IBM 2012 Annual Report Download - page 116

Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
115
In April 2010, the company appealed the determination of a non-
U.S. taxing authority with respect to certain foreign tax losses. The
tax benefit of these losses, approximately $1,475 million, had been
included in unrecognized tax benefits within 2010 additions for tax
positions of prior years. The tax benefit of these losses total $1,386
million as of December 31, 2012. The 2012 decrease was driven by
currency and has been included in the 2012 reductions for tax posi-
tions of prior years. In April 2011, the company had received
notification that the appeal was denied. In June 2011, the company
filed a lawsuit challenging this decision. The next court hearing is
scheduled for March 2013. No final determination has been reached
on this matter.
The liability at December 31, 2012 of $5,672 million can be
reduced by $573 million of offsetting tax benefits associated with the
correlative effects of potential transfer pricing adjustments, state
income taxes and timing adjustments. The net amount of $5,099
million, if recognized, would favorably affect the company’s effective
tax rate. The net amounts at December 31, 2011 and 2010 were
$5,090 million and $4,849 million, respectively.
Interest and penalties related to income tax liabilities are included
in income tax expense. During the year ended December 31, 2012,
the company recognized $134 million in interest expense and penalties;
in 2011, the company recognized $129 million in interest expense and
penalties, and in 2010, the company recognized a $15 million ben-
efit in interest expense and penalties. The company has $533 million
for the payment of interest and penalties accrued at December 31,
2012, and had $461 million accrued at December 31, 2011.
Within the next 12 months, the company believes it is reasonably
possible that the total amount of unrecognized tax benefits associ-
ated with certain positions may be significantly reduced. The
potential decrease in the amount of unrecognized tax benefits is
primarily associated with the anticipated resolution of the com-
pany’s U.S. income tax audit for 2008 through 2010, as well as
various non-U.S. audits. Specific positions that may be resolved,
and may reduce the amount of unrecognized tax benefits, include
transfer pricing matters, tax incentives and credits as well as vari-
ous other foreign tax matters. The company estimates that the
unrecognized tax benefits at December 31, 2012 could be reduced
by approximately $1,700 million.
With limited exception, the company is no longer subject to U.S.
federal, state and local or non-U.S. income tax audits by taxing
authorities for years through 2007. The years subsequent to 2007
contain matters that could be subject to differing interpretations of
applicable tax laws and regulations related to the amount and/or
timing of income, deductions and tax credits. Although the outcome
of tax audits is always uncertain, the company believes that ade-
quate amounts of tax and interest have been provided for any
adjustments that are expected to result for these years.
The company has not provided deferred taxes on $44.4 billion
of undistributed earnings of non-U.S. subsidiaries at December 31,
2012, as it is the company’s policy to indefinitely reinvest these earn-
ings in non-U.S. operations. However, the company periodically
repatriates a portion of these earnings to the extent that it does not
incur an additional U.S. tax liability. Quantification of the deferred tax
liability, if any, associated with indefinitely reinvested earnings is not
practicable.
Note O.
Research, Development
and Engineering
RD&E expense was $6,302 million in 2012, $6,258 million in 2011
and $6,026 million in 2010.
The company incurred expense of $6,034 million, $5,990 million
and $5,720 million in 2012, 2011 and 2010, respectively, for scientific
research and the application of scientific advances to the develop-
ment of new and improved products and their uses, as well as
services and their application. Within these amounts, software-
related expense was $3,078 million, $3,097 million and $3,028
million in 2012, 2011 and 2010, respectively.
Expense for product-related engineering was $268 million,
$267 million and $306 million in 2012, 2011 and 2010, respectively.