Cisco 2008 Annual Report Download - page 74

2008 Annual Report 79
Notes to Consolidated Financial Statements
U.S. income taxes and foreign withholding taxes associated with the repatriation of earnings of foreign subsidiaries were not provided
for on a cumulative total of $21.9 billion of undistributed earnings for certain foreign subsidiaries. The Company intends to reinvest these
earnings indefinitely in its foreign subsidiaries. If these earnings were distributed to the United States in the form of dividends or otherwise,
or if the shares of the relevant foreign subsidiaries were sold or otherwise transferred, the Company would be subject to additional U.S.
income taxes (subject to an adjustment for foreign tax credits) and foreign withholding taxes. Determination of the amount of unrecognized
deferred income tax liability related to these earnings is not practicable.
On October 22, 2004, the American Jobs Creation Act of 2004 (the “Jobs Creation Act”) was signed into law. The Jobs Creation
Act created a temporary incentive for U.S. corporations to repatriate accumulated income earned abroad by providing an 85 percent
dividends received deduction for certain dividends from controlled foreign corporations. In fiscal 2006, the Company distributed cash
from its foreign subsidiaries and reported an extraordinary dividend (as defined in the Jobs Creation Act) of $1.2 billion and a related tax
liability of approximately $63 million in its fiscal 2006 federal income tax return. This amount was previously provided for in the provision for
income taxes and is included in income taxes payable. This distribution does not change the Company’s intention to indefinitely reinvest
undistributed earnings of certain of its foreign subsidiaries in operations outside the United States.
As a result of certain employment and capital investment actions and commitments, the Company’s income in certain countries is
subject to reduced tax rates and in some cases is wholly exempt from tax. These tax incentives expire in whole or in part at various times
through fiscal 2025.
(b) Unrecognized Tax Benefits
On July 29, 2007, the Company adopted FIN 48 which prescribes a comprehensive model for the financial statement recognition,
measurement, classification, and disclosure of uncertain tax positions. As a result of the adoption of FIN 48, the Company reduced the
liability for net unrecognized tax benefits by $451 million and accounted for this as a cumulative effect of a change in accounting principle
that was recorded as an increase to retained earnings of $202 million and an increase to additional paid-in capital of $249 million. The total
amount of gross unrecognized tax benefits as of the date of adoption was $3.3 billion, of which $2.9 billion would affect the effective tax rate
if realized. The Company historically classified liabilities for unrecognized tax benefits in current income taxes payable. In implementing
FIN 48, the Company has reclassified liabilities for unrecognized tax benefits for which the Company does not anticipate payment or
receipt of cash within one year to noncurrent income taxes payable. In addition, the Company reclassified the income tax receivable
to income taxes payable.
The aggregate changes in the balance of gross unrecognized tax benefits during fiscal 2008 were as follows (in millions):
Amount
Balance at July 29, 2007 $ 3,331
Additions based on tax positions related to the current year 488
Additions for tax positions of prior years 147
Reductions for tax positions of prior years (466)
Settlements (951)
Lapse of statute of limitations (44)
Balance at July 26, 2008 $ 2,505
In connection with the regular examination of the Company’s federal income tax returns for fiscal years ended July 27, 2002 through
July 31, 2004, the IRS proposed certain adjustments related to the Company’s international operations. In the first quarter of fiscal 2008,
the Company and the IRS agreed to a settlement with respect to certain tax issues related to U.S. income inclusions arising from the
Company’s international operations for fiscal years ended July 27, 2002 through July 29, 2006. As a result of the settlement, the Company
reduced the amount of gross unrecognized tax benefits by approximately $1.0 billion. The Company also reduced the amount of accrued
interest by $39 million. In addition, the IRS has proposed other adjustments that are not covered under the settlement agreement related
to fiscal years ended July 27, 2002 through July 31, 2004. The Company has timely filed a protest with IRS Appeals on these proposed
adjustments. The Company believes that adequate amounts have been reserved for any adjustments that may ultimately result from
these examinations.