NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 70 UNITED TECHNOLOGIES CORPORATION Climate, Controls & Security and the UTC Propulsion & Aerospace Systems organizations as described above and are a component of our ongoing efforts to improve business efficiency. The sources of income before income taxes are: With few exceptions, U.S. income taxes have not been provided on undistributed earnings of international subsidiaries. It is not practicable to estimate the amount of tax that might be payable. Our intention is to reinvest these earnings permanently outside the U.S. or to repatriate the earnings only when it is tax effective to do so. Accordingly, we believe that U.S. tax on any earnings that might be repatriated would be substantially offset by U.S. foreign tax credits. Differences between effective income tax rates and the statutory U.S. federal income tax rate are as follows: The 2011 effective tax rate increased as compared to 2010 due to the absence of the repatriation of high taxed dividends which had a net favorable impact in 2010. The 2011 effective tax rate reflects approximately $63 million of favorable income tax adjustments related to the settlement of two refund claims for years prior to 2004, as well as a favorable tax impact of $17 million related to a U.K. tax rate reduction enacted in 2011. These favorable tax adjustments are partially offset by non-deductible charges accrued in 2011. The 2010 effective tax rate reflects a non-recurring tax expense reduction associated with management’s decision to repatriate additional high tax dividends from the current year to the U.S. in 2010 as a result of U.S. tax legislation enacted at the time. This is partially offset by the non-deductibility of impairment charges, the adverse impact from the health care legislation related to the Medicare Part D program and other increases to our effective tax rate. The 2009 effective tax rate reflects approximately $38 million of tax expense reductions relating to re-evaluation of our liabilities and contingencies based on global examination activity, including the IRS’s completion of 2004 and 2005 examination fieldwork and our related protest filing. As a result of the global examination activity, we recognized approximately $18 million of associated pre-tax interest income adjustments during 2009. At December 31, 2011, tax credit carryforwards, principally state and federal, and tax loss carryforwards, principally state and foreign, were as follows: At December 31, 2011, we had gross tax-effected unrecognized tax benefits of $946 million, all of which, if recognized, would impact the effective tax rate. A reconciliation of the beginning and ending amounts of unrecognized tax benefits and interest expense related to unrecognized tax benefits for the years ended December 31, 2011, 2010, and 2009 is as follows: Included in the balance at December 31, 2009 was $57 million of tax positions whose tax characterization was highly certain but for which there was uncertainty about the timing of tax return inclusion. During 2010, the uncertainty was removed as a result of an accounting method change approved by the Internal Revenue Service (IRS). During 2011, we reached final resolution with the IRS on two refund claims that had been pending with respect to pre-2004 tax years and refunds were received in accordance with the resolutions. A reduction in tax expense in the amount of $63 million and pretax interest income in the amount of $89 million was recognized during 2011 associated with the resolution of these claims. Tax years 2004 – 2005 are currently before the Appeals Division of the IRS for resolution discussions regarding certain proposed tax adjustments with which we do not agree. Tax years 2006 – 2008 are currently under review by the Examination Division of the IRS. It is possible that both the 2004 – 2005 appeals activity as well as 2006 – 2008 examination activity may conclude before the end of the second quarter of 2012. The Company expects the IRS to commence their review of the 2009 and 2010 tax years in the first quarter of 2012. 2011 2010 2009 Statutory U.S. federal income tax rate 35.0 % 35.0 % 35.0 % Tax on international activities (4.3)% (7.6)% (6.9)% Tax audit settlements (0.8)% — (0.7)% Other (0.6)% 0.5 % — Effective income tax rate 29.3 % 27.9 % 27.4 % (Dollars in millions) 2011 2010 2009 Balance at January 1 $891 $793 $ 773 Additions for tax positions related to the current year 71 115 90 Additions for tax positions of prior years 71 80 174 Reductions for tax positions of prior years (24) (81) (20) Settlements (63) (16) (224) Balance at December 31 $946 $891 $ 793 Gross interest expense related to unrecognized tax benefits $2 3 $2 7 $ 2 1 Total accrued interest balance at December 31 $165 $144 $ 142 (Dollars in millions) 2011 2010 2009 United States $3,293 $2,655 $2,584 Foreign 4,312 3,883 3,176 $7,605 $6,538 $5,760 (Dollars in millions) Tax Credit Carryforwards Tax Loss Carryforwards Expiration period: 2012-2016 $ 22 $ 523 2017-2021 164 125 2022-2031 308 397 Indefinite 753 2,157 Total $1,247 $3,202