Note 16 Taxes

“Provision for taxes” consisted of the following:

($ in millions)

2014

2013

2012

Current taxes

1,130

1,258

967

Deferred taxes

72

(136)

63

Tax expense from continuing operations

1,202

1,122

1,030

Tax expense (benefit) from discontinued operations

1

(8)

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 weighted-average global 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:

($ in millions, except % data)

2014

2013

2012

Income from continuing operations before taxes

3,896

4,066

3,838

Weighted-average global tax rate

23.8%

22.7%

23.6%

Income taxes at weighted-average tax rate

929

922

906

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

146

110

60

Impact of non-deductible goodwill allocated to divested businesses

77

Changes in valuation allowance, net

52

31

44

Effects of changes in tax laws and enacted tax rates

(52)

1

(27)

Other, net

50

58

47

Tax expense from continuing operations

1,202

1,122

1,030

Effective tax rate for the year

30.9%

27.6%

26.8%

In 2014, 2013 and 2012, 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 2014, 2013 and 2012, “Changes in 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 2014, the “Changes in valuation allowance, net” included an expense of $31 million related to certain of the Company’s operations in South America. In 2013, the “Changes in valuation allowance, net” included an expense 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 and 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.

In 2014, the “Effects of change in tax laws and enacted tax rates” included a benefit of $62 million related to enacted changes in double tax treaties.

In 2014, 2013 and 2012, “Other, net” of $50 million, $58 million and $47 million, respectively, included expenses of $45 million, $71 million and $94 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.

In 2014, “Provision for taxes” included $279 million relating to income taxes recorded on $543 million of net gains from sale of businesses. This expense is primarily included in “Weighted-average global tax rate” and “Impact of non-deductible goodwill allocated to divested businesses”.

Deferred income tax assets and liabilities consisted of the following:

December 31, ($ in millions)

2014

2013

Deferred tax assets:

 

 

Unused tax losses and credits

644

1,000

Provisions and other accrued liabilities

825

858

Pension

671

477

Inventories

297

302

Property, plant and equipment and other non-current assets

265

83

Other

112

140

Total gross deferred tax asset

2,814

2,860

Valuation allowance

(600)

(589)

Total gross deferred tax asset, net of valuation allowance

2,214

2,271

 

 

 

Deferred tax liabilities:

 

 

Property, plant and equipment

(343)

(323)

Intangibles and other non-current assets

(766)

(1,110)

Pension and other accrued liabilities

(191)

(206)

Inventories

(118)

(135)

Other current assets

(149)

(161)

Unremitted earnings

(612)

(598)

Other

(76)

(60)

Total gross deferred tax liability

(2,255)

(2,593)

Net deferred tax liability

(41)

(322)

 

 

 

Included in:

 

 

“Deferred taxes” – current assets

902

832

“Deferred taxes” – non-current assets

511

370

“Deferred taxes” – current liabilities

(289)

(259)

“Deferred taxes” – non-current liabilities

(1,165)

(1,265)

Net deferred tax liability

(41)

(322)

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 $600 million and $589 million, at December 31, 2014 and 2013, respectively. “Unused tax losses and credits” at December 31, 2014 and 2013, in the table above, included $151 million and $172 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, 2014 and 2013, deferred tax liabilities totaling $612 million and $598 million, respectively, have been provided for primarily in respect of withholding taxes, dividend distribution taxes or additional corporate income taxes (hereafter “withholding taxes”) on unremitted earnings which will be payable in foreign jurisdictions on the repatriation of earnings to Switzerland. 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.

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 2014 and 2013, certain taxes arose in certain foreign jurisdictions for which the technical merits do not allow utilization of benefits. At December 31, 2014 and 2013, foreign subsidiary retained earnings subject to withholding taxes upon distribution of approximately $100 million and $200 million, respectively, 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, 2014, net operating loss carry-forwards of $2,200 million and tax credits of $67 million were available to reduce future taxes of certain subsidiaries. Of these amounts, $1,232 million of loss carry-forwards and $48 million of tax credits will expire in varying amounts through 2034. The largest amount of these carry-forwards related to the Company’s Central Europe operations.

Unrecognized tax benefits consisted of the following:

($ in millions)

Unrecognized
tax benefits

Penalties and interest related to unrecognized tax benefits

Total

Classification as unrecognized tax items on January 1, 2012

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

Net change due to acquisitions and divestments

(3)

1

(2)

Increase relating to prior year tax positions

25

39

64

Decrease relating to prior year tax positions

(24)

(7)

(31)

Increase relating to current year tax positions

85

85

Decrease relating to current year tax positions

(1)

(1)

Decrease due to settlements with tax authorities

(19)

(10)

(29)

Decrease as a result of the applicable statute of limitations

(36)

(19)

(55)

Exchange rate differences

(55)

(12)

(67)

Balance at December 31, 2014, which would, if recognized, affect the effective tax rate

705

146

851

In 2014 and 2013, the “Increase relating to current year tax positions” included a total of $56 million and $62 million, respectively, 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.

At December 31, 2014, the Company expected the resolution, within the next twelve months, of uncertain tax positions related to pending court cases amounting to $69 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, 2014, the earliest significant open tax years that remained subject to examination were the following:

Region

Year

Europe

2007

The Americas

2010

Asia

2005

Middle East and Africa

2004