IBM 2015 Annual Report Download - page 124

Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
122
Deferred Tax Liabilities
($ inmillions)
At December 31: 2015 2014
Depreciation $ 919 $ 487
Retirement benefi ts 252 205
Goodwill and intangible assets 1,407 1,263
Leases 916 912
Software development costs 554 421
Deferred transition costs 395 374
Other 1,177 1,111
Gross deferred tax liabilities $5,620 $4,773
For income tax return purposes, the company has foreign and
domestic loss carryforwards, the tax effect of which is $742million,
as well as domestic and foreign credit carryforwards of $1,149mil-
lion. Substantially all of these carryforwards are available for at
least two years or are available for 10years or more.
The valuation allowances as of December31, 2015, 2014 and
2013 were $740million, $646million and $734million, respectively.
The amounts principally apply to certain foreign, state and local
loss carryforwards and credits that, in the opinion of management,
are more likely than not to expire unutilized. However, to the extent
that tax benefits related to these carryforwards 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, 2015
decreased by $530million in 2015 to $4,574 million. A reconciliation
of the beginning and ending amount of unrecognized tax benefits
is as follows:
($ inmillions)
2015 2014 2013
Balance at January1 $ 5,104 $4,458 $ 5,672
Additions based on tax positions
related to the current year 464 697 829
Additions for tax positions
of prior years 569 586 417
Reductions for tax positions
of prior years (including impacts
due to a lapse in statute) (1,348) (579) (2,201)
Settlements (215) (58) (259)
Balance at December 31 $ 4,574 $5,104 $ 4,458
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 and state issues. The settlements and
reductions to unrecognized tax benefits for tax positions of prior
years are primarily attributable to the completion of the IRS exam-
ination for 2011 and 2012, currency, non-U.S. audits and impacts
due to lapses in statutes of limitation.
In April 2010, the company appealed the determination of the
Japan Tax Authorities with respect to certain foreign tax losses.
The unrecognized tax benefit of these losses totals $997million
as of December31, 2015. In April 2011, the company received noti-
fication that the appeal was denied, and in June 2011, the company
filed a lawsuit challenging this decision. In May 2014, the Tokyo
District Court ruled in favor of the company. The Japanese govern-
ment appealed the ruling to the Tokyo High Court. In March 2015,
the Tokyo High Court ruled in favor of the company and, in April
2015, the Japanese government appealed the ruling to the Japan
Supreme Court. See Note U, “Subsequent Event,” for an update
on this matter.
The liability at December31, 2015 of $4,574 million can be
reduced by $850million of offsetting tax benefits associated with
the correlative effects of potential transfer pricing adjustments, U.S.
tax credits, state income taxes and timing adjustments. The net
amount of $3,724 million, if recognized, would favorably affect the
company’s effective tax rate. The net amounts at December31,
2014 and 2013 were $4,229 million and $3,902 million, respectively.
Interest and penalties related to income tax liabilities are
included in income tax expense. During the year ended Decem-
ber31, 2015, the company recognized $141million in interest
expense and penalties; in 2014, the company recognized $216mil-
lion in interest expense and penalties; and, in 2013, the company
recognized a benefit of $93million in interest expense and pen-
alties. The company has $613million for the payment of interest
and penalties accrued at December31, 2015, and had $593million
accrued at December31, 2014.
Within the next 12 months, the company believes it is reason-
ably possible that the total amount of unrecognized tax benefits
associated with certain positions may be reduced as certain
foreign issues may be concluded. The company estimates that
the unrecognized tax benefits at December31, 2015 could be
reduced by approximately $413million excluding the Japan matter
discussed above.
The company is subject to taxation in the U.S. and various
state and foreign jurisdictions. With respect to major U.S. state
and foreign taxing jurisdictions, the company is generally no
longer subject to tax examinations for years prior to 2011. With
limited exception, the company is no longer subject to income tax
examination of its U.S. federal tax return for years prior to 2013.
The open years 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 com-
pany believes that adequate amounts of tax and interest have been
provided for any significant adjustments that are expected to result
for these years.
In the fourth quarter of 2013, the company received a draft tax
assessment notice for approximately $866million (approximately
$810million at 2015 year-end currency rates) from the Indian
Tax Authorities for 2009. The company believes it will prevail on
these matters and that this amount is not a meaningful indicator