ADT 2007 Annual Report Download - page 154

or Tyco Electronics, then Tyco, Covidien and Tyco Electronics would be responsible for 27%, 42% and
31%, respectively, of any taxes imposed on Tyco, Covidien or Tyco Electronics as a result of such
determination. Such tax amounts could be significant. The Company is responsible for all of its own
taxes that are not shared pursuant to the Tax Sharing Agreement’s sharing formula. In addition,
Covidien and Tyco Electronics are responsible for their tax liabilities that are not subject to the Tax
Sharing Agreement’s sharing formula.
If any party to the Tax Sharing Agreement were to default in its obligation to another party to pay
its share of the distribution taxes that arise as a result of no party’s fault, each non-defaulting party
would be required to pay, equally with any other non-defaulting party, the amounts in default. In
addition, if another party to the Tax Sharing Agreement that is responsible for all or a portion of an
income tax liability were to default in its payment of such liability to a taxing authority, the Company
could be legally liable under applicable tax law for such liabilities and required to make additional tax
payments. Accordingly, under certain circumstances, the Company may be obligated to pay amounts in
excess of its agreed-upon share of Tyco’s, Covidien’s and Tyco Electronics’ tax liabilities. See Note 16
for further discussion of guarantees and indemnifications extended among Tyco, Covidien and Tyco
Electronics.
The Company and its subsidiaries’ income tax returns periodically are examined by various tax
authorities. In connection with these examinations, tax authorities, including the Internal Revenue
Service (‘‘IRS’’), have raised issues and proposed tax adjustments. The Company is reviewing and
contesting certain of the proposed tax adjustments. Amounts related to these tax adjustments and other
tax contingencies and related interest that management has assessed as probable and estimable have
been recorded.
In 2004, in connection with the IRS audit of the 1997 through 2000 years, the Company submitted
to the IRS proposed adjustments to these prior period U.S. federal income tax returns resulting in a
reduction in the taxable income previously filed. During 2006, the IRS accepted substantially all of the
proposed adjustments. Also during 2006, the Company developed proposed amendments to U.S.
federal income tax returns for additional periods through 2002. On the basis of previously accepted
amendments, the Company has determined that acceptance of these adjustments is probable and,
accordingly, has recorded them in the Consolidated Financial Statements. Such adjustments did not
have a material impact on the Company’s financial condition, results of operations or cash flows.
The Company has yet to complete proposed amendments to its U.S. federal income tax returns for
periods subsequent to 2002, which will primarily reflect the roll forward through 2006 of the
amendments for the periods 1997 to 2002. When the Company’s tax return positions are updated
additional adjustments may be identified and recorded in the Consolidated Financial Statements. While
the final adjustments cannot be determined until the income tax return amendment process is
completed, the Company believes that any resulting adjustments will not have a material impact on its
financial condition, results of operations or cash flows.
During the third quarter of 2007, the IRS concluded its field examination of certain of Tyco’s U.S.
federal income tax returns for the years 1997 though 2000 and issued anticipated Revenue Agents’
Reports (‘‘RARs’’) which reflect the IRS’ determination of proposed tax adjustments for the periods
under audit. The RARs propose tax audit adjustments to certain of the Company’s previously filed tax
return positions, all of which the Company expected and previously assessed at each balance sheet date.
Accordingly, the Company has made no additional provision during the year ended September 28, 2007
as a result of the proposed audit adjustments in the RARs.
The Company has agreed with the IRS on adjustments totaling $498 million, with an estimated
cash impact to the Company of $458 million, and during the third quarter of 2007, the Company paid
$458 million, of which $163 million relates to the Company’s discontinued operations. The Company
appealed other proposed tax audit adjustments totaling approximately $1 billion, and, as Audit
62 2007 Financials