HP 2009 Annual Report Download - page 138

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 14: Taxes on Earnings (Continued)
HP recognizes interest income from favorable settlements and income tax receivables and interest
expense and penalties accrued on unrecognized tax benefits within income tax expense. As of
October 31, 2009, HP had accrued a net $115 million payable for interest and penalties. During fiscal
2009, HP recognized net interest income on tax overpayments and deficiencies, net of tax, of
$40 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 $120 million within the next twelve months.
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. In addition, HP is subject to
numerous ongoing audits by state and foreign tax authorities. HP has received from the IRS Notices of
Deficiency for its fiscal 1999, 2000, 2003, 2004 and 2005 tax years, and Revenue Agent’s Reports
(‘‘RARs’’) for its fiscal 2001 and 2002 tax years. The IRS began an audit of HP’s 2006 and 2007
income tax returns in 2009. With respect to major foreign and state tax jurisdictions, HP is no longer
subject to tax authority examinations for years prior to 1999. HP believes that adequate reserves have
been provided for all open tax years.
On July 30, 2009, HP received a Notice of Deficiency from the IRS for its fiscal 2004 and 2005 tax
years. The Notice of Deficiency asserted that HP owes additional tax of $92 million and penalties of
$5 million. In addition to the proposed deficiency for fiscal 2004 and 2005, the IRS’s adjustments for
both years, if sustained, would reduce the tax benefits of net operating loss and tax credit carryforwards
to subsequent years by approximately $563 million. HP plans to contest certain of the adjustments
proposed in the Notice of Deficiency. HP believes that it has provided adequate reserves for any tax
deficiencies or reductions in tax benefits that could result from the IRS actions.
Tax years of EDS through 2002 have been audited by the IRS, and all proposed adjustments have
been resolved. The IRS is currently auditing EDS’s tax years 2005 and 2006. On December 5, 2008,
EDS received a RAR for exam years 2003 and 2004, proposing a tax deficiency of $82 million. This
deficiency includes a $12 million effect on carrybacks to 2000 and 2001. HP is appealing certain issues
and believes adequate reserves have been provided for all 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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