McKesson 2008 Annual Report Download - page 92

McKESSON CORPORATION
FINANCIAL NOTES (Continued)
85
In 2007, we recorded a credit to current income tax expense of $83 million, which primarily pertained to our
receipt of a private letter ruling from the IRS holding that our payment of approximately $960 million to settle our
Consolidated Securities Litigation Action (refer to Financial Note 17, “Other Commitments and Contingent
Liabilities”) is fully tax-deductible. We previously established tax reserves to reflect the lack of certainty regarding
the tax deductibility of settlement amounts paid in the Consolidated Securities Litigation Action and related
litigation. In 2007, we also recorded $24 million in income tax benefits arising primarily from settlements and
adjustments with various taxing authorities and research and development investment tax credits from our Canadian
operations.
In 2006, we made a $960 million payment into an escrow account relating to the Consolidated Securities
Litigation Action. This payment was deducted in our 2006 income tax returns and as a result, our current tax
expense decreased and our deferred tax expense increased in 2006 primarily reflecting the utilization of the deferred
tax assets associated with the Consolidated Securities Litigation Action. In 2006, we also recorded a $14 million
income tax expense, which primarily related to a basis adjustment in an investment and adjustments with various
taxing authorities.
Significant judgments and estimates are required in determining the consolidated income tax provision.
Although our major taxing jurisdictions are the U.S. and Canada, we are subject to income taxes in numerous
foreign jurisdictions. Annually, we file a federal consolidated income tax return with the IRS, and over 1,100
returns with various state and foreign jurisdictions. Our income tax expense, deferred tax assets and liabilities
reflect management’ s best assessment of estimated future taxes to be paid.
The reconciliation between the Company’ s effective tax rate on income from continuing operations and the
statutory tax rate is as follows:
Years Ended March 31,
(In millions) 2008 2007 2006
Income tax provision at federal statutory rate $ 510 $ 454 $ 410
State and local income taxes net of federal tax benefit 43 34 34
Foreign tax rate differential (126) (109) (74)
Securities Litigation reserve - (83) 3
Unrecognized tax benefits and settlements 31 44 30
Nondeductible/nontaxable items 11 3 1
Other—net (1) (14) 22
Income tax provision $ 468 $ 329 $ 426
At March 31, 2008, undistributed earnings of our foreign operations totaling $1,450 million were considered to
be permanently reinvested. No deferred tax liability has been recognized for the remittance of such earnings to the
U.S. since it is our intention to utilize those earnings in the foreign operations as well as to fund certain research and
development activities for an indefinite period of time, or to repatriate such earnings when it is tax efficient to do so.
The determination of the amount of deferred taxes on these earnings is not practicable because the computation
would depend on a number of factors that cannot be known until a decision to repatriate the earnings is made.