The provision (benefit) for income taxes by taxing jurisdiction was: The tax effects of significant temporary differences representing deferred tax assets and liabilities at December 31, 2004 and 2003 were as follows: International Paper made income tax payments, net of refunds, of $254 million, $253 million and $270 million in 2004, 2003 and 2002, respectively. A reconciliation of income tax expense (benefit) using the statutory U.S. income tax rate compared with actual income tax expense (benefit) follows: Deferred tax assets and liabilities are recorded in the accompanying consolidated balance sheet under the captions Deferred income tax assets, Deferred charges and other assets, Other accrued liabilities and Deferred income taxes. The increase in 2004 in Deferred income taxes principally reflects the use of U.S. net operating loss carryforwards. The valuation allowance for deferred tax assets as of January 1, 2004 was $179 million. The net change in the total valuation allowance for the year ended December 31, 2004 was a decrease of $42 million. The 2004 second-quarter provision for income taxes included a $54 million credit before minority interest ($27 million after minority interest) from the reduction of valuation reserves for capital loss carryovers and a $32 million charge for the adjustment of deferred tax balances. The reduction of valuation reserves reflected capital gains generated by the sale of the CHH Tissue business. During 2003, International Paper recorded decreases totaling $123 million in the provision for income taxes for significant items occurring in 2003, including a $13 million reduction in the fourth quarter ($26 million before minority interest) for a favorable settlement with Australian tax authorities of net operating loss carryforwards, a $60 million reduction in the third quarter reflecting a favorable revision of estimated tax accruals upon filing the 2002 federal income tax return and increased research and development credits, and a $50 million In millions 2004) 2003) 2002) Earnings from continuing  operations before income  taxes and minority interest $746) $ 292) $306) Statutory U.S. income tax rate 35%) 35% 35% Tax expense using statutory U.S. income tax rate 261) 102) 107) State and local income taxes 19) (41) (60) Tax rate and permanent differences on non-U.S. earnings (67) (131) (47) Permanent differences on sales of non-strategic assets -) 11) (70) Non-deductible business expenses 12) 14) 13) Retirement plan dividends (7) (7) -) Tax benefit on export sales (7) (12) (4) Minority interest (35) (37) (40) Net U.S. tax on non-U.S. dividends 52) 17) 26) Tax credits (37) (56) -) Other, net 15) 27) 3) Income tax expense (benefit) $206) $(113) $(72) Effective income tax rate 28% -39% -24% In millions 2004) 2003) 2002) Current tax provision U.S. federal $ 161) $ 173) $ 175) U.S. state and local 24) 11) 54) Non-U.S. 135) 100) 88) $ 320) $ 284) $ 317) Deferred tax provision (benefit) U.S. federal $ (26) $(271) $(231) U.S. state and local 5) (72) (146) Non-U.S. (93) (54) (12) $(114) $(397) $(389) Income tax provision (benefit) $ 206) $(113) $ (72) In millions 2004) 2003 ) Deferred tax assets: Postretirement benefit accruals $ 348) $ 372) Prepaid pension costs 320) 322) Alternative minimum and other tax credits 519) 474) Net operating loss carryforwards 1,540) 1,767) Compensation reserves 186) 196) Legal reserves 98) 147) Other 467) 449) Gross deferred tax assets 3,478) 3,727) Less: valuation allowance (137) (179) Net deferred tax assets $ 3,341) $ 3,548) Deferred tax liabilities: Plants, properties and equipment $(2,814) $(2,867) Forestlands (1,215) (1,153) Other (263) (264) Total deferred tax liabilities $(4,292) $(4,284) Net deferred tax liabilities $ (951) $ (736) 58