Baker Hughes 2010 Annual Report Download - page 130

48 B a k e r H u g h e s I n c o r p o r a t e d
The following table presents the changes in our unrecognized tax benefits and associated interest and penalties included in the
consolidated balance sheet.
Gross Unrecognized Tax Benefits, Interest and Total Gross
Excluding Interest and Penalties Penalties Unrecognized Tax Benefits
Balance at January 1, 2008 $ 363 $ 94 $ 457
Increase (decrease) in prior year tax positions (7) 10 3
Increase in current year tax positions 17 5 22
Decrease related to settlements with taxing authorities (24) (10) (34)
Decrease related to lapse of statute of limitations (20) (17) (37)
Decrease due to effects of foreign currency translation (6) (4) (10)
Balance at January 1, 2009 323 78 401
Increase (decrease) in prior year tax positions (75) 10 (65)
Increase in current year tax positions 16 6 22
Decrease related to settlements with taxing authorities (6) (2) (8)
Decrease related to lapse of statute of limitations (9) (4) (13)
Increase due to effects of foreign currency translation 1 1 2
Balance at January 1, 2010 250 89 339
Acquisition of BJ Services 102 28 130
Increase (decrease) in prior year tax positions (16) 4 (12)
Increase in current year tax positions 4 3 7
Decrease related to settlements with taxing authorities (7) (5) (12)
Decrease related to lapse of statute of limitations (6) (1) (7)
Increase due to effects of foreign currency translation (3) (4) (7)
Balance at December 31, 2010 $ 324 $ 114 $ 438
We record a valuation allowance when it is more likely
than not that some portion or all of the deferred tax assets
will not be realized. The ultimate realization of the deferred
tax assets depends on the ability to generate sufficient taxable
income of the appropriate character in the future and in the
appropriate taxing jurisdictions. We have provided a valuation
allowance for operating loss and foreign tax credit carryfor-
wards in certain non-U.S. jurisdictions. The majority of the
$90 million net increase in the valuation allowance in 2010,
represents net tax charges related to foreign losses. The oper-
ating loss carryforwards without a valuation allowance will
expire in varying amounts over the next twenty years.
We have provided for U.S. and additional foreign taxes for
the anticipated repatriation of certain earnings of our foreign
subsidiaries. We consider the undistributed earnings of our
foreign subsidiaries above the amount for which taxes have
already been provided to be indefinitely reinvested, as we
have no current intention to repatriate these earnings. As
such, deferred income taxes are not provided for temporary
differences of approximately $2.5 billion, $2.3 billion and
$2.2 billion as of December 31, 2010, 2009 and 2008, respec-
tively, representing earnings of non-U.S. subsidiaries intended
to be permanently reinvested. These additional foreign earn-
ings could become subject to additional tax if remitted, or
deemed remitted, as a dividend. Computation of the potential
deferred tax liability associated with these undistributed earn-
ings and any other basis differences is not practicable.
At December 31, 2010, we had approximately $64 million
of foreign tax credits which may be carried forward indefinitely
under applicable foreign law and $263 million of foreign tax
credits available to offset future payments of U.S. federal
income taxes, primarily expiring in 2018 through 2020.
In addition, at December 31, 2010, we had approximately
$2 million of state tax credits expiring in varying amounts
between 2016 and 2021.
As of December 31, 2010, we had $438 million of tax liabili-
ties for gross unrecognized tax benefits, which includes liabilities
for interest and penalties of $96 million and $18 million, respec-
tively. If we were to prevail on all uncertain tax positions, the
net effect would be a benefit to our effective tax rate of approx-
imately $383 million. The remaining approximately $55 million
is offset by deferred tax assets that represent tax benefits that
would be received in different taxing jurisdictions in the event
that we did not prevail on all uncertain tax positions.