NOTE 18. INCOME TAXES
Income from continuing operations before income tax expense was attributable to the following jurisdictions:
| For the years ended June 30, | |||||||||
| 2013 | 2012 | 2011 | |||||||
| (in millions) | |||||||||
| U.S. (including exports) | $ | 8,115 | $ | 3,861 | $ | 2,756 | |||
| Foreign | 621 | 602 | 342 | ||||||
| Income from continuing operations before income tax expense | $ | 8,736 | $ | 4,463 | $ | 3,098 | |||
Significant components of the Company's provision for income taxes from continuing operations were as follows:
| For the years ended June 30, | ||||||||||
| 2013 | 2012 | 2011 | ||||||||
| (in millions) | ||||||||||
| Current: | ||||||||||
| U.S. | ||||||||||
| Federal | $ | 1,024 | $ | 867 | $ | 1,000 | ||||
| State & local | 93 | 16 | 72 | |||||||
| Foreign | 93 | 49 | 106 | |||||||
| Total current | 1,210 | 932 | 1,178 | |||||||
| Deferred | 480 | 162 | (505) | |||||||
| Provision for income taxes from continuing operations | $ | 1,690 | $ | 1,094 | $ | 673 | ||||
The reconciliation of income tax attributable to continuing operations computed at the statutory rate to income tax expense was:
| For the years ended June 30, | |||||||||
| 2013 | 2012 | 2011 | |||||||
| U.S. federal income tax rate | 35 | % | 35 | % | 35 | % | |||
| (Sale) purchase of interest in subsidiaries | (4) | (4) | (4) | ||||||
| State and local taxes | 1 | 1 | 2 | ||||||
| Effect of foreign operations | (2) | (6) | (6) | ||||||
| Resolution of tax matters | (1) | - | (5) | ||||||
| Non-deductible goodwill on asset impairment(a) | - | 2 | 2 | ||||||
| Valuation allowance movements(b) | (7) | 1 | 1 | ||||||
| Nontaxable income attributable to noncontrolling interests | (1) | (2) | (2) | ||||||
| Domestic production activities deduction | (1) | (3) | (2) | ||||||
| Other | (1) | 1 | 1 | ||||||
| Effective tax rate for income from continuing operations | 19 | % | 25 | % | 22 | % | |||
The following is a summary of the components of the deferred tax accounts:
| As of June 30, | ||||||
| 2013 | 2012 | |||||
| (in millions) | ||||||
| Deferred tax assets: | ||||||
| Net operating loss carryforwards | $ | 1,109 | $ | 179 | ||
| Capital loss carryforwards | 1,676 | 215 | ||||
| Foreign tax credit carryforwards | 474 | 615 | ||||
| Accrued liabilities | 653 | 798 | ||||
| Other | 231 | - | ||||
| Total deferred tax assets | 4,143 | 1,807 | ||||
| Deferred tax liabilities: | ||||||
| Basis difference and amortization | (2,449) | (1,015) | ||||
| Revenue recognition | (505) | (436) | ||||
| Sports rights contracts | (128) | (160) | ||||
| Other | - | (72) | ||||
| Total deferred tax liabilities | (3,082) | (1,683) | ||||
| Net deferred tax asset (liability) before valuation allowance | 1,061 | 124 | ||||
| Less: valuation allowance | (3,284) | (1,514) | ||||
| Net deferred tax liabilities from continuing operations | (2,223) | (1,390) | ||||
| Net deferred tax liabilities from discontinued operations | - | (975) | ||||
| Total Net deferred tax liabilities | $ | (2,223) | $ | (2,365) | ||
The Company had net current deferred tax assets of $9 million and $1 million at June 30, 2013 and 2012, respectively, and noncurrent deferred tax assets of $48 million and $22 million at June 30, 2013 and 2012, respectively. The Company also had non-current deferred tax liabilities of $2,280 million and $1,413 million at June 30, 2013 and 2012, respectively.
At June 30, 2013, the Company had approximately $3.8 billion of net operating loss carryforwards available to offset future taxable income. The majority of these net operating loss carryforwards have an unlimited carryforward period. The increase in net operating loss carryforwards in fiscal 2013 as compared to fiscal 2012 is primarily due to the consolidation of Sky Deutschland. Sky Deutschland has a history of net operating losses and consequently we have made the determination that it is not more likely than not that the Company will have sufficient future taxable income to recognize these net operating loss carryforwards. Accordingly, a valuation allowance of $1.1 billion has been established to reflect the expected realization of these net operating loss carryforwards as of June 30, 2013 in accordance with ASC 740.
