HP 2010 Annual Report Download - page 134

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 14: Taxes on Earnings (Continued)
HP engages in continuous discussion and negotiation with taxing authorities regarding tax matters
in 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 federal, 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 $442 million within the next 12 months.
HP is subject to income tax in the United States and approximately 80 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
(‘‘RAR’’) for its fiscal 2001, 2002 and 2006 tax years. The IRS began an audit of HP’s 2007 income tax
returns in 2009, and began its audit of HP’s 2008 income tax returns during 2010. 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 accruals 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, 2006, 2007 and the short period
ended August 26, 2008. 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 an 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.
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 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
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