ADT 2008 Annual Report Download - page 226

TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Income Taxes (Continued)
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
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 14
for further discussion of guarantees and indemnifications extended between Tyco, Covidien and Tyco
Electronics.
Other Income Tax Matters
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
2008 Financials 123