HP 2005 Annual Report Download - page 40

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Taxes on Earnings
We calculate our current and deferred tax provisions based on estimates and assumptions that
could differ from the actual results reflected in our income tax returns filed during the subsequent year.
We record adjustments based on filed returns when we have identified and finalized them, which is
generally in the third quarter of the subsequent year for U.S. federal and state provisions.
We recognize deferred tax assets and liabilities for the expected tax consequences of temporary
differences between the tax bases of assets and liabilities and their reported amounts using enacted tax
rates in effect for the year in which we expect the differences to reverse. We record a valuation
allowance to reduce the deferred tax assets to the amount that we are more likely than not to realize.
We have considered future market growth, forecasted earnings, future taxable income, the mix of
earnings in the jurisdictions in which we operate and prudent and feasible tax planning strategies in
determining the need for a valuation allowance. In the event we were to determine that we would not
be able to realize all or part of our net deferred tax assets in the future, we would charge an
adjustment to the deferred tax assets to earnings in the period in which we make such determination.
Likewise, if we later determine that we are more likely than not to realize the net deferred tax assets,
we would reverse the applicable portion of the previously provided valuation allowance. In order for us
to realize our deferred tax assets we must be able to generate sufficient taxable income in the tax
jurisdictions in which the deferred tax assets are located.
Our effective tax rate includes the impact of certain undistributed foreign earnings for which we
have not provided U.S. taxes because we plan to reinvest such earnings indefinitely outside the United
States. We plan foreign earnings remittance amounts based on projected cash flow needs as well as the
working capital and long-term investment requirements of our foreign subsidiaries and our domestic
operations. Based on these assumptions, we estimate the amount we will distribute to the United States
and provide the U.S. federal taxes due on these amounts. Further, 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, for fiscal years
through 2018. Material changes in our estimates of cash, working capital and long-term investment
requirements in the various jurisdictions in which we do business could impact our effective tax rate.
We are subject to income taxes in the United States and over sixty foreign countries, and we are
subject to routine corporate income tax audits in many of these jurisdictions. We believe that our tax
return positions are fully supported, but tax authorities are likely to challenge certain positions, which
may not be fully sustained. However, our income tax expense includes amounts intended to satisfy
income tax assessments that result from these challenges. Determining the income tax expense for these
potential assessments and recording the related assets and liabilities requires significant management
judgments and estimates. We evaluate our income tax contingencies in accordance with Statement of
Financial Accounting Standards (‘‘SFAS’’) No. 5, ‘‘Accounting for Contingencies.’’ We believe that our
reserve for income tax liabilities, including related interest, is adequate in relation to the potential for
additional tax assessments. The amounts ultimately paid upon resolution of audits could be materially
different from the amounts previously included in our income tax expense and therefore could have a
material impact on our tax provision, net income and cash flows. Our reserve for income tax liabilities
is attributable primarily to uncertainties concerning the tax treatment of our international operations,
including the allocation of income among different jurisdictions, and related interest. We review our
reserves quarterly, and we may adjust such reserves because of proposed assessments by tax authorities,
changes in facts and circumstances, issuance of new regulations or new case law, previously unavailable
information obtained during the course of an examination, negotiations between tax authorities of
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