At June 30, 2013, the Company had approximately $4.8 billion of capital loss carryforwards available to offset future taxable income. The increase in capital loss carryforwards in fiscal 2013 as compared to fiscal 2012 is primarily due to the capital losses realized in respect to the Separation. The majority of these losses are subject to a five year carryfoward period. It is not more likely than not that we will generate capital gain income in the normal course of business. Therefore, a valuation allowance of $1.5 billion has been established to reflect the expected realization of these capital loss carryforwards as of June 30, 2013, in accordance with ASC 740.
At June 30, 2013, the Company has approximately $474 million of foreign tax credit carryovers available to offset future income tax expense. Foreign tax credit carryforwards may only be utilized to offset the portion of the Company's earnings in the U.S. which are considered foreign source. If these credits are not utilized to offset future U.S. income tax expense, the credits will expire starting in the June 30, 2014 fiscal year through the fiscal year June 30, 2020. In fiscal 2013, in connection with the NDS transaction, the Company was able to utilize foreign tax credit carryforwards that were previously subject to a valuation allowance. While the Company has been able to realize a benefit from foreign tax credits generated in the current year, absent significant one-time transactions outside the normal course of business, the Company is not able to benefit foreign tax credit carryforwards. As a result, the Company has concluded that it is more likely than not that these foreign tax credit carryforwards will not be realized. In accordance with ASC 740, a valuation allowance of $474 million has been established to reflect the expected realization of these tax credit carryovers as of June 30, 2013.
The following table sets forth the change in the unrecognized tax benefits, excluding interest and penalties:
| For the year ended June 30, | |||||||||
| 2013 | 2012 | 2011 | |||||||
| (in millions) | |||||||||
| Balance, beginning of period | $ | 173 | $ | 140 | $ | 127 | |||
| Additions for prior year tax positions | 60 | 32 | 40 | ||||||
| Additions for current year tax positions | 4 | 14 | - | ||||||
| Reduction for prior year tax positions | (37) | (13) | (27) | ||||||
| Balance, end of period from continuing operations | 200 | 173 | 140 | ||||||
| Balance, end of period from discontinued operations | - | 116 | 116 | ||||||
| Balance, end of period total | $ | 200 | $ | 289 | $ | 256 | |||
The Company recognizes interest and penalty charges related to unrecognized tax benefits as income tax expense, which is consistent with the recognition in prior reporting periods. During the fiscal years ended June 30, 2013, 2012 and 2011, the Company recognized approximately $4 million, $3 million and $2 million in interest charges, respectively. The Company recorded liabilities for accrued interest of approximately $44 million and $40 million as of June 30, 2013 and 2012, respectively.
The Company is subject to tax in various domestic and international jurisdictions and, as a matter of ordinary course, the Company is regularly audited by Federal, state and foreign tax authorities. The Company believes it has appropriately accrued for the expected outcome of all other pending tax matters and does not currently anticipate that the ultimate resolution of other pending tax matters will have a material adverse effect on its consolidated financial condition, future results of operations or liquidity. The U.S. Internal Revenue Service has concluded its examination of the Company's returns through fiscal year 2009. Additionally, the Company's income tax returns for fiscal years 2000 through 2012 are subject to examination in various foreign jurisdictions. The Company does not expect significant changes to these positions over the next 12 months. As of June 30, 2013 and 2012, approximately $200 million and $173 million, respectively, would affect the Company's effective income tax rate, if and when recognized in future fiscal years.
A foreign subsidiary of News Corp prior to the Separation has filed refunds to claim certain losses in a foreign jurisdiction. Pursuant to the tax sharing and indemnification agreement, the proceeds, if any, of such claims, net of applicable taxes incurred by News Corp, are to be paid to the Company. The Company has not recognized an asset since such amounts are currently being disputed by the foreign tax authority and the resolution is not determinable at this time. Depending upon the final outcome of this uncertainty, News Corp may receive a refund of taxes of $0 to $600 million plus interest.
The Company has not provided for U.S. taxes on undistributed earnings of foreign subsidiaries as they are considered to be reinvested indefinitely. Calculation of the unrecognized deferred tax liability for temporary differences related to these earnings is not practicable. Undistributed earnings of foreign subsidiaries of the Company considered to be indefinitely reinvested amounted to approximately $700 million at June 30, 2013.