ADT 2010 Annual Report Download - page 109

to our, Covidien’s and Tyco Electronics’ U.S. and certain non-U.S. income tax returns, certain income
tax liabilities arising from adjustments made by tax authorities to intercompany transactions or similar
adjustments, and certain taxes attributable to internal transactions undertaken in anticipation of the
Separation. Costs and expenses associated with the management of these shared tax liabilities will
generally be shared equally among the parties. We are responsible for all of our 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. In connection with the execution of the Tax Sharing Agreement, we established
receivables from Covidien and Tyco Electronics representing the amount we expected to receive for
pre-Separation uncertain tax positions. We also established liabilities representing the fair market value
of our share of their estimated obligations under the Tax Sharing Agreement. As of September 24,
2010, we had recorded $89 million in other assets and $25 million in prepaid expenses and other
current assets representing the receivables from Covidien and Tyco Electronics. We had also recorded
$398 million in other liabilities and $156 million in accrued and other current liabilities representing
our estimated obligations to Covidien and Tyco Electronics under the Tax Sharing Agreement.
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, we could be
legally liable under applicable tax law for such liabilities and required to make additional tax payments.
Accordingly, under certain circumstances, we may be obligated to pay amounts in excess of our agreed-
upon share of our, Covidien’s and Tyco Electronics’ tax liabilities.
Examinations and audits by tax authorities, including the Internal Revenue Service, could result in
additional tax payments for prior periods.
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, in particular, with respect to tax
years preceding the Separation. We are reviewing and contesting certain of the proposed tax
adjustments. Although we expect to resolve a substantial number of the proposed tax adjustments with
the IRS, a few significant items are expected to remain open with respect to the audit of the 1997
through 2004 years. As of the date hereof, it is unlikely that we will be able to resolve these open
items, which primarily involve the treatment of certain intercompany transactions during the period,
through the IRS appeals process. As a result, we may be required to litigate these matters. The
calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax
regulations in a multitude of jurisdictions across our global operations. We recognize potential liabilities
and record tax liabilities for anticipated tax audit issues in the United States and other tax jurisdictions
based on our estimate of whether, and the extent to which, additional income taxes will be due. These
tax liabilities are reflected net of related tax loss carryforwards. We adjust these liabilities in light of
changing facts and circumstances. We have assessed our obligations under the Tax Sharing Agreement
and determined that the recorded liability is sufficient to cover the indemnifications made by us under
such agreement. However, such amount could differ materially from amounts that are actually
determined to be due, and any such difference could materially adversely affect our financial position,
results of operations or cash flows.
2010 Financials 21