Cisco 2012 Annual Report Download - page 135

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During fiscal 2011, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010
reinstated the U.S. federal R&D tax credit through December 31, 2011, retroactive to January 1, 2010. As a
result, the tax provision in fiscal 2011 includes a tax benefit of $65 million related to the R&D tax credit for
fiscal 2010.
During fiscal 2010, the U.S. Court of Appeals for the Ninth Circuit (the “Ninth Circuit”) withdrew its prior
holding and reaffirmed the 2005 U.S. Tax Court ruling in Xilinx, Inc. v. Commissioner. This final decision
impacted the tax treatment of share-based compensation expenses for the purpose of determining intangible
development costs under a company’s research and development cost-sharing arrangement. While the Company
was not a named party to the case, this decision resulted in a change in the Company’s tax benefits recognized in
its financial statements. As a result of the decision, the Company recognized in fiscal 2011 a combined tax
benefit of $724 million, of which $158 million was recorded as a reduction to the provision for income taxes and
$566 million was recorded as an increase to additional paid-in capital.
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 $41.3 billion of undistributed earnings for certain
foreign subsidiaries as of the end of fiscal 2012. 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. The gross income tax benefit attributable to tax incentives were estimated to be $1.3 billion ($0.24
per diluted share) in fiscal 2012, of which, approximately $0.5 billion ($0.09 per diluted share) is based on tax
incentives that will expire at the end of fiscal 2015. As of the end of fiscal 2011 and fiscal 2010, the gross income
tax benefits attributable to tax incentives were estimated to be $1.3 billion ($0.24 per diluted share) and $1.7
billion ($0.30 per diluted share), for the respective years. The 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 28, 2012 July 30, 2011 July 31, 2010
Beginning balance .................................. $2,948 $2,677 $2,816
Additions based on tax positions related to the current year . . 155 374 246
Additions for tax positions of prior years ................. 54 93 60
Reductions for tax positions of prior years ................ (226) (60) (250)
Settlements ........................................ (41) (56) (140)
Lapse of statute of limitations .......................... (71) (80) (55)
Ending balance ..................................... $2,819 $2,948 $2,677
As of July 28, 2012, $2.4 billion of the unrecognized tax benefits would affect the effective tax rate if realized.
During fiscal 2012, the Company recognized $146 million of net interest expense and $21 million of penalties.
During fiscal 2011, the Company recognized $38 million of net interest expense and $9 million of penalties. The
Company’s total accrual for interest and penalties was $381 million and $214 million as of the end of fiscal 2012
and 2011, 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 foreign income tax
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