Medtronic 2009 Annual Report Download - page 40

36 Medtronic, Inc.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations
(continued)
Income Taxes
Fiscal Year
Percentage Point
Increase/
(Decrease)
(dollars in millions) 2009 2008 2007 FY09/08 FY08/07
Provision for income
taxes $425 $654 $713 N/A N/A
Effective tax rate 16.4% 22.7% 20.3% (6.3) 2.4
Impact of special,
restructuring,
certain litigation
and IPR&D charges
and certain tax
adjustments (4.5) 1.7 (3.9) (6.2) 5.6
Non-GAAP nominal
tax rate(1) 20.9% 21.0% 24.2% (0.1) (3.2)
(1) Non-GAAP nominal tax rate is defined as the income tax provision as a
percentage of earnings before income taxes, excluding special, restructuring,
certain litigation and IPR&D charges and certain tax adjustments. We believe
that the resulting non-GAAP financial measure provides useful information to
investors because it excludes the effect of these discrete items so that investors
can compare our recurring results over multiple periods.
The effective tax rate of 16.4 percent decreased by 6.3
percentage points from fiscal year 2008 to fiscal year 2009. The
change in our effective tax rate was primarily due to the impact
of special, restructuring, certain litigation and IPR&D charges and
certain tax adjustments. The 6.2 percentage points decrease
in the impact from special, restructuring, certain litigation and
IPR&D charges and certain tax adjustments is largely due to the
$132 million benefit from the certain tax adjustment associated
with the reversal of excess tax accruals in connection with the
settlement of certain issues reached with the U.S. Internal Revenue
Service (IRS) involving the review of the Company’s fiscal year
2005 and fiscal year 2006 domestic income tax returns, the
resolution of various state audit proceedings covering fiscal years
1997 through 2007 and the completion of foreign audits covering
various years recorded in fiscal year 2009. Our non-GAAP nominal
tax rate for fiscal year 2009 was 20.9 percent compared to
21.0 percent from the prior fiscal year. The decrease in our non-
GAAP nominal tax rate for fiscal year 2009 as compared to the
prior fiscal year was due to the impact of tax benefits derived
from our international operations and operational tax benefits
described below.
During fiscal year 2009, we recorded $44 million in operational
tax benefits. This included a $16 million operational tax benefit
associated with the retroactive renewal and extension of the
research and development credit enacted by the Tax Extenders
and Alternative Minimum Tax Relief Act of 2008 which related
to the first seven months of calendar year 2008. The remaining
$28 million of operational tax benefit related to the finalization
of certain tax returns, changes to uncertain tax position reserves
and the impact of a state law change in 2009. During fiscal year
2008, we recorded $37 million in operational tax benefits related
to the finalization of certain tax returns and changes to uncertain
tax position reserves. These tax adjustments are operational in
nature and are recorded in the provision for income taxes on the
consolidated statements of earnings. Excluding the impact of the
operational tax adjustments, our non-GAAP nominal tax rate
would have been 22.0 percent for fiscal years 2009 and 2008.
The fiscal year 2008 effective tax rate of 22.7 percent increased
by 2.4 percentage points from fiscal year 2007. The change in our
effective tax rate was due to the tax impact of special, restructuring,
certain litigation and IPR&D charges and certain tax adjustments
partially offset by the tax benefits derived from our international
operations. The 5.6 percentage points increase in the tax impact
from special, restructuring, certain litigation and IPR&D charges
and certain tax adjustments is largely due to the non-deductible
IPR&D charges incurred during fiscal year 2008 compared to the
$129 million benefit from the certain tax adjustment recorded in
fiscal year 2007 associated with the reversal of excess tax accruals
in connection with the settlement reached with the IRS with
respect to their review of our fiscal years 2003 and 2004 domestic
income tax returns and the resolution of competent authority
issues for fiscal years 1992 through 2000. Our non-GAAP nominal
tax rate for fiscal year 2008 was 21.0 percent compared to 24.2
percent from the prior fiscal year. The decrease in the non-GAAP
nominal tax rate of 3.2 percentage points is mainly due to
increased benefits from our international operations subject to
tax rates lower than the U.S. statutory rates.
Tax audits associated with the allocation of income, and other
complex issues, may require an extended period of time to resolve
and may result in income tax adjustments if changes to our
allocation are required between jurisdictions with different tax
rates. Tax authorities periodically review our tax returns and
propose adjustments to our tax filings. The IRS has settled its
audits with us for all years through fiscal year 1996. Tax years
settled with the IRS may remain open for foreign tax audits
and competent authority proceedings. Competent authority
proceedings are a means to resolve intercompany pricing
disagreements between countries.