Note 16 Taxes

“Provision for taxes” consisted of the following:

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($ in millions)

2013

2012

2011

Current taxes

1,258

967

1,278

Deferred taxes

(136)

63

(34)

Tax expense from continuing operations

1,122

1,030

1,244

Tax benefit from discontinued operations

(8)

(1)

Tax expense from continuing operations is reconciled below from the Company’s weighted-average global tax rate (rather than from the Swiss domestic statutory tax rate), as the parent company of the ABB Group, ABB Ltd, is domiciled in Switzerland and income generated in jurisdictions outside of Switzerland (hereafter “foreign jurisdictions”) which has already been subject to corporate income tax in those foreign jurisdictions is, to a large extent, tax exempt in Switzerland. There is no requirement in Switzerland for any parent company of a group to file a tax return of the consolidated group determining domestic and foreign pre-tax income. As the Company’s consolidated income from continuing operations is predominantly earned outside of Switzerland, corporate income tax in foreign jurisdictions largely determines the global weighted-average tax rate of the Company.

The reconciliation of “Tax expense from continuing operations” at the weighted-average tax rate to the effective tax rate is as follows:

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($ in millions, except % data)

2013

2012

2011

Income from continuing operations before taxes

4,066

3,838

4,550

Weighted-average tax rate

22.7%

23.6%

24.9%

Income taxes at weighted-average tax rate

922

906

1,134

Items taxed at rates other than the weighted-average tax rate

110

60

103

Changes in valuation allowance, net

31

44

(22)

Effects of changes in tax laws and enacted tax rates

1

(27)

(17)

Other, net

58

47

46

Tax expense from continuing operations

1,122

1,030

1,244

Effective tax rate for the year

27.6%

26.8%

27.3%

In 2013, 2012 and 2011, the “Items taxed at rates other than the weighted-average tax rate” predominantly related to tax credits arising in foreign jurisdictions for which the technical merits did not allow a benefit to be taken.

In 2013, 2012 and 2011, “Changes in the valuation allowance, net” included reductions in valuation allowances recorded in certain jurisdictions where the Company determined that it was more likely than not that such deferred tax assets (recognized for net operating losses and temporary differences in those jurisdictions) would be realized, as well as increases in the valuation allowance in certain other jurisdictions. In 2013, the “Changes in valuation allowance, net” included an amount of $104 million related to certain of the Company’s operations in Central Europe and South America. It also included a benefit of $42 million related to certain of the Company’s operations in Central Europe. In 2012, the “Changes in valuation allowance, net” included an expense of $36 million related to certain of the Company’s operations in Central Europe and in 2011, the “Changes in valuation allowance, net” included a benefit of $47 million, related to certain of the Company’s operations in Northern Europe.

In 2013, 2012 and 2011, “Other, net” of $58 million, $47 million and $46 million, respectively, included expenses of $71 million, $94 million and $60 million, respectively, in relation to items that were deducted for financial accounting purposes, but were not tax deductible, such as interest expense, local taxes on productive activities, disallowed meals and entertainment expenses and other similar items.

Deferred income tax assets and liabilities consisted of the following:

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December 31, ($ in millions)

2013

2012

Deferred tax assets:

 

 

Unused tax losses and credits

1,000

1,009

Pension and other accrued liabilities

1,335

1,395

Inventories

302

287

Property, plant and equipment

83

125

Other

140

104

Total gross deferred tax asset

2,860

2,920

Valuation allowance

(589)

(550)

Total gross deferred tax asset, net of valuation allowance

2,271

2,370

 

 

 

Deferred tax liabilities:

 

 

Property, plant and equipment, and intangible assets

(1,433)

(1,366)

Pension and other accrued liabilities

(206)

(252)

Inventories

(135)

(118)

Other current assets

(161)

(169)

Unremitted earnings

(598)

(766)

Other

(60)

(26)

Total gross deferred tax liability

(2,593)

(2,697)

Net deferred tax liability

(322)

(327)

 

 

 

Included in:

 

 

“Deferred taxes” – current assets

832

869

“Deferred taxes” – non-current assets

370

334

“Deferred taxes” – current liabilities

(259)

(270)

“Deferred taxes” – non-current liabilities

(1,265)

(1,260)

Net deferred tax liability

(322)

(327)

Certain entities have deferred tax assets related to net operating loss carry-forwards and other items. As recognition of these assets in certain entities did not meet the more likely than not criterion, valuation allowances have been recorded and amount to $589 million and $550 million, at December 31, 2013 and 2012, respectively. “Unused tax losses and credits” at December 31, 2013 and 2012, in the table above, included $172 million and $155 million, respectively, for which the Company has established a full valuation allowance as, due to limitations imposed by the relevant tax law, the Company determined that, more likely than not, such deferred tax assets would not be realized.

