HP 2007 Annual Report Download - page 133

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 13: Taxes on Earnings (Continued)
The IRS has completed its examination of the income tax returns of HP for all years through fiscal 1998. HP’ s 1993
through 1998 years were settled with the IRS’ s Appeals Division and the settlements were approved by the Joint Committee
on Taxation in 2006. 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.
On June 28, 2007, HP received a Notice of Deficiency from the IRS for its fiscal 1999 and 2000 tax years. The Notice of
Deficiency asserted that HP owes additional tax of $13 million for these two years. At the same time, HP received a Revenue
Agent’ s Report (“RAR”) from IRS for its fiscal 2001 tax year that proposed no change in HP’ s tax liability for that year. In
addition to the proposed deficiencies for fiscal 1999 and 2000, the IRS’ s adjustments, if sustained, would reduce tax refund
claims HP has filed for foreign tax credit and net operating loss carrybacks to earlier fiscal years and reduce the tax benefits
of carryforwards to subsequent years, by approximately $361 million. HP plans to contest certain of the adjustments
proposed in the Notice of Deficiency and the RAR. Towards this end, HP filed a Petition with the United States Tax Court on
September 25, 2007. HP believes that it has provided adequate reserves for any tax deficiencies or reductions in refund
claims that could result from the IRS actions.
As of October 31, 2007, the IRS was in the process of concluding its examination of HP’ s income tax returns for years
2002 and 2003. The IRS began an audit of HP’ s 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.
During fiscal 2007 substantially all of the remaining tax accruals for Compaq were reclassified as a reduction of goodwill
upon closing of the statute of limitations.
HP has not provided for U.S. federal income and foreign withholding taxes on $7.7 billion of undistributed earnings
from non-U.S. operations as of October 31, 2007 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.
American Jobs Creation Act of 2004—Repatriation of Foreign Earnings
The American Jobs Creation Act of 2004 (“the Jobs Act”), enacted on October 22, 2004, provided for a temporary 85%
dividends received deduction on certain foreign earnings repatriated during a one-year period. The deduction resulted 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 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
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