3M 2011 Annual Report Download - page 76

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the valuation allowance will be reduced within the next 12 months as a result of the potential closure of audits with
certain taxing authorities.
During 2011, the Company contributed $517 million to its U.S. and international pension plans and $65 million to its
postretirement plans. During 2010, the Company contributed $556 million to its U.S. and international pension plans
and $62 million to its postretirement plans. During 2009, the Company contributed $1.259 billion to its U.S. and
international pension plans and $133 million to its postretirement plans. Of this 2009 amount, $600 million was
contributed in shares of the Company’s common stock to the Company’s principal U.S. qualified pension plan. The
current income tax provision includes a benefit for the pension contributions; the deferred tax provision includes a
cost for the related temporary difference.
Reconciliation of Effective Income Tax Rate
2011 2010 2009
Statutory U.S. tax rate ............................................................. 35.0 % 35.0% 35.0 %
State income taxes — net of federal benefit ........................... 0.7 1.2 1.0
International income taxes — net ................................ ............ (4.6 ) (7.1) (5.3 )
U.S. research and development credit .................................... (0.5 ) (0.2) (0.3 )
Reserves for tax contingencies ............................................... (1.2 ) (0.5) 0.8
Medicare Modernization Act, one-time charge ....................... — 1.5 —
Domestic Manufacturer’s deduction ........................................ (1.5 ) (1.4) (0.5 )
A
ll other — net ................................ ......................................... (0.1 ) (0.8) (0.7 )
Effective worldwide tax rate ................................................. 27.8 % 27.7% 30.0 %
The effective tax rate for 2011 was 27.8 percent, compared to 27.7 percent in 2010, an increase of 0.1 percent. The
year-on-year change in international income taxes increased the effective tax rate for 2011 when compared to 2010
by approximately 2.5 percent, which includes a partial offsetting benefit from the corporate reorganization of a wholly
owned international subsidiary in 2011. This 2.5 percent net increase was due primarily to certain 2010 tax benefits,
which did not repeat in 2011, related to net operating losses partially offset by a valuation allowance resulting from
the 2010 corporate alignment transactions that allowed the Company to increase its ownership of a foreign
subsidiary. These transactions are described in the section of Note 6 entitled “Purchase and Sale of Subsidiary
Shares and Transfers of Ownership Interest Involving Non-Wholly Owned Subsidiaries”. Other significant items
impacting the year-on-year comparison include a one-time 2010 income tax charge of $84 million (discussed further
below), which benefited the 2011 tax rate when compared to 2010 by 1.5 percent, as this charge did not repeat in
2011. The Company’s effective tax rate also benefited during 2011 when compared to 2010 by approximately 0.7
percent from adjustments to its income tax reserves.
The effective tax rate for 2010 was 27.7 percent, compared to 30.0 percent in 2009, a decrease of 2.3 percent. This
included an approximately 1.8 percent decrease related to the year-on-year change in international income taxes,
due primarily to the 2010 corporate alignment transactions discussed above. Additionally, the Company’s effective
tax rate benefited in 2010 compared to 2009 by approximately 1.3 percent from adjustments to its income tax
reserves, and by approximately 0.9 percent from additional Domestic Manufacturer’s deductions. These benefits
were partially offset by a 1.5 percent increase related to the one-time 2010 income tax charge of $84 million
(discussed below).
Under a Federal program (Medicare Modernization Act) that was established to encourage companies to provide
retiree prescription drug coverage, many companies, including 3M, received a tax-advantaged subsidy. The tax
advantage of the subsidy was eliminated by the Patient Protection and Affordable Care Act (H.R. 3590), including
modifications included in the Health Care and Education Reconciliation Act of 2010 (collectively, the “Act’), which
were enacted in March 2010. Although the elimination of this tax advantage does not take effect until 2013 under the
Act, 3M was required to recognize the full accounting impact in its financial statements in the period in which the Act
was signed. Because future anticipated retiree health care liabilities and related tax subsidies are already reflected in
3M’s financial statements, the change in law resulted in a reduction of the value of the company’s deferred tax asset
related to the subsidy. This reduction in value resulted in a one-time non-cash income tax charge to 3M’s earnings in
2010 of approximately $84 million, or 12 cents per diluted share.
The Company files income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions.
With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax
examinations by tax authorities for years before 2003.