ADT 2010 Annual Report Download - page 193

TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Income Taxes (Continued)
Under the Tax Sharing Agreement, the Company shares responsibility for certain of Tyco’s,
Covidien’s and Tyco Electronics’ income tax liabilities, which result in cash payments, 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. and certain non-
U.S. income tax returns. The costs and expenses associated with the management of these shared tax
liabilities are generally shared equally among the parties. In connection with the execution of the Tax
Sharing Agreement, Tyco established a net receivable from Covidien and Tyco Electronics representing
the amount the Company expected to receive for pre-Separation uncertain tax positions. Such amounts
include any amounts owed to the Internal Revenue Service (‘‘IRS’’). As of September 24, 2010 and
September 25, 2009, respectively, the aggregate amount of the net receivable was $114 million and
$106 million, respectively, of which $89 million and $103 million, respectively, was included in other
assets and $25 million and $3 million, respectively, was included in prepaid expenses and other current
assets on the Consolidated Balance Sheet. The Company also established liabilities representing the fair
market value of its share of Covidien’s and Tyco Electronics’ estimated obligations, primarily to the
IRS, for their pre-Separation taxes covered by the Tax Sharing Agreement. As of September 24, 2010
and September 25, 2009, the Company had recorded $398 million and $554 million, respectively in
other liabilities and $156 million and nil, respectively, in accrued and other current liabilities. During
the fourth quarter of 2010, the Company reclassified $156 million from other liabilities to accrued and
other current liabilities as it expects to make a payment within the next twelve months to Covidien and
Tyco Electronics related to resolution of certain of the outstanding IRS audit matters discussed below.
Tyco assesses the shared tax liabilities and related guaranteed liabilities at each reporting period.
The receivable and liability were initially recognized with an offset to shareholders’ equity at the time
of the Separation in 2007. The Company recorded income of $8 million and expense of $14 million for
2010 and 2009, respectively, in accordance with the Tax Sharing Agreement. In the first quarter of 2008,
in connection with the adoption of the guidance pertaining to the accounting for uncertain income tax
positions 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). Tyco will provide payment to Covidien and Tyco Electronics
under the Tax Sharing Agreement as the shared income tax liabilities are settled. Settlement is expected
to occur as the audit process by applicable taxing authorities is completed for the impacted years and
cash payments are made. Given the nature of the shared liabilities, the maximum amount of potential
future payments is not determinable. Such cash payments, when they occur, will reduce the guarantor
liability as such payments represent an equivalent reduction of risk. The Company also assesses the
sufficiency of the Tax Sharing Agreement guarantee liability on a quarterly basis and will increase the
liability when it is probable that cash payments expected to be made under the Tax Sharing Agreement
exceed the recorded balance.
Tyco and its subsidiaries’ income tax returns are examined periodically by various tax authorities.
In connection with these examinations, tax authorities, including the IRS, have raised issues and
proposed tax adjustments, in particular with respect to years preceding the Separation. The issues and
proposed adjustments related to such years are generally subject to the sharing provisions of the Tax
Sharing Agreement. Tyco is reviewing and contesting certain of the proposed tax adjustments. With
respect to adjustments raised by the IRS, although we expect to resolve a substantial number of these
2010 Financials 105