ADT 2007 Annual Report Download - page 230

TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. Commitments and Contingencies (Continued)
claims expected to be filed over the next seven years. The Company believes that it has adequate
amounts recorded related to these matters. While it is not possible at this time to determine with
certainty the ultimate outcome of these asbestos-related proceedings, the Company believes that the
final outcome of all known and anticipated future claims, after taking into account its substantial
indemnification rights and insurance coverage, will not have a material adverse effect on the Company’s
financial position, results of operations or cash flows.
Income Taxes
In connection with the spin-offs of Covidien and Tyco Electronics from Tyco, Tyco entered into a
Tax Sharing Agreement that generally governs Covidien’s, Tyco Electronics’ and Tyco’s respective rights,
responsibilities, and obligations after the distribution with respect to taxes, including ordinary course of
business taxes and taxes, if any, incurred as a result of any failure of the distribution of all of the shares
of Covidien or Tyco Electronics to qualify as a tax-free distribution for U.S. federal income tax
purposes within the meaning of Section 355 of the Code or certain internal transactions undertaken in
anticipation of the spin-offs to qualify for tax-favored treatment under the Code.
Under the Tax Sharing Agreement, with certain exceptions, Tyco generally is responsible for the
payment of 27% of any additional U.S. income taxes that are required to be paid to a U.S. tax
authority as a result of a U.S. tax audit of Covidien’s, Tyco Electronics’ or Tyco’s subsidiaries’ income
tax returns for all periods prior to the spin-offs.
Under the Tax Sharing Agreement, the Company shares responsibility for certain of Tyco’s,
Covidien’s and Tyco Electronics’ income tax liabilities based on a sharing formula for periods prior to
and including June 29, 2007. More specifically, Tyco, Covidien and Tyco Electronics share 27%, 42%
and 31%, respectively, of U.S. income tax liabilities that arise from adjustments made by tax authorities
to Tyco’s, Covidien’s and Tyco Electronics’ U.S. income tax returns. All costs and expenses associated
with the management of these shared tax liabilities are shared equally among the parties. At
September 28, 2007, Tyco has recorded a receivable from Covidien and Tyco Electronics of $103 million
reflected in other assets as our estimate of their portion of the Tax Sharing obligations with an offset to
shareholders’ equity. Other liabilities include $543 million for the fair value of Tyco’s obligations under
the Tax Sharing Agreement, determined in accordance with FIN 45 recognized with an offset to
shareholders’ equity.
Tyco will provide payment under the Tax Sharing Agreement as the shared income tax liabilities are
settled. Settlement is expected to occur as the IRS audit process is completed for the impacted years. Given
the nature of the shared liabilities, the maximum amount of potential future payments is not determinable.
In the event the Separation is determined to be taxable and such determination was the result of
actions taken after the Separation by Tyco, Covidien or Tyco Electronics, the party responsible for such
failure would be responsible for all taxes imposed on Tyco, Covidien or Tyco Electronics as a result
thereof. If such determination is not the result of actions taken after the Separation by Tyco, Covidien
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,
138 2007 Financials