HP 2006 Annual Report Download - page 118

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 13: Taxes on Earnings (Continued)
will be recorded in HP’s financial statements in the first quarter of fiscal 2007, the quarter in which the
Act was signed into law. While HP is still evaluating the Tax Relief and Health Care Act, the
retroactive research credit is not expected to have a material impact on HP’s consolidated results of
operations and financial condition.
In fiscal 2005, HP recorded $697 million of net income tax expense related to items unique to the
year. The tax expense was the result primarily of $792 million associated with the repatriation of
$14.5 billion under the Jobs Act and $76 million related to additional distributions received from
foreign subsidiaries. These tax expenses were offset in part by tax benefits of $177 million resulting
from agreements with the IRS and other governmental authorities, which were reflected in ‘‘Lower
rates in other jurisdictions, net’’ and ‘‘Other, net.’’
In fiscal 2004, the tax rate benefited from net favorable adjustments to previously estimated tax
liabilities of $207 million, which decreased the provision for taxes. The most significant favorable
adjustments related to the resolution of a California state income tax audit, a net favorable revision to
estimated tax accruals upon filing the 2003 U.S. income tax return and a reduction in taxes on foreign
earnings due to a change in regulatory policy. These favorable adjustments were offset in part by the
net effect of smaller adjustments to income tax liabilities in various jurisdictions.
As a result of certain employment actions and capital investments HP has undertaken, income
from manufacturing activities of subsidiaries in certain countries is subject to reduced tax rates, and in
some cases is wholly exempt from taxes through fiscal 2019. The gross income tax benefits attributable
to the tax status of these subsidiaries were estimated to be approximately $876 million ($0.31 per
diluted share) in fiscal 2006, $1,051 million ($0.36 per diluted share) in fiscal 2005 and $947 million
($0.31 per diluted share) in fiscal 2004. The gross income tax benefits were offset partially by accruals
of U.S. income taxes on undistributed earnings.
The IRS has completed its examination of the income tax returns of HP for all years through
1998. These years have been settled with the IRS’s Appeals Division and the settlements have been
approved by the Joint Committee on Taxation. These tax years remain open for net operating loss and
foreign tax credit carrybacks from subsequent years if the IRS’s audits of those years approve such
carrybacks. As of October 31, 2006, the IRS was in the process of examining HP’s income tax returns
for years 1999 through 2003. HP expects that the IRS will begin an audit of its 2004 and 2005 income
tax returns in 2007. In addition, HP is subject to numerous ongoing audits by state and foreign tax
authorities. HP believes that adequate accruals have been provided for all HP open tax years.
All Compaq tax years through the merger date with HP, May 3, 2002, have been audited and
agreed with the IRS. HP expects that substantially all of the remaining tax accruals for Compaq will be
reclassified as a reduction of goodwill during fiscal 2007 upon closing of the statute of limitations.
HP has not provided for U.S. federal income and foreign withholding taxes on $3.1 billion of
undistributed earnings from non-U.S. operations as of October 31, 2006 because HP intends to reinvest
such earnings indefinitely outside of the United States. If HP were to distribute these earnings, foreign
tax credits may become available under current law to reduce the resulting U.S. income tax liability.
Determination of the amount of unrecognized deferred tax liability related to these earnings is not
practicable. HP will remit non-indefinitely reinvested earnings of its non-US subsidiaries where excess
cash has accumulated and it determines that it is advantageous for business operations, tax or cash
reasons.
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