NOTE 14. INCOME TAXES
| Provision for Income Taxes | ||||||||
| (In millions) | 2013 | 2012 | 2011 | |||||
| GE | ||||||||
| Current tax expense | $ | 4,239 | $ | 2,307 | $ | 5,166 | ||
| Deferred tax expense (benefit) from temporary differences | (2,571) | (294) | (327) | |||||
| 1,668 | 2,013 | 4,839 | ||||||
| GECC | ||||||||
| Current tax expense (benefit) | (268) | 1,379 | 783 | |||||
| Deferred tax expense (benefit) from temporary differences | (724) | (858) | 123 | |||||
| (992) | 521 | 906 | ||||||
| Consolidated | ||||||||
| Current tax expense | 3,971 | 3,686 | 5,949 | |||||
| Deferred tax expense (benefit) from temporary differences | (3,295) | (1,152) | (204) | |||||
| Total | $ | 676 | $ | 2,534 | $ | 5,745 |
GE and GECC file a consolidated U.S. federal income tax return. This enables GE to use GECC tax deductions and credits to reduce the tax that otherwise would have been payable by GE. The GECC effective tax rate for each period reflects the benefit of these tax reductions in the consolidated return. GE makes cash payments to GECC for these tax reductions at the time GE's tax payments are due.
Consolidated U.S. earnings from continuing operations before income taxes were $6,099 million, $8,309 million and $10,206 million in 2013, 2012 and 2011, respectively. The corresponding amounts for non-U.S.-based operations were $10,052 million, $9,072 million and $9,953 million in 2013, 2012 and 2011, respectively.
Consolidated current tax expense includes amounts applicable to U.S. federal income taxes of $85 million, $685 million and $1,079 million in 2013, 2012 and 2011, respectively, including the benefit from GECC deductions and credits applied against GE's current U.S. tax expense. Consolidated current tax expense amounts applicable to non-U.S. jurisdictions were $3,659 million, $2,871 million and $4,624 million in 2013, 2012 and 2011, respectively. Consolidated deferred taxes related to U.S. federal income taxes were an expense (benefit) of $(2,315) million, $(414) million and $1,529 million in 2013, 2012 and 2011, respectively, and amounts applicable to non-U.S. jurisdictions of an expense (benefit) of $(1,038) million, $(773) million and $(2,077) million in 2013, 2012 and 2011, respectively.
Deferred income tax balances reflect the effects of temporary differences between the carrying amounts of assets and liabilities and their tax bases, as well as from net operating loss and tax credit carryforwards, and are stated at enacted tax rates expected to be in effect when taxes are actually paid or recovered. Deferred income tax assets represent amounts available to reduce income taxes payable on taxable income in future years. We evaluate the recoverability of these future tax deductions and credits by assessing the adequacy of future expected taxable income from all sources, including reversal of taxable temporary differences, forecasted operating earnings and available tax planning strategies. To the extent we do not consider it more likely than not that a deferred tax asset will be recovered, a valuation allowance is established.
Our businesses are subject to regulation under a wide variety of U.S. federal, state and foreign tax laws, regulations and policies. Changes to these laws or regulations may affect our tax liability, return on investments and business operations. For example, GE's effective tax rate is reduced because active business income earned and indefinitely reinvested outside the United States is taxed at less than the U.S. rate. A significant portion of this reduction depends upon a provision of U.S. tax law that defers the imposition of U.S. tax on certain active financial services income until that income is repatriated to the United States as a dividend. This provision is consistent with international tax norms and permits U.S. financial services companies to compete more effectively with foreign banks and other foreign financial institutions in global markets. This provision, which had expired at the end of 2011, was reinstated in January 2013 retroactively for two years through the end of 2013. The provision had been scheduled to expire and had been extended by Congress on six previous occasions, but there can be no assurance that it will continue to be extended. In the event the provision is not extended after 2013, the current U.S. tax imposed on active financial services income earned outside the United States would increase, making it more difficult for U.S. financial services companies to compete in global markets. If this provision is not extended, we expect our effective tax rate to increase significantly after 2014.
