automatically on July 12, 2014. As a result, the tax rate for these subsidiaries decreased significantly (from 34% to
15.25%), resulting in future cash tax savings over the 10-year holiday period (retroactively effective as of January 1,
2013). Additionally, a portion of one of the subsidiaries net deferred tax asset that reverses within the holiday period was
remeasured at the new tax rate (the net deferred tax asset of the other subsidiary was not remeasured since it could still be
utilized against the subsidiary’s future earnings not subject to the tax holiday). This remeasurement resulted in a decrease
to that subsidiary’s net deferred tax asset and a noncash charge to earnings of $52 ($31 after noncontrolling interest).
The following table details the changes in the valuation allowance:
December 31, 2014 2013 2012
Balance at beginning of year $1,804 $1,400 $1,398
Increase to allowance 117 471 45
Release of allowance (77) (41) (31)
Acquisitions and divestitures (F) (37) — —
U.S. state tax apportionment and tax rate changes (80) (32) (17)
Foreign currency translation (59) 6 5
Balance at end of year $1,668 $1,804 $1,400
The cumulative amount of Alcoa’s foreign undistributed net earnings for which no deferred taxes have been provided
was approximately $4,600 at December 31, 2014. 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.
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