Income Taxes
The following table sets forth the geographic split of earnings before income taxes:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended | | Six Months Ended | | Year Ended |
(In millions) | December 31 | | December 31 | | June 30 |
| 2013 | | 2012 | | 2012 | | 2011 | | 2012 | | 2011 |
| | | (Unaudited) | | | | (Unaudited) | | | | |
| | | | | | | | | | | |
United States | $ | 1,509 |
| | $ | 1,054 |
| | $ | 611 |
| | $ | 592 |
| | $ | 1,035 |
| | $ | 2,035 |
|
Foreign | 515 |
| | 927 |
| | 386 |
| | 189 |
| | 730 |
| | 980 |
|
| $ | 2,024 |
| | $ | 1,981 |
| | $ | 997 |
| | $ | 781 |
| | $ | 1,765 |
| | $ | 3,015 |
|
Significant components of income tax are as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended | | Six Months Ended | | Year Ended |
(In millions) | December 31 | | December 31 | | June 30 |
| 2013 | | 2012 | | 2012 | | 2011 | | 2012 | | 2011 |
| | | (Unaudited) | | | | (Unaudited) | | | | |
Current | | | | | | | | | | | |
Federal | $ | 348 |
| | $ | 213 |
| | $ | 92 |
| | $ | 179 |
| | $ | 300 |
| | $ | 251 |
|
State | 14 |
| | 11 |
| | 9 |
| | 19 |
| | 21 |
| | 10 |
|
Foreign | 146 |
| | 194 |
| | 83 |
| | 7 |
| | 118 |
| | 222 |
|
Deferred | | | | | |
| | |
| | |
| | |
|
Federal | 112 |
| | 144 |
| | 92 |
| | 14 |
| | 66 |
| | 483 |
|
State | (5 | ) | | 26 |
| | 20 |
| | 3 |
| | 9 |
| | 43 |
|
Foreign | 55 |
| | 1 |
| | 7 |
| | 15 |
| | 9 |
| | (12 | ) |
| $ | 670 |
| | $ | 589 |
| | $ | 303 |
| | $ | 237 |
| | $ | 523 |
| | $ | 997 |
|
Significant components of deferred tax liabilities and assets are as follows:
|
| | | | | | | |
| December 31, 2013 | | December 31, 2012 |
| (In millions) |
Deferred tax liabilities | | | |
Property, plant, and equipment | $ | 1,286 |
| | $ | 1,163 |
|
Equity in earnings of affiliates | 323 |
| | 329 |
|
Debt exchange | 123 |
| | 140 |
|
Inventories | 132 |
| | 89 |
|
Other | 119 |
| | 141 |
|
| $ | 1,983 |
| | $ | 1,862 |
|
Deferred tax assets | | | |
|
Pension and postretirement benefits | $ | 267 |
| | $ | 373 |
|
Stock compensation | 60 |
| | 67 |
|
Foreign tax credit carryforwards | 26 |
| | 32 |
|
Foreign tax loss carryforwards | 329 |
| | 344 |
|
Capital loss carryforwards | 24 |
| | 25 |
|
State tax attributes | 74 |
| | 79 |
|
Other | 205 |
| | 105 |
|
Gross deferred tax assets | 985 |
| | 1,025 |
|
Valuation allowances | (329 | ) | | (173 | ) |
Net deferred tax assets | $ | 656 |
| | $ | 852 |
|
| | | |
Net deferred tax liabilities | $ | 1,327 |
| | $ | 1,010 |
|
| | | |
The net deferred tax liabilities are classified as follows: | | | |
|
Current assets | $ | — |
| | $ | 36 |
|
Current assets (foreign) | 17 |
| | — |
|
Current liabilities | (8 | ) | | — |
|
Current liabilities (foreign) | (22 | ) | | (97 | ) |
Noncurrent assets (foreign) | 134 |
| | 318 |
|
Noncurrent liabilities | (1,404 | ) | | (1,267 | ) |
Noncurrent liabilities (foreign) | (44 | ) | | — |
|
| $ | (1,327 | ) | | $ | (1,010 | ) |
Reconciliation of the statutory federal income tax rate to the Company’s effective income tax rate on earnings is as follows:
|
| | | | | | | | | | | | | | | | | |
| Year Ended | | Six Months Ended | | Year Ended |
| December 31 | | December 31 | | June 30 |
| 2013 | | 2012 | | 2012 | | 2011 | | 2012 | | 2011 |
| | | (Unaudited) | | | | (Unaudited) | | | | |
| | | | | | | | | | | |
Statutory rate | 35.0 | % | | 35.0 | % | | 35.0 | % | | 35.0 | % | | 35.0 | % | | 35.0 | % |
State income taxes, net of federal tax benefit | 0.2 |
| | 1.5 |
| | 2.4 |
| | 2.4 |
| | 1.4 |
| | 1.1 |
|
Foreign earnings taxed at rates other than the U.S. statutory rate | (3.7 | ) | | (5.7 | ) | | (7.6 | ) | | (7.2 | ) | | (4.8 | ) | | (5.0 | ) |
Foreign currency remeasurement | (0.9 | ) | | (1.3 | ) | | 2.6 |
| | (0.3 | ) | | (3.3 | ) | | 0.9 |
|
Income tax adjustment to filed returns | 0.5 |
| | 0.6 |
| | (1.5 | ) | | (0.7 | ) | | 0.9 |
| | (0.2 | ) |
Tax benefit on U.S. biodiesel credits | (5.1 | ) | | — |
| | — |
| | — |
| | — |
| | — |
|
Valuation allowances | 8.0 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Other | (0.9 | ) | | (0.4 | ) | | (0.5 | ) | | 1.1 |
| | 0.4 |
| | 1.3 |
|
Effective income tax rate | 33.1 | % | | 29.7 | % | | 30.4 | % | | 30.3 | % | | 29.6 | % | | 33.1 | % |
The Company has historically included amounts received from the U.S. Government in the form of a biodiesel credit as taxable income on its federal and state income tax returns. In the fourth quarter of 2013, the Internal Revenue Service released a Chief Counsel Advice stipulating that biodiesel credits should not be included in taxable income. Based upon the Chief Counsel Advice, the Company has changed its position related to these credits and excluded them from taxable income for years 2011 through the current year. Of the total tax benefit recorded of $107 million, $55 million relates to years prior to 2013.
