3M 2013 Annual Report Download - page 76

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70
second quarter of 2012. In December 2012, the Company received a statutory notice of deficiency for the 2006 year. The
Company filed a petition in Tax Court in the first quarter of 2013 relating to the 2006 tax year.
Currently, the Company is under examination by the IRS for its U.S. federal income tax returns for the years 2011, 2012,
and 2013. It is anticipated that the IRS will complete its examination of the Company for 2011 and 2012 by the end of the
first quarter of 2014 and for 2013 by the end of the first quarter of 2015. As of December 31, 2013, the IRS has not
proposed any significant adjustments to the Company’s tax positions for which the Company is not adequately reserved.
During the first quarter of 2010, the Company paid the agreed upon assessments for the 2005 tax year. During the
second quarter of 2010, the Company paid the agreed upon assessments for the 2008 tax year. During the second
quarter of 2011, the Company received a refund from the IRS for the 2004 tax year. During the first quarter of 2012, the
Company paid the agreed upon assessments for the 2010 tax year. Payments relating to other proposed assessments
arising from the 2005 through 2013 examinations may not be made until a final agreement is reached between the
Company and the IRS on such assessments or upon a final resolution resulting from the administrative appeals process
or judicial action. In addition to the U.S. federal examination, there is also limited audit activity in several U.S. state and
foreign jurisdictions.
3M anticipates changes to the Company’s uncertain tax positions due to the closing of various audit years mentioned
above. Currently, the Company is not able to reasonably estimate the amount by which the liability for unrecognized tax
benefits will increase or decrease during the next 12 months as a result of the ongoing income tax authority examinations.
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits (UTB) is as follows:
Federal, State and Foreign Tax
(Millions)
2013
2012
2011
Gross UTB Balance at January 1
$
528
$ 594
$ 622
Additions based on tax positions related to the current year
97
80
92
Additions for tax positions of prior years
158
114
69
Reductions for tax positions of prior years
(29)
(120)
(123)
Settlements
(17)
(50)
9
Reductions due to lapse of applicable statute of limitations
(78)
(90)
(75)
Gross UTB Balance at December 31
$
659
$ 528
$ 594
Net UTB impacting the effective tax rate at December 31
$
262
$ 185
$ 295
The total amount of UTB, if recognized, would affect the effective tax rate by $262 million as of December 31, 2013, $185
million as of December 31, 2012, and $295 million as of December 31, 2011. The ending net UTB results from adjusting
the gross balance for items such as Federal, State, and non-U.S. deferred items, interest and penalties, and deductible
taxes. The net UTB is included as components of Other Current Assets, Other Current Liabilities, Accrued Income Taxes,
and Other Liabilities within the Consolidated Balance Sheet.
The Company recognizes interest and penalties accrued related to unrecognized tax benefits in tax expense. The
Company recognized in the consolidated statement of income on a gross basis approximately $22 million of expense, $12
million of benefit, and $1 million of benefit in 2013, 2012, and 2011, respectively. At December 31, 2013 and
December 31, 2012, accrued interest and penalties in the consolidated balance sheet on a gross basis were $62 million
and $44 million, respectively. Included in these interest and penalty amounts are interest and penalties related to tax
positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such
deductibility. Because of the impact of deferred tax accounting, other than interest and penalties, the disallowance of the
shorter deductibility period would not affect the annual effective tax rate but would accelerate the payment of cash to the
taxing authority to an earlier period.
As a result of certain employment commitments and capital investments made by 3M, income from manufacturing
activities in China, Taiwan, Korea, Brazil, and Singapore is subject to reduced tax rates or, in some cases, is exempt from
tax for years through 2013, 2016, 2018, 2023, and 2023, respectively. The income tax benefits attributable to the tax
status of these subsidiaries are estimated to be $87 million (13 cents per diluted share) in 2013, $64 million (9 cents per
diluted share) in 2012, and $77 million (11 cents per diluted share) in 2011.