Pfizer 2006 Annual Report Download - page 50

48 2006 Financial Report
Notes to Consolidated Financial Statements
Pfizer Inc and Subsidiary Companies
The increase in domestic income from continuing operations
before taxes in 2006 compared to 2005 is due primarily to IPR&D
charges in 2005 of $1.7 billion, primarily related to our acquisitions
of Vicuron and Idun, the Bextra impairment and changes in
product mix, among other factors, partially offset by IPR&D
charges recorded in 2006 of $835 million, primarily related to our
acquisitions of Rinat and PowderMed, and a 2006 charge of $320
million related to the impairment of the Depo-Provera intangible
asset.
The decrease in domestic income from continuing operations
before taxes in 2005 compared to 2004 is due primarily to IPR&D
charges in 2005 of $1.7 billion, related to our acquisitions of
Vicuron and Idun, the Bextra impairment, changes in product mix
and adverse changes in product volume, among other factors,
partially offset by IPR&D charges recorded in 2004 of $1.1 billion,
primarily related to our acquisition of Esperion.
The provision for taxes on income from continuing operations
before minority interests and the cumulative effect of a change
in accounting principles consists of the following:
YEAR ENDED DEC. 31,
_____________________________________________________
(MILLIONS OF DOLLARS) 2006 2005 2004
United States:
Taxes currently payable:
Federal $ 1,399 $ 2,572 $ 2,273
State and local 205 108 340
Deferred income taxes (1,371) (1,295) (1,521)
Total U.S. tax provision 233 1,385 1,092
International:
Taxes currently payable 1,913 1,963 1,599
Deferred income taxes (154) (170) (231)
Total international tax
provision 1,759 1,793 1,368
Total provision for taxes
on income
(a)
$ 1,992 $ 3,178 $ 2,460
(a)
Excludes federal, state and international benefits of approximately
$119 million in 2006, $127 million in 2005 and nil in 2004, primarily
related to the resolution of certain tax positions related to
Pharmacia, which were credited to Goodwill.
In 2006, we were notified by the Internal Revenue Service (IRS)
Appeals Division that a resolution had been reached on the
matter that we were in the process of appealing related to the
tax deductibility of an acquisition-related breakup fee paid by the
Warner-Lambert Company in 2000. As a result, we recorded a tax
benefit of approximately $441 million related to the resolution
of this issue (see Note 7D. Taxes on Income: Tax Contingencies).
Also in 2006, we recorded a decrease to the 2005 estimated U.S.
tax provisions related to the repatriation of foreign earnings, due
primarily to the receipt of information that raised our assessment
of the likelihood of prevailing on the technical merits of a certain
position, and we recognized a tax benefit of $124 million.
Additionally, in 2006, the IRS issued final regulations on Statutory
Mergers and Consolidations, which impacted certain prior-period
transactions, and we recorded a tax benefit of $217 million,
reflecting the total impact of these regulations.
In 2005, we recorded an income tax charge of $1.7 billion, included
in Provision for taxes on income, in connection with our decision
to repatriate approximately $37 billion of foreign earnings in
accordance with the American Jobs Creation Act of 2004 (the Jobs
Act). The Jobs Act created a temporary incentive for U.S.
corporations to repatriate accumulated income earned abroad by
providing an 85% dividend-received deduction for certain
dividends from controlled foreign corporations, subject to various
limitations and restrictions including qualified U.S. reinvestment
of such earnings. In addition, in 2005, we recorded a tax benefit
of $586 million related to the resolution of certain tax positions
(see Note 7D. Taxes on Income: Tax Contingencies).
Amounts reflected in the preceding tables are based on the
location of the taxing authorities. As of December 31, 2006, we
have not made a U.S. tax provision on approximately $41 billion
of unremitted earnings of our international subsidiaries. As of
December 31, 2006, these earnings are intended to be
permanently reinvested overseas. Because of the complexity, it is
not practical to compute the estimated deferred tax liability on
these permanently reinvested earnings.
B. Tax Rate Reconciliation
Reconciliation of the U.S. statutory income tax rate to our effective
tax rate for continuing operations before the cumulative effect
of a change in accounting principles follows:
YEAR ENDED DEC. 31,
__________________________________________________
2006 2005 2004
U.S. statutory income tax rate 35.0% 35.0% 35.0%
Earnings taxed at other than
U.S. statutory rate (15.7) (20.6) (19.0)
Resolution of certain tax
positions (3.4) (5.4) —
Tax legislation impact (1.7) ——
U.S. research tax credit (0.5) (0.8) (0.6)
Repatriation of foreign
earnings (1.0) 15.4 —
Acquired IPR&D 2.2 5.4 2.8
All other—net 0.4 0.4 0.2
Effective tax rate for income
from continuing operations
before cumulative effect of
a change in accounting
principles 15.3% 29.4% 18.4%
We operate manufacturing subsidiaries in Puerto Rico and Ireland.
We benefit from Puerto Rican incentive grants that expire
between 2013 and 2023. Under the grants, we are partially
exempt from income, property and municipal taxes. Under Section
936 of the U.S. Internal Revenue Code, Pfizer was a
“grandfathered” entity and was entitled to the benefits under
such statute until September 30, 2006. In Ireland, we benefit
from an incentive tax rate effective through 2010 on income
from manufacturing operations.
The U.S. research tax credit is effective through December 31, 2007.
For a discussion about the repatriation of foreign earnings and
the tax legislation impact, see Note 7A. Taxes on Income: Taxes
on Income. For a discussion about the resolution of certain tax
positions, see Note 7D. Taxes on Income: Tax Contingencies. The
charges for acquired IPR&D in 2006, 2005 and 2004 are not
deductible.