The Company has $329 million and $344 million of tax assets related to net operating loss carry-forwards of certain international subsidiaries at December 31, 2013 and 2012, respectively. As of December 31, 2013, approximately $306 million of these assets have no expiration date, and the remaining $23 million expire at various times through fiscal 2030. The annual usage of certain of these assets is limited to a percentage of taxable income of the respective foreign subsidiary for the year. The Company has recorded a valuation allowance of $196 million and $102 million against these tax assets at December 31, 2013 and 2012, respectively, due to the uncertainty of their realization.
During the fourth quarter of 2013, the Company recorded a full valuation allowance on net deferred tax assets of a German subsidiary in the amount of $103 million ($82 million, equal to $0.12 per share, when adjusted for the income attributable to the minority interest holders). Management’s establishment of a valuation allowance resulted from a combination of matters, including increasing cumulative book and net tax losses and the absence of evidence that the financial performance of the subsidiary had improved during the year to assure management that sufficient taxable income would be generated in the future in order to utilize the losses, which do not expire under German tax law.
During the fourth quarter of 2013, the Company placed a full valuation allowance on the deferred tax asset related to the impairment of its investment in GrainCorp in the amount of $41 million. The Company also placed a full valuation allowance on the impairment of assets related to its sugar business in Brazil in the amount of $17 million.
The Company has $24 million of tax assets related to foreign and domestic capital loss carryforwards at December 31, 2013. The Company has recorded a valuation allowance of $22 million against these tax assets at December 31, 2013.
The Company has $26 million and $32 million of tax assets related to excess foreign tax credits at December 31, 2013 and 2012, respectively, which begin to expire in 2015. The Company has $74 million and $79 million of tax assets related to state income tax attributes (incentive credits and net operating loss carryforwards), net of federal tax benefit, at December 31, 2013 and 2012, respectively, which will expire at various times through fiscal 2033. The Company has not recorded a valuation allowance against the excess foreign tax credits at December 31, 2013. Due to the uncertainty of realization, the Company has recorded a valuation allowance of $53 million and $56 million related to state income tax assets net of federal tax benefit as of December 31, 2013 and 2012, respectively.
The Company remains subject to federal examination in the U.S. for the calendar tax years 2012 and 2013.
Undistributed earnings of the Company’s foreign subsidiaries and the Company’s share of the undistributed earnings of affiliated corporate joint venture companies accounted for on the equity method amounting to approximately $7.5 billion at December 31, 2013, are considered to be permanently reinvested, and accordingly, no provision for U.S. income taxes has been provided thereon. It is not practicable to determine the deferred tax liability for temporary differences related to these undistributed earnings.
The following table sets forth a rollforward of activity of unrecognized tax benefits for the year ended December 31, 2013 and the six months ended December 31, 2012 as follows:
|
| | | | | | | |
| Unrecognized Tax Benefits |
| December 31, 2013 | | December 31, 2012 |
| (In millions) |
| | | |
Beginning balance | $ | 77 |
| | $ | 80 |
|
Additions related to current year’s tax positions | — |
| | — |
|
Additions related to prior years’ tax positions | 7 |
| | 6 |
|
Reductions related to prior years’ tax positions | — |
| | (1 | ) |
Reductions related to lapse of statute of limitations | (6 | ) | | (1 | ) |
Settlements with tax authorities | (12 | ) | | (7 | ) |
Ending balance | $ | 66 |
| | $ | 77 |
|
The additions and reductions in unrecognized tax benefits shown in the table include effects related to net income and shareholders’ equity. The changes in unrecognized tax benefits did not have a material effect on the Company’s net income or cash flow.
