HP 2005 Annual Report Download - page 110

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 12: Taxes on Earnings (Continued)
The domestic and foreign components of earnings (losses) were as follows for the following fiscal
years ended October 31:
2005 2004 2003
In millions
U.S. .............................................. $(1,406) $ (603) $ 661
Non-U.S. .......................................... 4,949 4,799 2,227
$ 3,543 $4,196 $2,888
As a result of certain employment actions and capital investments HP has undertaken, income
from manufacturing activities in certain countries is subject to reduced tax rates, and in some cases is
wholly exempt from taxes through fiscal 2018. The gross income tax benefits attributable to the tax
status of these subsidiaries were estimated to be approximately $1,051 million ($0.36 per share) in fiscal
2005, $947 million ($0.31 per share) in fiscal 2004 and $705 million ($0.23 per share) in fiscal 2003. The
gross income tax benefits were offset partially by accruals of U.S. income taxes on undistributed
earnings, among other factors.
The IRS has completed its examination of the income tax returns of HP for all years through 1998
and of Compaq for all years through 1997. HP’s tax years from 1993 through 1998 are currently before
the IRS’s Appeals Division. As of October 31, 2005, the IRS was in the process of examining HP’s
income tax returns for years 1999 through 2003 and Compaq’s income tax returns for years 1998
through 2002. In addition, HP is subject to numerous ongoing audits by state and foreign tax
authorities. HP believes that adequate accruals for HP and Compaq have been provided for all years.
HP has not provided for U.S. federal income and foreign withholding taxes on $1.2 billion of
undistributed earnings from non-U.S. operations as of October 31, 2005 because HP intends to reinvest
such earnings indefinitely outside of the United States. If HP distributes these earnings, foreign tax
credits may become available under current law to reduce or eliminate the resulting U.S. income tax
liability. Where excess cash has accumulated in HP’s non-U.S. subsidiaries and it is advantageous for
business operations, tax or cash reasons, HP remits subsidiary earnings.
American Jobs Creation Act of 2004—Repatriation of Foreign Earnings
The Jobs Act, enacted on October 22, 2004, provides for a temporary 85% dividends received
deduction on certain foreign earnings repatriated during a one-year period. The deduction results in an
approximate 5.25% federal tax rate on the repatriated earnings. During the third quarter of fiscal 2005,
HP’s CEO and Board of Directors approved a domestic reinvestment plan as required by the Jobs Act
to repatriate $14.5 billion in foreign earnings in fiscal 2005.
HP recorded tax expense in fiscal 2005 of $792 million ($0.27 per share) related to this
$14.5 billion dividend under the Jobs Act. The additional tax expense consists of federal taxes of
$744 million, state taxes, net of federal benefits, of $73 million, and a net tax benefit of $25 million
related to an adjustment of deferred tax liabilities on both repatriated and unrepatriated foreign
earnings.
HP repatriated $7.5 billion under the Jobs Act in the third quarter and the remaining $7.0 billion
in the fourth quarter of fiscal 2005.
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