Cisco 2010 Annual Report Download - page 75

Notes to Consolidated Financial Statements
benefits of $158 million as a reduction to the provision for income taxes, or an impact of 1.7 percentage points as presented under
the caption of “Transfer pricing adjustment related to share-based compensation” in the preceding table. In addition, an increase
was recorded to additional paid-in capital for $566 million. The fiscal 2010 tax benefits above effectively reverse the related
charges that the Company incurred during fiscal 2009.
The tax provision in fiscal 2009 included a net tax benefit of $106 million, related to the R&D tax credit for fiscal 2008, as a
result of the Tax Extenders and Alternative Minimum Tax Relief Act of 2008 which reinstated the U.S. federal R&D tax credit
retroactive to January 1, 2008. The tax provision in fiscal 2008 included tax expense of $229 million related to the intercompany
realignment of certain of the Company’s foreign operations and a net tax benefit of $162 million related to a settlement of certain
tax matters with the IRS.
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 $31.6 billion of undistributed earnings for certain foreign subsidiaries as of the end of fiscal 2010.
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.
As a result of certain employment and capital investment actions, the Company’s income in certain foreign countries is subject
to reduced tax rates and in some cases is wholly exempt from taxes. A portion of these tax incentives will expire at the end of fiscal
2015 and the majority of the remaining balance will expire at the end of fiscal 2025. As of the end of the respective fiscal years, the
gross income tax benefits attributable to these tax incentives were estimated to be $1.7 billion ($0.30 per diluted share) in fiscal
2010, $1.3 billion ($0.22 per diluted share) in fiscal 2009, and $1.6 billion ($0.26 per diluted share) in fiscal 2008. These gross
income tax benefits for the respective years were partially offset by accruals of U.S. income taxes on undistributed earnings.
(b) Unrecognized Tax Benefits
The aggregate changes in the balance of gross unrecognized tax benefits were as follows (in millions):
Years Ended July 31, 2010 July 25, 2009 July 26, 2008
Beginning balance(1) $ 2,816 $ 2,505 $ 3,331
Additions based on tax positions related to the current year 246 190 488
Additions for tax positions of prior years 60 307 147
Reductions for tax positions of prior years (250) (17) (466)
Settlements (140) (109) (951)
Lapse of statute of limitations (55) (60) (44)
Ending Balance $ 2,677 $ 2,816 $ 2,505
(1)The beginning balance of the unrecognized tax benefits for the year ended July 26, 2008 included a cumulative effect of a change in accounting principle for
$451 million.
As of July 31, 2010, $2.3 billion of the unrecognized tax benefits would affect the effective tax rate if realized. During fiscal 2010,
the Company recognized $167 million of net interest income and $5 million of penalties. During 2009, the Company recognized
$158 million of net interest expense and $5 million of penalties. The Company’s total accrual for interest and penalties was $167
million and $329 million as of the end of fiscal 2010 and 2009, respectively. The Company is no longer subject to U.S. federal
income tax audit for returns covering tax years through fiscal 2001. With limited exceptions, the Company is no longer subject to
state and local or foreign income tax audits for returns covering tax years through fiscal 1997.
During fiscal 2010, the Ninth Circuit withdrew its prior holding and reaffirmed the 2005 U.S. Tax Court ruling in Xilinx, Inc. v.
Commissioner. As a result of this final decision, the Company decreased the amount of gross unrecognized tax benefits by
approximately $220 million and decreased the amount of accrued interest by $218 million.
During fiscal 2009, the Company increased the amount of unrecognized tax benefits by approximately $214 million and
increased the amount of accrued interest by $197 million as a result of the Ninth Circuit’s initial decision.
During 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
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.
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