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NOTE 14 – INCOME TAXES

Our tax provision for the three months ended March 31, 2012 was a benefit of $210.8 million. Our tax provision for the same period ended March 31, 2011 was an expense of $142.2 million. The effective tax rate for the first three months of 2012 is approximately a benefit ofÌý112.4 percent, while the effective tax rate for the first three months of 2011 wasÌý25.3 percent. The difference in the effective rate from the prior year primarily is due to the enactment of the MRRT by the Australian federal government. Additionally, the effective rate is impacted by lower pre-tax book income in 2012 over 2011 with similar book to tax differences, and the impact of currency elections on remeasurement of deferred tax assets and liabilities.

Our 2012 estimated annual effective tax rate before discrete items is approximatelyÌý23.2 percent. This estimated annual effective tax rate differs from the U.S. statutory rate ofÌý35 percent primarily due to deductions for percentage depletion in excess of cost depletion related to U.S. operations, income not subject to tax, non-taxable income related to noncontrolling interests in partnerships, foreign taxes including MRRT and Quebec Mining Duty and benefits derived from operations outside the U.S., which are taxed at rates lower than the U.S. statutory rate of 35 percent.

In July 2010, the Australian federal government announced its intention to introduce a new MRRT applicable to the mining of iron ore and coal in Australia. The MRRT legislation was passed by the Australian Senate on March 19, 2012 and received Royal Assent on March 29, 2012, thereby enacting the law. The MRRT commencement date is July 1, 2012 and broadly aims to tax existing and future iron ore and coal projects at an effective tax rate ofÌý22.5 percent. Based on valuations and modeling carried out on each of our Australian projects, we will be liable to pay MRRT over the course of the Koolyanobbing mine life, but not for the Cockatoo Island or Sonoma operations. The financial impact of this MRRT enactment is an increase to the balance of deferred tax assets of $334.6 million. From the results of a recoverability analysis undertaken, a valuation allowance of $19.9 million has also been recorded. The net deferred tax asset of $314.7 million represents the amount of allowance available to us to offset any future MRRT liability. The effect of the MRRT will be to increase our consolidated effective tax rate by approximatelyÌý3 percent toÌý4 percent each year over the life of the mines, which also includes the unwinding of the deferred tax asset.

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As of March 31, 2012, our valuation allowance against certain deferred tax assets increased by $51.8 million from December 31, 2011. This increase primarily relates to ordinary losses of certain foreign operations for which future utilization is uncertain and a portion of the MRRT depreciable starting base expected not to be realized.

As of March 31, 2012, cumulative undistributed earnings of foreign subsidiaries included in consolidated retained earnings continue to be indefinitely reinvested in international operations. Accordingly, no provision has been made for U.S. deferred taxes related to future repatriation of these earnings, nor is it practical to estimate the amount of income taxes that would have to be provided if we concluded that such earnings will be remitted in the future.

As of March 31, 2012, we had $78.5 million of unrecognized tax benefits recorded in Other liabilities in the Statements of Consolidated Financial Position. If the $78.5 million were recognized, the full amount would impact the effective tax rate. It is reasonably possible that unrecognized tax benefits will decrease in the range of $27.2 million to $29.5 million within the next 12 months due to expected settlements with the taxing authorities. During the three months ended March 31, 2012, we settled an audit for approximately $23.9 million, which previously was recorded. Additionally, we recorded $0.1 million of interest relating to unrecognized tax benefits during the first quarter of 2012.

Tax years that remain subject to examination are yearsÌý2009 and forward for the United States,Ìý2005 and forward for Canada, andÌý2007 and forward for Australia.