We have not provided U.S. deferred taxes on cumulative earnings of non-U.S. affiliates and associated companies that have been reinvested indefinitely. These earnings relate to ongoing operations and, at December 31, 2013 and December 31, 2012, were approximately $110 billion and $108 billion, respectively. Most of these earnings have been reinvested in active non-U.S. business operations and we do not intend to repatriate these earnings to fund U.S. operations. Because of the availability of U.S. foreign tax credits, it is not practicable to determine the U.S. federal income tax liability that would be payable if such earnings were not reinvested indefinitely. Deferred taxes are provided for earnings of non-U.S. affiliates and associated companies when we plan to remit those earnings.
Annually, we file over 5,800 income tax returns in over 250 global taxing jurisdictions. We are under examination or engaged in tax litigation in many of these jurisdictions. During 2013, the Internal Revenue Service (IRS) completed the audit of our consolidated U.S. income tax returns for 2008-2009, except for certain issues that remain under examination. During 2011, the IRS completed the audit of our consolidated U.S. income tax returns for 2006-2007, except for certain issues that remained under examination. At December 31, 2013, the IRS was auditing our consolidated U.S. income tax returns for 2010-2011. In addition, certain other U.S. tax deficiency issues and refund claims for previous years were unresolved. The IRS has disallowed the tax loss on our 2003 disposition of ERC Life Reinsurance Corporation. We have contested the disallowance of this loss. It is reasonably possible that the unresolved items could be resolved during the next 12 months, which could result in a decrease in our balance of “unrecognized tax benefits” – that is, the aggregate tax effect of differences between tax return positions and the benefits recognized in our financial statements. We believe that there are no other jurisdictions in which the outcome of unresolved issues or claims is likely to be material to our results of operations, financial position or cash flows. We further believe that we have made adequate provision for all income tax uncertainties. Resolution of audit matters, including the IRS audit of our consolidated U.S. income tax returns for 2008-2009, reduced our 2013 consolidated income tax rate by 2.8 percentage points. Resolution of audit matters, including the IRS audit of our consolidated U.S. income tax returns for 2006-2007, reduced our 2011 consolidated effective tax rate by 2.4 percentage points.
The balance of unrecognized tax benefits, the amount of related interest and penalties we have provided and what we believe to be the range of reasonably possible changes in the next 12 months were:
| December 31 (In millions) | 2013 | 2012 | |||
| Unrecognized tax benefits | $ | 5,816 | $ | 5,445 | |
| Portion that, if recognized, would reduce tax expense and effective tax rate(a) | 4,307 | 4,032 | |||
| Accrued interest on unrecognized tax benefits | 975 | 961 | |||
| Accrued penalties on unrecognized tax benefits | 164 | 173 | |||
| Reasonably possible reduction to the balance of unrecognized tax benefits | |||||
| in succeeding 12 months | 0-900 | 0-800 | |||
| Portion that, if recognized, would reduce tax expense and effective tax rate(a) | 0-350 | 0-700 | |||
(a) Some portion of such reduction might be reported as discontinued operations.
A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows:
| (In millions) | 2013 | 2012 | |||
| Balance at January 1 | $ | 5,445 | $ | 5,230 | |
| Additions for tax positions of the current year | 771 | 293 | |||
| Additions for tax positions of prior years | 872 | 882 | |||
| Reductions for tax positions of prior years | (1,140) | (723) | |||
| Settlements with tax authorities | (98) | (191) | |||
| Expiration of the statute of limitations | (34) | (46) | |||
| Balance at December 31 | $ | 5,816 | $ | 5,445 |
We classify interest on tax deficiencies as interest expense; we classify income tax penalties as provision for income taxes. For the years ended December 31, 2013, 2012 and 2011, $22 million, $(45) million and $(197) million of interest expense (income), respectively, and $0 million, $33 million and $10 million of tax expense (income) related to penalties, respectively, were recognized in the Statement of Earnings.
A reconciliation of the U.S. federal statutory income tax rate to the actual income tax rate is provided below.
