International Paper 2012 Annual Report Download - page 91

A reconciliation of income tax expense using the
statutory U.S. income tax rate compared with the
actual income tax provision follows:
In millions 2012 2011 2010
Earnings (loss) from continuing operations
before income taxes and equity earnings $1,024 $1,458 $822
Statutory U.S. income tax rate 35% 35% 35%
Tax expense (benefit) using statutory U.S.
income tax rate 358 510 288
State and local income taxes 11 16 15
Tax rate and permanent differences on non-
U.S. earnings (116) (34) (69)
Net U.S. tax on non-U.S. dividends 48 23 16
Tax benefit on manufacturing activities (15) (8) 3
Non-deductible business expenses 768
Non-deductible goodwill 34 ——
Sales of non-strategic businesses —(195) —
Retirement plan dividends (5) (5) (2)
Cellulosic bio-fuel credits —— (40)
Tax credits —(7) (25)
Medicare subsidy 5—29
Other, net 45(2)
Income tax provision $ 331 $ 311 $221
Effective income tax rate 32% 21% 27%
The tax effects of significant temporary differences,
representing deferred income tax assets and
liabilities at December 31, 2012 and 2011, were as
follows:
In millions 2012 2011
Deferred income tax assets:
Postretirement benefit accruals $ 229 $ 242
Pension obligations 1,620 954
Alternative minimum and other tax credits 741 478
Net operating loss carryforwards 579 536
Compensation reserves 242 189
Other 302 232
Gross deferred income tax assets 3,713 2,631
Less: valuation allowance (400) (424)
Net deferred income tax asset $ 3,313 $ 2,207
Deferred income tax liabilities:
Intangibles $ (263) $ (59)
Plants, properties and equipment (3,126) (2,383)
Forestlands and related installment sales (2,511) (1,833)
Gross deferred income tax liabilities $(5,900) $(4,275)
Net deferred income tax liability $(2,587) $(2,068)
Deferred income tax assets and liabilities are
recorded in the accompanying consolidated balance
sheet under the captions Deferred income tax assets,
Deferred charges and other assets, Other accrued
liabilities, and Deferred income taxes. The acquis-
ition of Temple-Inland in 2012 resulted in additional
deferred tax assets of $600 million and deferred
income tax liabilities of $1.8 billion. In addition, there
is an increase in deferred income tax assets princi-
pally relating to the tax impact of changes in quali-
fied pension liabilities. Certain tax attributes reflected
on our tax returns as filed differ significantly from
those reflected in the deferred income tax accounts
due to uncertain tax benefits.
The valuation allowance for deferred income tax
assets as of December 31, 2012 was $400 million.
The net change in the total valuation allowance for
the year ended December 31, 2012 was a decrease of
$24 million. The decrease is primarily attributable to
the release of a valuation allowance previously
imposed on state income tax attributes which the
Company now foresees utilizing.
A reconciliation of the beginning and ending amount
of unrecognized tax benefits for the years ended
December 31, 2012 , 2011 and 2010 is as follows:
In millions 2012 2011 2010
Balance at January 1 $(857) $(199) $(308)
(Additions) reductions based on tax positions
related to current year 12 (2) (12)
Additions for tax positions of prior years (140) (719) (50)
Reductions for tax positions of prior years 629 97
Settlements 22—
Expiration of statutes of limitations 725 70
Currency translation adjustment (2) 74
Balance at December 31 $(972) $(857) $(199)
Included in the balance at December 31, 2012 , 2011
and 2010 are $14 million, $9 million and $13 million,
respectively, for tax positions for which the ultimate
benefits are highly certain, but for which there is
uncertainty about the timing of such benefits. How-
ever, except for the possible effect of any penalties,
any disallowance that would change the timing of
these benefits would not affect the annual effective
tax rate, but would accelerate the payment of cash to
the taxing authority to an earlier period.
The Company accrues interest on unrecognized tax
benefits as a component of interest expense. Penalties,
if incurred, are recognized as a component of income
tax expense. The Company had approximately $104
million and $88 million accrued for the payment of
estimated interest and penalties associated with
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