IBM 2013 Annual Report Download - page 123

Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
122
The significant components reflected within the tax rate reconcili-
ation labeled “Foreign tax differential” include the effects of foreign
subsidiaries’ earnings taxed at rates other than the U.S. statutory
rate, foreign export incentives, the U.S. tax impacts of non-U.S.
earnings repatriation and any net impacts of intercompany trans-
actions. These items also reflect audit settlements or changes in
the amount of unrecognized tax benefits associated with each of
these items.
In the fourth quarter of 2013, the Internal Revenue Service (IRS)
concluded its examination of the company’s income tax returns for
2008 through 2010 and issued a final Revenue Agent Report (RAR).
The company agreed with all of the adjustments. The company has
redetermined its unrecognized tax benefits, including similar items
in open tax years, based on the agreed adjustments in the RAR and
associated information and analysis.
The 2013 effective tax rate benefitted by 11.5 points from the
completion of the IRS examination discussed above including associ-
ated reserve redeterminations. In addition, the effective tax rate also
benefitted from the company’s geographic mix of pre-tax income and
incentives, the impact of foreign tax credits, benefits realized during
the year related to the American Taxpayer Relief Act, a favorable tax
agreement which required a reassessment of certain valuation allow-
ances on deferred taxes and certain non-U.S. audit settlements.
These benefits were partially offset by 2013 tax charges related to
certain intercompany payments made by foreign subsidiaries and the
tax costs associated with the intercompany licensing of certain IP.
The effect of tax law changes on deferred tax assets and liabilities
did not have a material impact on the company’s effective tax rate.
The significant components of deferred tax assets and liabilities
that are recorded in the Consolidated Statement of Financial Position
were as follows:
Deferred Tax Assets
($ in millions)
At December 31: 2013 2012*
Retirement benefits $ 3,704 $ 5,870
Share-based and other compensation 1,262 1,666
Domestic tax loss/credit carryforwards 982 954
Deferred income 964 1,018
Foreign tax loss/credit carryforwards 651 681
Bad debt, inventory and warranty reserves 592 586
Depreciation 382 456
Other 1,774 1,659
Gross deferred tax assets 10,311 12,890
Less: valuation allowance 734 1,187
Net deferred tax assets $ 9,577 $11,703
* Reclassified to conform with 2013 presentation.
Deferred Tax Liabilities
($ in millions)
At December 31: 2013 2012*
Depreciation $1,346 $1,378
Retirement benefits 1,219 257
Goodwill and intangible assets 1,173 957
Leases 1,119 2,216
Software development costs 558 542
Deferred transition costs 424 440
Other 841 993
Gross deferred tax liabilities $6,680 $6,783
* Reclassified to conform with 2013 presentation.
For income tax return purposes, the company has foreign and
domestic loss carryforwards, the tax effect of which is $626 million,
as well as domestic and foreign credit carryforwards of $1,007 mil-
lion. Substantially all of these carryforwards are available for at least
two years or are available for 10 years or more.
The valuation allowance at December 31, 2013 principally applies
to certain foreign, state and local loss carryforwards that, in the
opinion of management, are more likely than not to expire unutilized.
However, to the extent that tax benefits related to these carry-
forwards are realized in the future, the reduction in the valuation
allowance will reduce income tax expense.
The amount of unrecognized tax benefits at December 31, 2013
decreased by $1,214 million in 2013 to $4,458 million. A reconciliation
of the beginning and ending amount of unrecognized tax benefits
is as follows:
($ in millions)
2013 2012 2011
Balance at January 1 $ 5,672 $5,575 $5,293
Additions based on tax positions
related to the current year 829 401 672
Additions for tax positions
of prior years 417 215 379
Reductions for tax positions
of prior years (including impacts
due to a lapse in statute) (2,201) (425) (538)
Settlements (259) (94) (231)
Balance at December 31 $ 4,458 $5,672 $5,575
The additions to unrecognized tax benefits related to the current
and prior years are primarily attributable to non-U.S. issues, certain
tax incentives and credits, acquisition-related matters and state
issues. The settlements and reductions to unrecognized tax benefits
for tax positions of prior years are primarily attributable to the com-
pletion of the IRS examination for 2008-2010, non-U.S. audits and
impacts due to lapses in statutes of limitation.
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 totals $1,141 million as of
December 31, 2013. The 2013 decrease was driven by currency