HP 2014 Annual Report Download - page 132

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 6: Taxes on Earnings (Continued)
HP recognizes interest income from favorable settlements and interest expense and penalties
accrued on unrecognized tax benefits in Provision for taxes in the Consolidated Statements of Earnings.
HP had accrued $254 million and $196 million for interest and penalties as of October 31, 2014 and
October 31, 2013, respectively.
HP engages in continuous discussion and negotiation with taxing authorities regarding tax matters
in various jurisdictions. HP does not expect complete resolution of any U.S. Internal Revenue Service
(‘‘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 $1.4 billion within the next 12 months.
HP is subject to income tax in the U.S. and approximately 105 other 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 federal, state and foreign tax authorities. The IRS is conducting an audit
of HP’s 2009, 2010 and 2011 income tax returns. HP has received from the IRS Notices of Deficiency
for its fiscal 1999, 2000, 2003, 2004 and 2005 tax years, and Revenue Agent Reports (‘‘RAR’’) for its
fiscal 2001, 2002, 2006, 2007 and 2008 tax years. The proposed IRS adjustments for these tax years
would, if sustained, reduce the benefits of tax refund claims HP has filed for net operating loss
carrybacks to earlier fiscal years and tax credit carryforwards to subsequent years by approximately
$445 million. In addition, HP expects the IRS to issue an RAR for 2009 relating to certain tax
positions taken on the filed tax returns, including matters related to the U.S. taxation of certain
intercompany loans. While the RAR may be material in amount, HP believes it has valid positions
supporting its tax returns and, if necessary, it will vigorously defend such matters.
HP has filed petitions with the U.S. Tax Court regarding certain proposed IRS adjustments
regarding tax years 1999 through 2003 and is continuing to contest additional adjustments proposed by
the IRS for other tax years. The U.S. Tax Court ruled in May 2012 against HP regarding one of the
IRS adjustments for which HP has filed a formal Notice of Appeal. The Court proceedings are
expected to begin in fiscal 2015.
Pre-acquisition tax years of HP’s U.S. group of subsidiaries providing enterprise services through
2004 have been audited by the IRS, and all proposed adjustments have been resolved. RARs have been
received for tax years 2005, 2006, 2007 and the short period ended August 26, 2008, proposing total tax
deficiencies of $274 million. HP is contesting certain of these issues.
The IRS began an audit in fiscal 2013 of the 2010 income tax return for HP’s U.S. group of
subsidiaries providing enterprise services, and has issued an RAR for the short period ended October 31,
2008 and the period ending October 31, 2009 proposing a total tax deficiency of $62 million. HP is
contesting certain of these issues.
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 a foreign tax audit concerning an intercompany
transaction for fiscal 2009. The relevant taxing authority has proposed an assessment of approximately
$680 million. HP is contesting this proposed assessment.
HP believes it has provided adequate reserves for all tax deficiencies or reductions in tax benefits
that could result from federal, state and foreign tax audits. HP regularly assesses the likely outcomes of
these audits in order to determine the appropriateness of HP’s tax provision. HP adjusts its uncertain
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