ADT 2011 Annual Report Download - page 213

TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. Income Taxes (Continued)
Under the Tax Sharing Agreement, Tyco shares responsibility for certain of its, Covidien’s and TE
Connectivity’s 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 TE Connectivity
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 TE Connectivity’s 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 TE Connectivity representing the
amount Tyco expected to receive for pre-Separation uncertain tax positions, including amounts owed to
the Internal Revenue Service (‘‘IRS’’). As of September 30, 2011 and September 24, 2010, respectively,
the aggregate amount of the net receivable was $89 million and $114 million, respectively, of which
$73 million and $89 million, respectively, was included in other assets and $16 million and $25 million,
respectively, was included in prepaid expenses and other current assets on the Consolidated Balance
Sheet. Tyco also established liabilities representing the fair market value of its share of Covidien’s and
TE Connectivity’s estimated obligations, primarily to the IRS, for their pre-Separation taxes covered by
the Tax Sharing Agreement. As of September 30, 2011 and September 24, 2010, Tyco had recorded
$387 million and $398 million, respectively, in other liabilities, and $49 million and $156 million,
respectively, in accrued and other current liabilities. During the year ended September 30, 2011, Tyco
made a net cash payment of $113 million to Covidien and TE Connectivity related to the resolution of
certain IRS audit and pre-Separation tax matters.
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 in 2007.
During the year ended September 30, 2011, September 24, 2010 and September 25, 2009, Tyco
recorded expense of $7 million, income of $8 million and expense of $14 million, respectively, in
accordance with the Tax Sharing Agreement. Tyco will provide payment to Covidien and TE
Connectivity 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. Notwithstanding the resolution of these items, certain
significant items regarding pre-Separation shared tax liabilities remain open, and given the nature of
these liabilities, the maximum amount of potential future payments under the Tax Sharing Agreement is
not determinable. Such cash payments, when they occur, will reduce the guarantor liability as such
payments represent an equivalent reduction of risk. Tyco 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 2007 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 the Company expects to resolve a substantial
number of these adjustments, 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 Tyco will be able to
resolve the open items, which primarily involve the treatment of certain intercompany debt transactions
during the period, through the IRS appeals process. As a result, Tyco may be required to litigate these
110 2011 Financials