Northrop Grumman 2014 Annual Report Download - page 64

NORTHROP GRUMMAN CORPORATION
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Income tax expense differs from the amount computed by multiplying the statutory federal income tax rate times
earnings before income taxes due to the following:
Year Ended December 31
$ in millions 2014 2013 2012
Income tax expense at statutory rate $ 1,028 $ 1,002 $ 1,038
Settlements with taxing authorities (51)— —
Manufacturing deduction (48)(63)(42)
Research tax credit (43)(37) —
Other, net (18)9(9)
Total federal and foreign income taxes $ 868 $ 911 $ 987
2014 – The effective tax rate for 2014 was 29.6 percent, as compared with 31.8 percent in 2013. The company's
lower effective tax rate for 2014 reflects a $51 million benefit for the partial resolution of its 2007-2009 Internal
Revenue Service (IRS) examination.
2013 – The effective tax rate for 2013 was 31.8 percent, as compared with 33.3 percent in 2012. The company's
lower effective tax rate for 2013 includes a $37 million benefit for the American Taxpayer Relief Act, enacted in
January 2013, which reinstated research tax credits for 2012 and 2013, and a $21 million benefit for higher section
199 manufacturing deductions than in prior year.
Income tax payments, net of refunds received, were $727 million, $880 million and $1.1 billion for the years ended
December 31, 2014, 2013 and 2012, respectively.
Uncertain Tax Positions
The company files income tax returns in the U.S. federal jurisdiction and in various state and foreign jurisdictions.
In the first quarter of 2014, the U.S. Congressional Joint Committee on Taxation approved a partial resolution of the
IRS examination of the company’s 2007-2009 tax returns. As a result, the company recorded a reduction of income
tax expense of $51 million. The company also reduced its unrecognized tax benefits by $59 million and related
accrued interest by $12 million. During the fourth quarter of 2014, the company filed appeals with the IRS for the
unresolved 2007-2009 tax return matters and for unresolved 2010-2011 examination matters.
The company believes it is reasonably possible that during the next twelve months, we will resolve the remaining
matters on our 2007-2011 tax returns. The combined resolution of these items, excluding interest, could result in a
reduction in our unrecognized tax benefits up to $75 million and a reduction of our income tax expense up to $40
million. Open tax years related to state and foreign jurisdictions remain subject to examination, but are not
considered material.
The change in unrecognized tax benefits during 2014, 2013 and 2012, excluding interest, is as follows:
December 31
$ in millions 2014 2013 2012
Unrecognized tax benefits at beginning of the year $ 241 $ 156 $ 118
Additions based on tax positions related to the current year 62 56 12
Additions for tax positions of prior years 944 28
Settlements with taxing authorities (61)(1)(1)
Other, net (41)(14)(1)
Net change in unrecognized tax benefits (31)85 38
Unrecognized tax benefits at end of the year $ 210 $ 241 $ 156
These liabilities, along with $25 million of accrued interest and penalties, are included in other current and non-
current liabilities in the consolidated statements of financial position. If the income tax benefits from these tax
positions are ultimately realized, $145 million of federal and foreign tax benefits would reduce the company’s
effective tax rate.
Net interest expense within the company's federal, foreign and state income tax provisions was not material for all
years presented.