At December 31, 2013 and 2012, deferred tax liabilities totaling $598 million and $766 million have been provided for in respect of withholding taxes, dividend distribution taxes or additional corporate income taxes (hereafter “withholding taxes”) on unremitted earnings, as well as for limited Swiss income taxes on any such repatriated earnings. Income which has been generated outside of Switzerland and has already been subject to corporate income tax in such foreign jurisdictions is, to a large extent, tax exempt in Switzerland. Therefore, generally no or only limited Swiss income tax has to be provided for on the repatriated earnings of foreign subsidiaries. The decrease during 2013 was mainly due to repatriation of earnings.

Certain countries levy withholding taxes on dividend distributions. Such taxes cannot always be fully reclaimed by the shareholder, although they have to be declared and withheld by the subsidiary. In 2013 and 2012, certain taxes arose in certain foreign jurisdictions for which the technical merits do not allow utilization of benefits. At December 31, 2013 and 2012, approximately $200 million and $400 million, respectively, of foreign subsidiary retained earnings subject to withholding taxes upon distribution were considered as permanently reinvested, as these funds are used for financing current operations as well as business growth through working capital and capital expenditure in those countries, and consequently, no deferred tax liability was recorded.

At December 31, 2013, net operating loss carry-forwards of $2,685 million and tax credits of $239 million were available to reduce future taxes of certain subsidiaries. Of these amounts, $1,779 million of loss carry-forwards and $238 million of tax credits will expire in varying amounts through 2033. The largest amount of these carry-forwards related to the Company’s Central Europe operations.

Unrecognized tax benefits consisted of the following:

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($ in millions)

Unrecognized
tax benefits

Penalties and interest related to unrecognized tax benefits

Total

Classification as unrecognized tax items on January 1, 2011

714

178

892

Net change due to acquisitions and divestments

9

2

11

Increase relating to prior year tax positions

52

61

113

Decrease relating to prior year tax positions

(31)

(11)

(42)

Increase relating to current year tax positions

128

2

130

Decrease relating to current year tax positions

(2)

(2)

Decrease due to settlements with tax authorities

(78)

(27)

(105)

Decrease as a result of the applicable statute of limitations

(135)

(35)

(170)

Exchange rate differences

(4)

(1)

(5)

Balance at December 31, 2011, which would, if recognized, affect the effective tax rate

653

169

822

Net change due to acquisitions and divestments

10

10

Increase relating to prior year tax positions

51

26

77

Decrease relating to prior year tax positions

(73)

(56)

(129)

Increase relating to current year tax positions

141

1

142

Decrease relating to current year tax positions

(3)

(3)

Decrease due to settlements with tax authorities

(89)

(11)

(100)

Decrease as a result of the applicable statute of limitations

(29)

(7)

(36)

Exchange rate differences

8

5

13

Balance at December 31, 2012, which would, if recognized, affect the effective tax rate

669

127

796

Net change due to acquisitions and divestments

17

2

19

Increase relating to prior year tax positions

43

36

79

Decrease relating to prior year tax positions

(30)

(30)

Increase relating to current year tax positions

90

4

94

Decrease relating to current year tax positions

(1)

(1)

Decrease due to settlements with tax authorities

(18)

(5)

(23)

Decrease as a result of the applicable statute of limitations

(46)

(13)

(59)

Exchange rate differences

9

3

12

Balance at December 31, 2013, which would, if recognized, affect the effective tax rate

733

154

887

In 2013, the “Increase relating to current year tax positions” included a total of $62 million in taxes related to the interpretation of tax law and double tax treaty agreements by competent tax authorities.

In 2012, the “Decrease relating to prior year tax positions” included a total of $87 million relating to the release of provisions due to favorable resolution of a tax dispute in Northern Europe. In 2012, the “Increase relating to current year tax positions” included a total of $108 million in taxes related to the interpretation of tax law and double tax treaty agreements by competent tax authorities. In 2012, the “Decrease due to settlements with tax authorities” included a total of $47 million relating to the interpretation of tax law and double tax treaty agreements by competent tax authorities.

In 2011, the “Increase relating to prior year tax positions”, in unrecognized tax benefits above, related primarily to a tax dispute in Asia. The “Increase relating to prior year tax positions”, in penalties and interest related to unrecognized tax benefits above, mainly reflected the interest accrual on prior years’ tax positions. Also in 2011, the “Increase relating to current year tax positions” included a total of $97 million in taxes related to the interpretation of tax law and double tax treaty agreements by competent tax authorities. In 2011, the “Decrease due to settlements with tax authorities” included $49 million in tax, penalty and interest relating to a tax dispute in Northern Europe, while the “Decrease as a result of the applicable statute of limitations” included both the effect of the statute of limitations in certain jurisdictions, as well as instances where tax audits had been concluded by taxing authorities and the corresponding tax years were consequently considered closed.

At December 31, 2013, the Company expected the resolution, within the next twelve months, of uncertain tax positions related to pending court cases amounting to $34 million for taxes, penalties and interest. Otherwise, the Company had not identified any other significant changes which were considered reasonably possible to occur within the next twelve months.

At December 31, 2013, the earliest significant open tax years that remained subject to examination were the following:

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Region

Year

Europe

2007

The Americas

2010

Asia

2004

Middle East & Africa

2004