ADT 2011 Annual Report Download - page 214

TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. Income Taxes (Continued)
matters. The Company has assessed its obligations under the Tax Sharing Agreement, including with
respect to the proposed civil fraud penalties discussed below, to determine that its recorded liability of
$436 million is sufficient to cover the indemnifications made by the Company under such agreement.
See Note 13. However, the ultimate resolution of these matters is uncertain and could result in a
material adverse impact to the Company’s financial position, results of operations, cash flows or the
effective tax rate in future reporting periods.
In connection with the aforementioned audits, the IRS proposed civil fraud penalties against a
prior subsidiary that was distributed to TE Connectivity in connection with the 2007 Separation. The
penalties allegedly arise from actions of former executives taken in connection with intercompany
transfers of stock of Simplex Technologies in 1998 and 1999. Based on statutory guidelines, the
Company estimates the proposed penalties could range between $30 million and $50 million. This is a
pre-Separation tax liability that is covered by the provisions of the Tax Sharing Agreement. Also in
connection with the IRS audits described above, during the fourth quarter of 2009, the Company, as
Audit Management Party under the Tax Sharing Agreement, reached a settlement agreement with the
IRS on certain deductions taken by Tyco, Covidien and TE Connectivity on pre-separation tax returns
filed for the periods 2001 to 2004. The settlement did not have a material effect to the Company’s
results of operations, financial position or cash flows. Notwithstanding this settlement, as mentioned
above, certain significant items related to the audits of the periods from 1997 to 2004 remain open.
Additionally, the Company considered the potential impact of the settlement as part of its quarterly
assessment of the guarantee liability and concluded that no adjustment to the liability was needed.
In addition to dealing with pre 2007 Separation tax liabilities of each of the three entities party
thereto, the Tax Sharing Agreement contains sharing provisions to address the contingency that the
2007 Separation itself, or internal transactions related to the 2007 Separation, may be deemed taxable
by U.S. or non U.S. taxing authorities. In the event the 2007 Separation is determined to be taxable
and such determination was the result of actions taken after the 2007 Separation by Tyco, Covidien or
TE Connectivity, the party responsible for such failure would be responsible for all taxes imposed on
each company as a result thereof. If such determination is not the result of actions taken by any of the
three companies after the 2007 Separation, then Tyco, Covidien and TE Connectivity would be
responsible for 27%, 42% and 31%, respectively, of any taxes imposed on any of the companies 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 TE Connectivity 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 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 TE Connectivity’s tax liabilities. See Note 13.
Except for earnings that are currently distributed, no additional material provision has been made
for U.S. or non-U.S. income taxes on the undistributed earnings of subsidiaries or for unrecognized
2011 Financials 111