HP 2008 Annual Report Download - page 136

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 13: Taxes on Earnings (Continued)
The total amount of gross unrecognized tax benefits was $2.3 billion as of October 31, 2008, of
which up to $680 million would affect HP’s effective tax rate if realized. A reconciliation of the
beginning and ending amount of unrecognized tax benefits is as follows:
Balance at November 1, 2007 .................................. $2,271
Increases:
For current year’s tax positions .............................. 101
For prior years’ tax positions ................................ 739
Decreases:
For prior years’ tax positions ................................ (751)
Statute of limitations expiration ............................. (16)
Settlements with taxing authorities ........................... (11)
Balance at October 31, 2008 ................................... $2,333
HP recognizes interest expense and penalties accrued on unrecognized tax benefits within income
tax expense. This policy did not change as a result of adoption of FIN 48. In addition, upon adoption
of FIN 48, HP began recognizing interest income from favorable settlements and income tax
receivables within income tax expense. As of the date of adoption of FIN 48, HP had accrued a net
$28 million payable for interest and penalties. As of October 31, 2008, HP had accrued a net
$20 million receivable for interest and penalties. During fiscal 2008, HP recognized net interest income
on tax overpayments and deficiencies, net of tax, of $34 million.
HP engages in continuous discussion and negotiation with taxing authorities regarding tax matters
in the various jurisdictions. HP does not expect complete resolution of any IRS audit cycle within the
next 12 months. However, it is reasonably possible that certain foreign and state tax issues may be
concluded in the next 12 months, including issues involving transfer pricing and other matters.
Accordingly, HP believes it is reasonably possible that its existing unrecognized tax benefits may be
reduced by an amount up to $340 million within the next twelve months. With respect to major foreign
and state tax jurisdictions, HP is no longer subject to tax authority examinations for years prior to 1999.
HP is subject to income tax in the United States and over sixty foreign countries and is subject to
routine corporate income tax audits in many of these jurisdictions. As described below, HP has received
from the IRS Notices of Deficiency for its fiscal 1999, 2000 and 2003 tax years and Revenue Agent’s
Reports (‘‘RAR’s’’) for its fiscal 2001 and 2002 tax years.
On January 30, 2008, HP received a Notice of Deficiency from the IRS for its fiscal 2003 tax year.
The Notice of Deficiency asserted that HP owes additional tax of $21 million. At the same time, HP
received a RAR from the IRS for its fiscal 2002 tax year that proposed no change in HP’s tax liability
for that year. In addition to the proposed deficiency for fiscal 2003, the IRS’s adjustments for both
years, if sustained, would reduce tax refund claims HP has filed for net operating loss carrybacks to
earlier fiscal years and reduce the tax benefits of tax credit carryforwards to subsequent years, by
approximately $249 million. This amount reflects certain transfer pricing adjustments that were settled
during fiscal 2008. HP plans to contest certain remaining adjustments proposed in the Notice of
Deficiency and the RAR. Towards this end, HP filed a petition with the United States Tax Court on
April 29, 2008. HP believes that it has provided adequate reserves for any tax deficiencies or reductions
in refund claims that could result from the IRS actions.
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