| Reconciliation of U.S. Federal Statutory Income Tax Rate to Actual Income Tax Rate | ||||||||||||||||||
| Consolidated | GE | GECC | ||||||||||||||||
| 2013 | 2012 | 2011 | 2013 | 2012 | 2011 | 2013 | 2012 | 2011 | ||||||||||
| U.S. federal statutory income | ||||||||||||||||||
| tax rate | 35.0 | % | 35.0 | % | 35.0 | % | 35.0 | % | 35.0 | % | 35.0 | % | 35.0 | % | 35.0 | % | 35.0 | % |
| Increase (reduction) in rate | ||||||||||||||||||
| resulting from | ||||||||||||||||||
| inclusion of after-tax | ||||||||||||||||||
| earnings of GECC in | ||||||||||||||||||
| before-tax earnings of GE | - | - | - | (16.9) | (15.3) | (11.9) | - | - | - | |||||||||
| Tax on global activities | ||||||||||||||||||
| including exports(a) | (24.7) | (12.5) | (10.4) | (4.1) | (4.3) | (5.2) | (45.0) | (18.4) | (14.7) | |||||||||
| NBCU gain | (0.7) | - | 9.3 | (0.7) | - | 9.8 | - | - | - | |||||||||
| Business Property disposition | - | (1.9) | - | - | - | - | - | (4.2) | - | |||||||||
| U.S. business credits(b) | (3.6) | (2.6) | (3.2) | (1.5) | (0.7) | (1.5) | (4.6) | (4.3) | (4.7) | |||||||||
| All other – net | (1.8) | (3.4) | (2.2) | (2.0) | (2.7) | (0.9) | 1.0 | (1.5) | (3.5) | |||||||||
| (30.8) | (20.4) | (6.5) | (25.2) | (23.0) | (9.7) | (48.6) | (28.4) | (22.9) | ||||||||||
| Actual income tax rate | 4.2 | % | 14.6 | % | 28.5 | % | 9.8 | % | 12.0 | % | 25.3 | % | (13.6) | % | 6.6 | % | 12.1 | % |
Deferred Income Taxes
Aggregate deferred income tax amounts are summarized below.
| December 31 (In millions) | 2013 | 2012 | |||
| Assets | |||||
| GE | $ | 15,284 | $ | 19,745 | |
| GECC | 13,224 | 11,876 | |||
| 28,508 | 31,621 | ||||
| Liabilities | |||||
| GE | (10,223) | (13,799) | |||
| GECC | (18,010) | (17,876) | |||
| (28,233) | (31,675) | ||||
| Net deferred income tax asset (liability) | $ | 275 | $ | (54) |
Principal components of our net asset (liability) representing deferred income tax balances are as follows:
| December 31 (In millions) | 2013 | 2012 | |||
| GE | |||||
| Provision for expenses(a) | $ | 5,934 | $ | 6,503 | |
| Principal pension plans | 3,436 | 6,567 | |||
| Retiree insurance plans | 3,154 | 3,800 | |||
| Non-U.S. loss carryforwards(b) | 874 | 942 | |||
| Contract costs and estimated earnings | (3,550) | (3,087) | |||
| Intangible assets | (2,268) | (2,269) | |||
| Depreciation | (1,079) | (698) | |||
| Investment in global subsidiaries | (1,077) | (921) | |||
| Investment in NBCU LLC | - | (4,937) | |||
| Other – net | (363) | 46 | |||
| 5,061 | 5,946 | ||||
| GECC | |||||
| Operating leases | (6,284) | (6,141) | |||
| Financing leases | (4,075) | (4,506) | |||
| Intangible assets | (1,943) | (1,666) | |||
| Cash flow hedges | (163) | (115) | |||
| Net unrealized gains (losses) on securities | (145) | (314) | |||
| Non-U.S. loss carryforwards(b) | 3,791 | 3,049 | |||
| Allowance for losses | 2,640 | 1,975 | |||
| Investment in global subsidiaries | 1,883 | 1,689 | |||
| Other – net | (490) | 29 | |||
| (4,786) | (6,000) | ||||
| Net deferred income tax asset (liability) | $ | 275 | $ | (54) | |
(a) Represented the tax effects of temporary differences related to expense accruals for a wide variety of items, such as employee compensation and benefits, other pension plan liabilities, interest on tax liabilities, product warranties and other sundry items that are not currently deductible.
(b) Net of valuation allowances of $2,089 million and $1,712 million for GE and $862 million and $628 million for GECC, for 2013 and 2012, respectively. Of the net deferred tax asset as of December 31, 2013, of $4,665 million, $30 million relates to net operating loss carryforwards that expire in various years ending from December 31, 2014, through December 31, 2016; $478 million relates to net operating losses that expire in various years ending from December 31, 2017 through December 31, 2030 and $4,157 million relates to net operating loss carryforwards that may be carried forward indefinitely.