HP 2006 Annual Report Download - page 117

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 13: Taxes on Earnings (Continued)
from acquired companies. HP has provided $158 million in valuation allowance for such losses. In
addition, HP has provided $86 million in valuation allowance on unrealized domestic capital losses.
Of the total tax credit carryforwards of $2.2 billion, HP had foreign tax credit carryforwards of
$1.5 billion, which will begin to expire in fiscal 2012. HP had alternative minimum tax credit
carryforwards of $92 million, which do not expire, and research and development credit carryforwards
of $330 million, of which $24 million will expire in fiscal 2013 and the remainder will expire after fiscal
2018. HP also had tax credit carryforwards of $363 million in various states and foreign countries, on
which HP has provided a valuation allowance of $281 million.
Gross deferred tax assets at October 31, 2006 and 2005 were reduced by valuation allowances of
$840 million and $812 million, respectively. The total valuation allowance increased by $28 million. This
valuation allowance increase was comprised of a $95 million increase to acquired net operating losses
and tax credits, which was partially offset by a decrease in the valuation allowances of state net
operating losses and tax credits of $25 million, foreign net operating losses and tax credits of $35
million, and other miscellaneous items of $7 million. Of the $840 million in valuation allowances at
October 31, 2006, $236 million was related to deferred tax assets for Compaq and other acquired
companies that existed at the time of acquisition. In the future, if HP determines that the realization of
these deferred tax assets is more likely than not, the reversal of the related valuation allowance will
reduce goodwill instead of the provision for taxes.
Of the total tax benefits resulting from the exercise of employee stock options and other employee
stock programs, the amounts booked to stockholders’ equity were approximately $356 million in fiscal
2006, $30 million in fiscal 2005 and $35 million in fiscal 2004.
The differences between the U.S. federal statutory income tax rate and HP’s effective tax rate
were as follows for the following fiscal years ended October 31:
2006 2005 2004
U.S. federal statutory income tax rate ......................... 35.0% 35.0% 35.0%
State income taxes, net of federal tax benefit .................... (0.1) (3.0) (2.3)
Lower rates in other jurisdictions, net ......................... (11.9) (23.6) (15.3)
Jobs Act Repatriation, including state taxes ..................... — 22.4 —
Research and development credit ............................ (0.2) (0.2) (0.6)
Valuation allowance ...................................... (1.0) 3.4 1.1
U.S. federal tax audit settlement ............................. (7.9) — —
Other, net ............................................. (0.1) (1.7) (1.2)
13.8% 32.3% 16.7%
In fiscal 2006, HP recorded $599 million of net income tax benefit related to items unique to the
year. This included net favorable tax adjustments of $565 million to income tax accruals as a result of
the settlement of the Internal Revenue Service (‘‘IRS’’) examinations of HP’s U.S. income tax returns
for fiscal years 1993 to 1998. The reductions to the net income tax accruals for these years related
primarily to the resolution of issues with respect to Puerto Rico manufacturing tax incentives and
export tax incentives, and other issues involving our non-U.S. operations.
In December 2006, The Tax Relief and Health Care Act of 2006 was signed into law, which
includes a retroactive reinstatement of the research and development credit. The retroactive amount
113