Dow Chemical 2013 Annual Report Download - page 152

130
Reconciliation to U.S. Statutory Rate
In millions 2013 2012 2011
Taxes at U.S. statutory rate $ 2,381 $ 583 $ 1,260
Equity earnings effect (276) (115) (459)
Foreign income taxed at rates other than 35% (1) (76) (76) (242)
U.S. tax effect of foreign earnings and dividends 102 13 218
Goodwill impairment losses — 77 —
Discrete equity earnings (2) — 48 —
Change in permanent reinvestment assertions — (236) —
Change in valuation allowances (197) 135 367
Unrecognized tax benefits 243 122 35
Federal tax accrual adjustments 29 4 8
Sale of a contract manufacturing subsidiary (3) — — (231)
Joint venture reorganization — — (95)
Gain from K-Dow arbitration (4) (212) — —
Other – net (6) 10 (44)
Total tax provision $ 1,988 $ 565 $ 817
Effective tax rate 29.2% 33.9% 22.7%
(1) Includes the tax provision for statutory taxable income in foreign jurisdictions for which there is no
corresponding amount in “Income Before Income Taxes.”
(2) Includes nonrecurring charges related to equity in earnings of nonconsolidated affiliates.
(3) The Company recognized a tax benefit of $231 million related to the sale of a contract manufacturing
subsidiary, which was reduced by a $95 million valuation allowance in 2011.
(4) In 2013, the K-Dow arbitration award generated a tax rate benefit of $212 million due to the tax treatment
of certain components of the award. See Note 14 for further information.
The tax rate for 2013 was favorably impacted by increased equity earnings; the K-Dow arbitration award, due to favorable tax
treatment of certain components of the award; and, changes in valuation allowances in the United States on state income tax
attributes and capital loss carryforwards. The tax rate was unfavorably impacted by adjustments to uncertain tax positions
related to court rulings on two separate tax matters as well as the establishment of valuation allowances outside the United
States. Additionally, the tax rate was unfavorably impacted by an increase in statutory taxable income in Latin America,
primarily due to local currency devaluation. These factors resulted in an effective tax rate of 29.2 percent for 2013.
The tax rate for 2012 was negatively impacted by a change in the geographic mix of earnings, notably a decrease in earnings in
Europe and an increase in earnings in the United States, as well as reductions in equity earnings. Equity earnings were further
impacted by asset impairment and restructuring charges at Dow Corning. Additionally, the Company's impairment of Dow
Formulated Systems goodwill and the impairment of the long-lived assets of Dow Kokam LLC received minimal tax
relief. The tax rate was favorably impacted by a change in the permanent reinvestment assertions of certain affiliates in Europe
and Asia Pacific; however, this was primarily offset by unfavorable adjustments to uncertain tax positions and valuation
allowances. These factors resulted in an effective tax rate of 33.9 percent for 2012.
The tax rate for 2011 was positively impacted by a high level of equity earnings as a percentage of total earnings, earnings in
foreign locations taxed at rates less than the U.S. statutory rate, the sale of a contract manufacturing subsidiary and the
reorganization of a joint venture and was negatively impacted by a $264 million valuation allowance recorded in the fourth
quarter of 2011. The valuation allowance was recorded against the deferred tax assets of two Dow entities in Brazil. As a result
of the global recession in 2008-2009, coupled with rapidly deteriorating isocyanate industry conditions and increasing local
costs, these two entities were in a three-year cumulative pretax operating loss position at December 31, 2011. While the
Company expects to realize the tax loss carryforwards generated by these operating losses based on several factors - including
forecasted margin expansion resulting from improving economic conditions, higher industry growth rates in Brazil, improving
Dow operating rates, and a restructuring of legal entities to maximize the use of existing tax loss carryforwards - Dow was
unable to overcome the negative evidence of recent cumulative operating losses; and at December 31, 2011, the Company
could not assert it was more likely than not that it will realize its deferred tax assets in the two Brazilian entities. Accordingly,
the Company established the valuation allowance against the deferred tax assets of these companies in the fourth quarter of
2011. If in the future, as a result of the Company's plans and expectations, one or both of these entities generates sufficient
profitability such that the evaluation of the recoverability of the deferred tax assets changes, the valuation allowance could be
reversed in whole or in part in a future period. These factors resulted in an effective tax rate of 22.7 percent for 2011.