ADT 2008 Annual Report Download - page 155

tax liabilities. Further, management has reviewed with tax counsel the issues raised by these taxing
authorities and the adequacy of these recorded amounts. Substantially all of these potential tax
liabilities are recorded in other liabilities on the Consolidated Balance Sheets as payment is not
expected within one year.
Tax Sharing Agreement
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 Separation 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, 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 shared 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.
Tyco has recorded a receivable from Covidien and Tyco Electronics of $113 million at September 26,
2008 and $103 million at September 28, 2007 which is included in other assets as our estimate of their
portion of the Tax Sharing obligations. Other liabilities include $554 million and $543 million at
September 26, 2008 and September 28, 2007, respectively for the fair value of Tyco’s obligations under
the Tax Sharing Agreement, determined in accordance with FIN No. 45, ‘‘Guarantor’s Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.’’ Tyco
assesses the shared tax liabilities and related FIN No. 45 liability at each reporting period. The
receivable and liability were initially recognized with an offset to shareholders’ equity in 2007. In the
first quarter of 2008, in connection with the adoption of FIN No. 48 and the related increase in
uncertain tax positions for shared tax liabilities under the Tax Sharing Agreement, Tyco increased its
receivable from Covidien and Tyco Electronics under the Tax Sharing Agreement with a corresponding
increase to other income, net by $40 million ($0.08 for both basic and diluted earnings per share). In
addition, $6 million of expense for other activity was recorded in accordance with the Tax Sharing
Agreement during 2008.
Tyco will provide payment under the Tax Sharing Agreement as the shared income tax liabilities are
settled. Settlement is expected to occur as the audit process by local taxing authorities 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,
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
52 2008 Financials