At December 31, 2013 and 2012, the Company had accrued interest and penalties on unrecognized tax benefits of $18 million and $17 million, respectively.
The Company is subject to income taxation in many jurisdictions around the world. Resolution of the related tax positions, through negotiations with relevant tax authorities or through litigation, may take years to complete. Therefore, it is difficult to predict the timing for resolution of tax positions. However, the Company does not anticipate that the total amount of unrecognized tax benefits will increase or decrease significantly in the next twelve months. Given the long periods of time involved in resolving tax positions, the Company does not expect that the recognition of unrecognized tax benefits will have a material impact on the Company’s effective income tax rate in any given period. If the total amount of unrecognized tax benefits were recognized by the Company at one time, there would be a reduction of $46 million on the tax expense for that period.
The Company is subject to routine examination by domestic and foreign tax authorities and frequently faces challenges regarding the amount of taxes due. These challenges include positions taken by the Company related to the timing, nature and amount of deductions and the allocation of income among various tax jurisdictions. Resolution of the related tax positions, through negotiation with relevant tax authorities or through litigation, may take years to complete. Therefore, it is difficult to predict the timing for resolution of tax positions. In its routine evaluations of the exposure associated with various tax filing positions, the Company recognizes a liability, when necessary, for estimated potential additional tax owed by the Company in accordance with the applicable accounting standard. However, the Company cannot predict or provide assurance as to the ultimate outcome of these ongoing or future examinations.
The Company’s wholly-owned subsidiary, ADM do Brasil Ltda. (ADM do Brasil), received three separate tax assessments from the Brazilian Federal Revenue Service (BFRS) challenging the tax deductibility of commodity hedging losses and related expenses for the tax years 2004, 2006 and 2007. As of December 31, 2013, these assessments, updated for estimated penalties, interest, and variation in currency exchange rates, totaled approximately $528 million. ADM do Brasil’s tax return for 2005 was also audited and no assessment was received. The statute of limitations for 2005 and 2008 has expired. If the BFRS were to challenge commodity hedging deductions in tax years after 2008, the Company estimates it could receive additional tax assessments of approximately $35 million based on currency exchange rates as of December 31, 2013.
ADM do Brasil enters into commodity hedging transactions that can result in gains, which are included in ADM do Brasil's calculations of taxable income in Brazil, and losses, which ADM do Brasil deducts from its taxable income in Brazil. The Company has evaluated its tax position regarding these hedging transactions and concluded, based upon advice from Brazilian legal counsel, that it was appropriate to recognize both gains and losses resulting from hedging transactions when determining its Brazilian income tax expense. Therefore, the Company has continued to recognize the tax benefit from hedging losses in its financial statements and has not recorded any tax liability for the amounts assessed by the BFRS.
ADM do Brasil filed an administrative appeal for each of the assessments. During the second quarter of fiscal 2011, a decision in favor of the BFRS on the 2004 assessment was received and a second level administrative appeal was filed and is still ongoing as of the date of this report. In January of 2012, a decision in favor of the BFRS on the 2006 and 2007 assessments was received and a second level administrative appeal was filed and is still ongoing as of the date of this report. If ADM do Brasil continues to be unsuccessful in the administrative appellate process, further appeals are available in the Brazilian federal courts. While the Company believes its consolidated financial statements properly reflect the tax deductibility of these hedging losses, the ultimate resolution of this matter could result in the future recognition of additional payments of, and expense for, income tax and the associated interest and penalties. The Company intends to vigorously defend its position against the current assessments and any similar assessments that may be issued for years subsequent to 2008.
The Company’s subsidiaries in Argentina have received tax assessments challenging transfer prices used to price grain exports totaling $44 million (inclusive of interest and adjusted for variation in currency exchange rates) for the tax years 2004 and 2005. The Argentine tax authorities have been conducting a review of income and other taxes paid by large exporters and processors of cereals and other agricultural commodities resulting in allegations of income tax evasion. While the Company believes that it has complied with all Argentine tax laws, it cannot rule out receiving additional assessments challenging transfer prices used to price grain exports for years subsequent to 2005, and estimates the potential assessments to be $534 million (as of December 31, 2013 and subject to variation in currency exchange rates). The Company intends to vigorously defend its position against the current assessments and any similar assessments that may be issued for years subsequent to 2005. The Company believes that it has appropriately evaluated the transactions underlying these assessments, and has concluded, based on Argentine tax law, that its tax position would be sustained, and accordingly, the Company has not recorded a tax liability for these assessments.
In accordance with the accounting requirements for uncertain tax positions, the Company has concluded that it is more likely than not to prevail on the Brazil and Argentina matters based upon their technical merits. The Company has not recorded an uncertain tax liability for these assessments partly because the taxing jurisdictions' processes do not provide a mechanism for settling at less than the full amount of the assessment. The Company's consideration of these tax assessments requires judgments about the application of income tax regulations to specific facts and circumstances. The final outcome of these matters cannot reliably be predicted, may take many years to resolve, and could result in financial impacts of up to the entire amount of these assessments.
