ADT 2010 Annual Report Download - page 134

profitability in lower tax rate jurisdictions and release of contingency reserves partially offset by enacted
tax law changes and changes in foreign exchange rates that negatively impacted the non-U.S. deferred
tax assets. Our effective income tax rate was 23.5% for 2008. Income taxes during 2008 were positively
impacted by increased profitability in lower tax rate jurisdictions and release of deferred tax valuation
allowances partially offset by enacted tax law changes that negatively impacted the non-U.S. deferred
tax assets.
The valuation allowance for deferred tax assets of $1,379 million and $766 million as of
September 24, 2010 and September 25, 2009, respectively, relates principally to the uncertainty of the
utilization of certain deferred tax assets, primarily tax loss and credit carryforwards in various
jurisdictions. The valuation allowance was calculated and recorded when we determined that it was
more-likely-than-not that all or a portion of our deferred tax assets would not be realized. We believe
that we will generate sufficient future taxable income to realize the tax benefits related to the
remaining net deferred tax assets on our Consolidated Balance Sheets.
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 record tax
liabilities for anticipated tax audit issues in the U.S. and other tax jurisdictions based on our estimate
of whether, and the extent to which, additional 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;
however, due to the complexity of some of these uncertainties, the ultimate resolution may result in a
payment that is materially different from our current estimate of the tax liabilities. Substantially all of
these potential tax liabilities are recorded in other liabilities in the Consolidated Balance Sheets as
payment is not expected within one year.
Other Income Tax Matters
In connection with the spin-offs of Covidien and Tyco Electronics from Tyco, Tyco entered into a
Tax Sharing Agreement that governs the rights and obligations of each party with respect to certain
pre-Separation income tax liabilities. 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. and certain non-U.S. income tax returns.
Costs and expenses associated with the management of these shared tax liabilities are generally shared
equally among the parties. Consistent with the sharing provisions of the Tax Sharing Agreement, Tyco
had a net receivable from Covidien and Tyco Electronics of $114 million and $106 million as of
September 24, 2010 and September 25, 2009, respectively. In addition, as of September 24, 2010, Tyco
had a recorded liability of $554 million (of which $156 million is included in accrued and other current
liabilities and the remaining amount in other liabilities) representing the fair value of Tyco’s obligations
under the Tax Sharing Agreement as of the date of the Separation. The liability was $554 million as of
September 25, 2009, which was recorded in other liabilities. During the fourth quarter of 2010, we
reclassified $156 million from other liabilities to accrued and other current liabilities as we expect to
make a payment within the next twelve months to Covidien and Tyco Electronics related to resolution
of certain IRS audit matters.
Tyco and its subsidiaries’ income tax returns periodically are examined by various tax authorities.
In connection with these examinations, tax authorities, including the 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
have been assessed as uncertain income tax positions and recorded as appropriate.
For a detailed discussion of contingencies related to Tyco’s income taxes, see Note 6 to the
Consolidated Financial Statements.
46 2010 Financials