IBM 2005 Annual Report Download - page 81
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NotestoConsolidatedFinancialStatements
INTERNATIONALBUSINESSMACHINESCORPORATION ANDSUBSIDIARYCOMPANIES
80_ NotestoConsolidatedFinancialStatements
Thevaluation allowance atDecember31, 2005,principally
appliesto certainforeign, stateandlocal,andcapital losscarry-
forwardsthat,intheopinionofmanagement,aremorelikelythan
nottoexpireunutilized.However,to theextentthattaxbenefits
relatedtothesecarryforwardsarerealizedinthefuture,thereduc-
tion inthevaluationallowancewillreduceincometaxexpense.
Forincometaxreturnpurposes,thecompanyhasforeign,
stateandlocal,andcapitallosscarryforwards,thetaxeffectof
which is $662 million. Substantially all of these carryforwards
areavailableforatleastthreeyearsorhaveanindefinitecarry-
forward period. The company also has available alternative
minimum taxcreditcarryforwardsofapproximately$214million
whichhaveanindefinitecarryforwardperiod.
Withlimitedexception,thecompanyisnolongersubjectto
U.S. federal, stateandlocalornon-U.S.incometaxauditsbytax
authoritiesforyearsbefore1999.Theyearssubsequentto1998
containmattersthatcouldbesubjecttodifferinginterpretations
ofapplicabletaxlawsandregulationsasitrelatestotheamount
and/ortimingofincome,deductionsand tax credits.Although
the outcome of tax audits is always uncertain, the company
believesthatadequateamounts of taxandinteresthavebeen
provided for any adjustments that are expected to result for
theseyears.
TheIRScommenceditsauditofthecompany’sU.S.income
taxreturnsfor2001 through2003inthefirstquarterof2005.Asof
December 31, 2005, the IRS has not proposed any significant
adjustments.Thecompanyanticipatesthatthisauditwillbecom-
pletedbytheendof2006.Whileitisnotpossibletopredictthe
impact ofthisaudit onincome tax expense, the companydoes
notanticipatehavingtomakeasignificantcashtaxpayment.
On October 22, 2004, the President signed the American
JobsCreationActof2004(the“Act”).TheActcreated atempo-
raryincentiveforthecompanytorepatriateearningsaccumu-
lated outside the U.S. by allowing the company to reduce its
taxable income by 85 percent of certain eligible dividends
receivedfromnon-U.S.subsidiariesbytheendof2005.Inorder
to benefit from this incentive, the company must reinvest the
qualifyingdividendsintheU.S.underadomesticreinvestment
planapprovedbythe Chief Executive Officer (CEO) and Board
of Directors (BOD). Duringthe thirdquarter of 2005,the com-
pany’sCEOandBODapprovedadomesticreinvestmentplanto
repatriate $9.5 billion of foreign earnings under the Act.
Accordingly, the company recorded income tax expense of
$525millionassociatedwiththisrepatriation.Theadditionaltax
expenseconsistsoffederaltaxes($493million),statetaxes,net
offederalbenefit($22million)andnon-U.S.taxes($10million).
Therepatriationaction resulted inacashtax liability ofapproxi-
mately$225 millionandtheutilizationofexistingalternativemin-
imumtaxcredits.
Thecompanyrepatriated$3.1 billionundertheActinthethird
quarterandtheremaining$6.4billioninthefourthquarterof2005.
Uses of the repatriated funds included domestic expenditures
relatingtoresearchanddevelopment,capitalassetinvestments,
aswellasotherpermittedactivitiesundertheAct.
Thecompanyhasnotprovideddeferredtaxeson$10.1 bil-
lion of undistributed earnings of non-U.S. subsidiaries at
December31,2005,asitisthecompany’spolicytoindefinitely
reinvest these earnings in non-U.S. operations. However, the
companyperiodicallyrepatriatesaportionoftheseearningsto
the extent that it does not incur an additional U.S. tax liability.
Quantificationofthedeferredtaxliability,ifany,associatedwith
indefinitelyreinvestedearningsisnotpracticable.
Foradditionalinformationonthetrendsrelatedtothecom-
pany’songoing effectivetaxrate,aswellasthecompany’scash
tax position, refer to the “Looking Forward” section of the
ManagementDiscussiononpages 37 and38.
Q.Research,DevelopmentandEngineering
RD&E expense was $5,842 million in 2005, $5,874 million in
2004and$5,314millionin2003.
The company incurred expense of $5,379 million in 2005,
$5,339 million in 2004 and $4,814 million in 2003 for scientific
researchandtheapplicationofscientificadvancestothedevel-
opmentofnewandimprovedproductsandtheiruses,aswellas
services and their application. Of these amounts, software-
relatedexpensewas$2,689 million,$2,626millionand$2,393
million in 2005, 2004 and 2003, respectively. Included in the
expensewasachargeof$1 millionand$9millionin 2005and
2003,respectively, foracquiredin-processR&D.
Expense for product-related engineering was $463 million,
$535millionand$500millionin2005,2004and2003,respectively.
R.2005Actions
InMay2005,managementannounceditsplanstoimplementa
series of restructuring actions designed to improve the com-
pany’s efficiencies, strengthen its client-facing operations and
capture opportunities in high-growth markets. The company’s
actions primarily included voluntary and involuntary workforce
reductions, with the majority impacting the Global Services
segment,primarilyinEurope,aswellascostsincurredincon-
nectionwiththevacatingofleasedfacilities.Theseactionswere
inadditiontothecompany’s ongoing workforcereductionand
rebalancingactivitiesthatoccureachquarter.Thetotalcharges
expectedto be incurred in connection withallsecond-quarter
2005initiativesisapproximately$1,799million($1,776millionof
which has been recorded cumulatively through December 31,
2005)andtheseinitiativesareexpectedtobecompletedwithin
one year. Approximately $1,625 million of the total charges
require cash payments, of which approximately $1,066 million
havebeenmadeasofDecember31,2005and$391 millionare
expectedtobemadeoverthenext 12 months.