3M 2012 Annual Report Download - page 77

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have inabilities to utilize certain losses without the same type of taxable income. The Company has provided $29 million
of valuation allowance against certain of these deferred tax assets based on management's determination that it is more-
likely-than-not that the tax benefits related to these assets will not be realized. The valuation allowance was reduced in
2012 due to the closure of audits with certain taxing authorities.
During 2012, the Company contributed $1.079 billion to its U.S. and international pension plans and $67 million to its
postretirement plans. During 2011, the Company contributed $517 million to its U.S. and international pension plans and
$65 million to its postretirement plans. During 2010, the Company contributed $556 million to its U.S. and international
pension plans and $62 million to its postretirement plans. The current income tax provision includes a benefit for the
pension contributions; the deferred tax provision includes a cost for the related temporary difference.
Reconciliation of Effective Income Tax Rate
2012
2011
2010
Statutory U.S. tax rate
35.0
%
35.0
%
35.0
%
State income taxes - net of federal benefit
0.9
0.7
1.2
International income taxes - net
(4.2)
(4.6)
(7.1)
U.S. research and development credit
-
(0.5)
(0.2)
Reserves for tax contingencies
(1.9)
(1.2)
(0.5)
Medicare Modernization Act, one-time charge
-
-
1.5
Domestic Manufacturer's deduction
(1.2)
(1.5)
(1.4)
All other - net
0.4
(0.1)
(0.8)
Effective worldwide tax rate
29.0
%
27.8
%
27.7
%
The effective tax rate for 2012 was 29.0 percent, compared to 27.8 percent in 2011, an increase of 1.2 percentage points.
Various factors increased or decreased the effective tax rate when compared to the same periods last year. The primary
factors that increased the Company’s effective tax rate year-on-year include international taxes, specifically with respect
to the corporate reorganization of a wholly owned international subsidiary (which benefited 2011), state income taxes,
lower domestic manufacturer’s deduction, and the lapse of the U.S. research and development credit. These and other
factors, when compared to 2011, increased the 2012 effective tax rate by 2.1 percentage points. Factors that decreased
the Company’s effective tax rate year-on-year include international taxes as a result of changes to the geographic mix of
income before taxes and adjustments to its income tax reserves. These factors, when compared to last year, decreased
the effective tax rate 0.9 percentage points.
On January 2, 2013, the American Taxpayer Relief Act of 2012 was signed into law. Included in this Act was the
extension of the research and development credit for years 2012 and 2013. As this Act was enacted during 2013, the
impacts of this law are not included in the 2012 financial results. The Company anticipates a beneficial impact on the
effective tax rate in 2013 for both the 2012 and 2013 research and development credit.
The effective tax rate for 2011 was 27.8 percent, compared to 27.7 percent in 2010, an increase of 0.1 percentage points.
The year-on-year change in international income taxes increased the effective tax rate for 2011 when compared to 2010
by approximately 2.5 percentage points, which includes a partial offsetting benefit from the corporate reorganization of a
wholly owned international subsidiary in 2011. This 2.5 percentage point net increase was due primarily to certain 2010
tax benefits, which did not repeat in 2011, related to net operating losses partially offset by a valuation allowance resulting
from the 2010 corporate alignment transactions that allowed the Company to increase its ownership of a foreign
subsidiary. These transactions are described in the section of Note 5 entitled "Purchase and Sale of Subsidiary Shares
and Transfers of Ownership Interest Involving Non-Wholly Owned Subsidiaries". Other significant items impacting the
year-on-year comparison include a one-time 2010 income tax charge of $84 million (discussed further below), which
benefited the 2011 tax rate when compared to 2010 by 1.5 percentage points, as this charge did not repeat in 2011. The
Company's effective tax rate also benefited during 2011 when compared to 2010 by approximately 0.7 percentage points
from adjustments to its income tax reserves.
Under a Federal program (Medicare Modernization Act) that was established to encourage companies to provide retiree
prescription drug coverage, many companies, including 3M, received a tax-advantaged subsidy. The tax advantage of the
subsidy was eliminated by the Patient Protection and Affordable Care Act (H.R. 3590), including modifications included in
the Health Care and Education Reconciliation Act of 2010 (collectively, the "Act'), which were enacted in March 2010.
Although the elimination of this tax advantage does not take effect until 2013 under the Act, 3M was required to recognize
the full accounting impact in its financial statements in the period in which the Act was enacted. Because future
anticipated retiree health care liabilities and related tax subsidies are already reflected in 3M's financial statements, the