ADT 2013 Annual Report Download - page 91

FORM 10-K
companies is responsible for such failure, then Tyco, Covidien and TE Connectivity would be responsible for
such taxes, in the same manner and in the same proportions as other shared tax liabilities under the 2007 Tax
Sharing Agreement. Costs and expenses associated with the management of these shared tax liabilities are
generally shared equally among the parties.
In connection with the Separation from Tyco, we entered into a tax sharing agreement (the “2012 Tax
Sharing Agreement”) with Tyco and Pentair that governs the rights and obligations of ADT, Tyco and Pentair for
certain pre-Separation tax liabilities, including Tyco’s obligations under the 2007 Tax Sharing Agreement. The
2012 Tax Sharing Agreement provides that ADT, Tyco and Pentair will share (i) certain pre-Separation income
tax liabilities that arise from adjustments made by tax authorities to ADT’s, Tyco’s, and Pentair’s U.S. and
certain non-U.S. income tax returns, and (ii) payments required to be made by Tyco in respect to the 2007 Tax
Sharing Agreement (collectively, “Shared Tax Liabilities”). Tyco will be responsible for the first $500 million of
Shared Tax Liabilities. ADT and Pentair will share 58% and 42%, respectively, of the next $225 million of
Shared Tax Liabilities. ADT, Tyco and Pentair will share 27.5%, 52.5% and 20.0%, respectively, of Shared Tax
Liabilities above $725 million.
With respect to years prior to and including the 2007 Separation, tax authorities have raised issues and
proposed tax adjustments that are generally subject to the sharing provisions of the 2007 Tax Sharing Agreement
and which may require Tyco to make a payment to a taxing authority, Covidien or TE Connectivity. Although
Tyco has advised us that it has resolved a substantial number of these adjustments, a few significant items raised
by the IRS remain open with respect to the audit of the 1997 through 2004 tax years. On July 1, 2013, Tyco
announced that the IRS issued Notices of Deficiency to Tyco primarily related to the treatment of certain
intercompany debt transactions (the “Tyco IRS Notices”). These notices assert that additional taxes of $883
million plus penalties of $154 million are owed based on audits of the 1997 through 2000 tax years of Tyco and
its subsidiaries, as they existed at that time. Further, Tyco reported receiving Final Partnership Administrative
Adjustments (the “Partnership Notices”) for certain U.S. partnerships owned by its former U.S. subsidiaries, for
which Tyco estimates an additional tax deficiency of approximately $30 million will be asserted. The additional
tax assessments related to the Tyco IRS Notices and the Partnership Notices exclude interest and do not reflect
the impact on subsequent periods if the IRS challenge to Tyco’s tax filings is proved correct. Tyco has filed
petitions with the U.S. Tax Court to contest the IRS assessments. Consistent with its petitions filed with the U.S.
Tax Court, Tyco has advised us that it strongly disagrees with the IRS position and believes (i) it has meritorious
defenses for the respective tax filings, (ii) the IRS positions with regard to these matters are inconsistent with
applicable tax laws and Treasury regulations, and (iii) the previously reported taxes for the years in question are
appropriate. If the IRS should successfully assert its position, our share of the collective liability, if any, would be
determined pursuant to the 2012 Tax Sharing Agreement. In accordance with the 2012 Tax Sharing Agreement,
the amount ultimately assessed under the Tyco IRS Notices and the Partnership Notices would have to be in
excess of $1.85 billion before we would be required to pay any of the amounts assessed. We believe that our
income tax reserves and the liabilities recorded in the consolidated balance sheet for the 2012 Tax Sharing
Agreement continue to be appropriate. No payments with respect to these matters would be required until the
dispute is resolved in the U.S. Tax Court, which Tyco has advised us, could take several years. However, the
ultimate resolution of these matters is uncertain, and if the IRS were to prevail, it could have a material adverse
impact on our financial condition, results of operations and cash flows, potentially including a reduction in our
available net operating loss carryforwards.
We are responsible for all of our own taxes that are not shared pursuant to the 2012 Tax Sharing
Agreement’s sharing formulae, and Tyco and Pentair are responsible for their tax liabilities that are not subject to
the 2012 Tax Sharing Agreement’s sharing formulae. We also have sole responsibility for any income tax
liability arising as a result of our acquisition of Broadview Security in May 2010, including any liability of
Broadview Security under the tax sharing agreement between Broadview Security and The Brink’s Company
dated October 31, 2008 (collectively, the “Broadview Tax Liabilities”). Costs and expenses associated with the
management of Shared Tax Liabilities and Broadview Tax Liabilities are generally shared 20% by Pentair,
27.5% by ADT, and 52.5% by Tyco.
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