Medtronic 2012 Annual Report Download - page 122

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Medtronic, Inc.
Notes to Consolidated Financial Statements (Continued)
105
The Company had $917 million, $769 million, and $538 million of gross unrecognized tax benefits as of
April 27, 2012, April 29, 2011, and April 30, 2010, respectively. A reconciliation of the beginning and ending
amount of unrecognized tax benefits for fiscal years 2012, 2011, and 2010 is as follows:
Fiscal Year
__________________________________________
(in millions) 2012 2011 2010
___________ ___________ ___________ ___________
Gross unrecognized tax benefits at beginning of fiscal year . . $ 769 $ 538 $ 431
Gross increases:
Prior year tax positions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 151 51
Current year tax positions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171 172 74
Gross decreases:
Prior year tax positions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (53) (57) (14)
Settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4) (32) (4)
Statute of limitation lapses . . . . . . . . . . . . . . . . . . . . . . . . . . . (13) (3) –
___________ ___________ ___________
Gross unrecognized tax benefits at end of fiscal year . . . . . . . $ 917 $ 769 $ 538
___________ ___________ ___________
___________ ___________ ___________
If all of the Company’s unrecognized tax benefits as of April 27, 2012, April 29, 2011, and April 30, 2010
were recognized, $858 million, $685 million, and $459 million would impact the Company’s effective tax
rate, respectively. Although the Company believes that it has adequately provided for liabilities resulting
from tax assessments by taxing authorities, positions taken by these tax authorities could have a material
impact on the Company’s effective tax rate in future periods. The Company has recorded the gross
unrecognized tax benefits as a long-term liability, as it does not expect significant payments to occur or the
total amount of unrecognized tax benefits to change significantly over the next 12 months.
The Company recognizes interest and penalties related to income tax matters in the provision for
income taxes in the consolidated statements of earnings and records the liability in the current or long-term
accrued income taxes in the consolidated balance sheets, as appropriate. The Company had $120 million,
$80 million, and $94 million of accrued gross interest and penalties as of April 27, 2012, April 29, 2011, and
April 30, 2010, respectively. During the fiscal years ended April 27, 2012, April 29, 2011, and April 30, 2010,
the Company recognized interest expense, net of tax benefit, of approximately $23 million, $12 million, and
$14 million in the provision for income taxes in the consolidated statements of earnings, respectively.
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 the Company’s allocation
are required between jurisdictions with different tax rates. Tax authorities periodically review the Company’s
tax returns and propose adjustments to the Company’s tax filings. The IRS has settled its audits with the
Company for all years through fiscal year 2004. 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.
In September 2005, the IRS issued its audit report for fiscal years 2000, 2001, and 2002. In addition,
the IRS issued its audit report for fiscal years 2003 and 2004 in March 2007. During October 2011, the
Company reached agreement with the IRS on all remaining final proposed adjustments for fiscal years 2000
through 2004.
In March 2009, the IRS issued its audit report for fiscal years 2005 and 2006. The Company reached
agreement with the IRS on some but not all matters related to these fiscal years. The unresolved significant
issues that remain outstanding relate to the allocation of income between Medtronic, Inc. and its wholly-
owned subsidiary operating in Puerto Rico, which is one of the Company’s key manufacturing sites, as well
as the timing of the deductibility of a settlement payment. On December 23, 2010, the IRS issued a statutory
notice of deficiency with respect to the remaining issues. The Company filed a Petition with the U.S. Tax
Court on March 21, 2011 objecting to the deficiency. The Company is currently in settlement discussions with
the IRS as it relates to the outstanding issues; however, a settlement has not yet been reached.
In October 2011, the IRS issued its audit report for fiscal years 2007 and 2008. The Company reached
agreement with the IRS on some but not all matters related to these fiscal years. The significant issues that
remain unresolved relate to the allocation of income between Medtronic, Inc. and its wholly-owned