ADT 2012 Annual Report Download - page 120

Distribution or the internal transactions should be treated as taxable transactions if it determines that any of these
facts, assumptions, representations or undertakings is not correct or has been violated, or that the Distribution, the
Pentair Distribution or the internal transactions should be taxable for other reasons, including as a result of
significant changes in stock or asset ownership after the Distributions. An opinion of counsel represents
counsel’s best legal judgment, is not binding on the IRS or the courts, and the IRS or the courts may not agree
with the opinion. In addition, the opinion was based on current law, and cannot be relied upon if current law
changes with retroactive effect. If the Distribution ultimately is determined to be taxable, the Distribution could
be treated as a taxable dividend or capital gain to our shareholders for U.S. federal income tax purposes, and our
shareholders could incur significant U.S. federal income tax liabilities. In addition, Tyco would recognize gain in
an amount equal to the excess of the fair market value of shares of our common stock and the Pentair common
shares distributed to Tyco shareholders on the distribution date over Tyco’s tax basis in such shares, but such
gain, if recognized, generally would not be subject to U.S. federal income tax. However, we or Tyco could incur
significant U.S. federal income tax liabilities if it ultimately is determined that certain internal transactions
undertaken in anticipation of the Distributions are taxable.
In addition, under the terms of the 2012 Tax Sharing Agreement, in the event the Distribution, the Pentair
Distribution or the internal transactions were determined to be taxable as a result of actions taken after the
Distributions by us, Pentair or Tyco, the party responsible for such failure would be responsible for all taxes
imposed on us, Pentair or Tyco as a result thereof. Taxes resulting from the determination that the Distribution,
the Pentair Distribution, or any internal transaction that was intended to be tax-free is taxable are referred to
herein as “Distribution Taxes.” If such failure is not the result of actions taken after the Distributions by us,
Pentair or Tyco, then we, Pentair and Tyco would be responsible for 27.5%, 20% and 52.5%, respectively, of any
taxes imposed on us, Pentair or Tyco as a result of such determination. Such tax amounts could be significant. In
the event that any party to the 2012 Tax Sharing Agreement defaults in its obligation to pay Distribution Taxes to
another party that arise as a result of no party’s fault, each non-defaulting party would be responsible for an equal
amount of the defaulting party’s obligation to make a payment to another party in respect of such other party’s
taxes. To the extent we are responsible for any liability under the 2012 Tax Sharing Agreement, there could be a
material adverse impact on our financial condition, results of operations, cash flows or our effective tax rate in
future reporting periods.
If the Distribution is determined to be taxable for Swiss withholding tax purposes, we or Tyco could incur
significant Swiss withholding tax liabilities.
Generally, Swiss withholding tax of 35% is due on dividends and similar distributions to our and Tyco’s
shareholders, regardless of the place of residency of the shareholder. As of January 1, 2011, distributions to
shareholders out of qualifying contributed surplus (Kapitaleinlage) accumulated on or after January 1, 1997 are
exempt from Swiss withholding tax, if certain conditions are met (Kapitaleinlageprinzip). Tyco obtained a ruling
from the Swiss Federal Tax Administration confirming that the Distribution qualifies as payment out of such
qualifying contributed surplus and, therefore, no amount was withheld by Tyco when making the Distribution.
This tax ruling relies on certain facts and assumptions and certain representations and undertakings from
Tyco regarding the past conduct of its businesses and other matters. Notwithstanding this tax ruling, the Swiss
Federal Tax Administration could determine on audit that the Distribution should be treated as a taxable
transaction for withholding tax purposes if it determines that any of these facts, assumptions, representations or
undertakings is not correct or has been violated. If the Distribution ultimately is determined to be taxable for
withholding tax purposes, we and Tyco could incur material Swiss withholding tax liabilities that could
significantly detract from or eliminate the benefits of the Separation. In addition, we could become liable to
indemnify Tyco for part of any Swiss withholding tax liabilities to the extent provided under the 2012 Tax
Sharing Agreement.
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