Annual report pursuant to Section 13 and 15(d)

Income Taxes

v2.4.1.9
Income Taxes
 12 Months Ended
Dec. 31, 2014
Income Tax Disclosure [Abstract]  
Income Taxes
Income Taxes
Income tax expense (benefit) consisted of the following:
 
Years ended December 31,
 
(in millions)
2014

2013

2012

Current:



U.S. federal
$
396

361

369

State and local
28

22

23

Foreign jurisdiction
132

78

136

Total
556

461

528

Deferred:



U.S. federal
(182
)
(107
)
(121
)
State and local
(15
)
(7
)
(7
)
Foreign jurisdiction
(5
)
6

(6
)
Total
(202
)
(108
)
(134
)
Total income tax expense
$
354

353

394


Pre-tax income was as follows:
 
Years ended December 31,
 
(in millions)
2014

2013

2012

QVC-U.S.
$
827

824

865

QVC-Germany
16

18

29

QVC-Japan
146

181

253

QVC-U.K.
19

1

(17
)
QVC-Italy
(15
)
(38
)
(49
)
QVC-France
(6
)
—

—

Consolidated QVC
$
987

986

1,081


Total income tax expense differs from the amounts computed by applying the U.S. federal income tax rate of 35% as a result of the following:
 
Years ended December 31,
 

2014

2013

2012

Provision at statutory rate
35.0
 %
35.0
 %
35.0
 %
State income taxes, net of federal benefit
0.9
 %
0.7
 %
1.0
 %
Foreign taxes
0.6
 %
0.6
 %
1.3
 %
Foreign earnings repatriation
(0.3
)%
(0.4
)%
(1.1
)%
Valuation allowance
0.2
 %
—
 %
—
 %
Permanent differences
(0.5
)%
—
 %
0.1
 %
Other, net
—
 %
(0.1
)%
0.1
 %
Total income tax expense
35.9
 %
35.8
 %
36.4
 %

The tax effects of temporary differences that gave rise to significant portions of the deferred income tax assets and deferred income tax liabilities are presented below:
 
December 31,
 
(in millions)
2014

2013

Deferred tax assets:


Accounts receivable, principally due to the allowance for doubtful accounts and related reserves for the uncollectible accounts
$
33

32

Inventories, principally due to obsolescence reserves and additional costs of inventories for tax purposes pursuant to the Tax Reform Act of 1986
33

36

Allowance for sales returns
41

39

Deferred compensation
43

36

Unrecognized federal and state tax benefits
63

29

Accrued liabilities
82

25

Other
27

36

Subtotal
322

233

Valuation allowance
(3
)
(1
)
Total deferred tax assets
319

232

Deferred tax liabilities:


Depreciation and amortization
(1,222
)
(1,349
)
Cumulative translation of foreign currencies
(8
)
(47
)
Total deferred tax liabilities
(1,230
)
(1,396
)
Net deferred tax liability
$
(911
)
(1,164
)

In the above table, valuation allowances exist due, in part, to the uncertainty of whether or not the benefit of certain foreign tax credits and benefits will ultimately be utilized for income tax purposes.
The Company has recognized tax benefits from the exercise of employee stock options that reduced taxes payable and were credited to additional paid-in capital. The amount of the tax benefits is reported in the consolidated statements of equity.
The Company is party to a Tax Liability Allocation and Indemnification Agreement (the "Tax Agreement") with Liberty. The Tax Agreement establishes the methodology for the calculation and payment of income taxes in connection with the consolidation of the Company with Liberty for income tax purposes. Generally, the Tax Agreement provides that the Company will pay Liberty an amount equal to the tax liability, if any, that it would have if it were to file as a consolidated group separate and apart from Liberty, with exceptions for the treatment and timing of certain items, including but not limited to deferred intercompany transactions, credits, and net operating and capital losses. To the extent that the separate company tax expense is different from the payment terms of the Tax Agreement, the difference is recorded as either a dividend or capital contribution. These differences are related primarily to foreign tax credits recognized by QVC that are creditable under the Tax Agreement when and if utilized in Liberty’s consolidated tax return.  The difference recorded during the year ended December 31, 2014, was a $29 million capital contribution related primarily to foreign tax credit carryovers being utilized in Liberty’s consolidated tax return in excess of those recognized by QVC during the year. The differences recorded during the years ended December 31, 2013 and 2012 were $45 million and $47 million in dividends, respectively, and related primarily to foreign tax credits recognized by QVC and not utilized in Liberty’s tax return during the respective tax years. The amounts of the tax-related balance due to Liberty at December 31, 2014 and 2013 were $52 million and $78 million, respectively, and are included in accrued liabilities in the consolidated balance sheets.
The Company has provided for U.S. income taxes on the undistributed earnings of foreign subsidiaries. The Company expects the amount of foreign tax credits available on those undistributed earnings to offset the U.S. income tax liability and to result in an incremental benefit related to the increased utilization of foreign tax credits. The amount of the U.S. income tax benefit recorded in the years ended December 31, 2014, 2013 and 2012 on those undistributed earnings was $3 million, $3 million and $12 million, respectively.
A reconciliation of the 2014 beginning and ending amount of the liability for unrecognized tax benefits is as follows:
(in millions)

Balance at January 1, 2014
89

Increases related to prior year tax positions
27

Decreases related to prior year tax positions
(10
)
Increases related to current year tax positions
17

Balance at December 31, 2014
123


Included in the balance of unrecognized tax benefits at December 31, 2014 are potential benefits of $59 million (net of a $32 million federal tax effect) that, if recognized, would affect the effective rate on income from continuing operations.
The Company recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties in other income (expense) in the consolidated statements of operations. The Company did not have a material amount of interest accrued related to unrecognized tax benefits or tax penalties.
The Company has tax positions for which the amount of related unrecognized tax benefits could change during 2015. These include nonfederal transfer pricing and other tax issues. The amount of unrecognized tax benefits related to these issues could have a net decrease of $23 million in 2015 as a result of potential settlements, lapsing of statute of limitations and revisions of settlement estimates.
The Company participates in a consolidated federal return filing with Liberty. As of December 31, 2014, the Company's tax years through 2010 are closed for federal income tax purposes, and the IRS has completed its examination of the Company's 2011, 2012 and 2013 tax years. The Company's 2014 tax year is being examined currently as part of the Liberty consolidated return under the IRS's Compliance Assurance Process ("CAP") program. The Company, or one of its subsidiaries, files income tax returns in various states and foreign jurisdictions. As of December 31, 2014, the Company, or one of its subsidiaries, was under examination in the states of California, Minnesota, New York, Pennsylvania and Virgina as well as in Germany, Italy and the U.K.