United Technologies 2008 Annual Report Download - page 78

The tax effects of net temporary differences and tax carryforwards which gave rise to future
income tax benefits and payables at December 31, 2008 and 2007 are as follows:
(in millions of dollars) 2008 2007
Future income tax benefits:
Insurance and employee benefits $3,200 $ 755
Other asset basis differences (397) (332)
Other liability basis differences 1,271 1,266
Tax loss carryforwards 683 549
Tax credit carryforwards 1,125 700
Valuation allowance (698) (545)
$5,184 $2,393
Future income taxes payable:
Fixed assets $ 523 $ 630
Other items, net 290 192
$ 813 $ 822
Valuation allowances have been established primarily for tax credit, tax loss carryforwards, and
certain foreign temporary differences to reduce the future income tax benefits to expected
realizable amounts. Of the total valuation allowance amount of $698 million, $278 million was
established in purchase accounting, relating primarily to the purchase of Chubb. Upon the
January 1, 2009 adoption of SFAS 141(R), changes in deferred tax asset valuation allowances
and income tax uncertainties after the acquisition date generally will affect income tax expense
including those associated with acquisitions that closed prior to the effective date of
SFAS 141(R).
The sources of income from continuing operations before income taxes and minority
interests are:
(in millions of dollars) 2008 2007 2006
United States $2,899 $2,786 $2,410
Foreign 4,037 3,598 3,082
$6,936 $6,384 $5,492
U.S. income taxes have not been provided on undistributed earnings of international
subsidiaries. It is not practicable to estimate the amount of tax that might be payable. Our
intention is to reinvest these earnings permanently or to repatriate the earnings only when it is
tax effective to do so. Accordingly, we believe that U.S. tax on any earnings that might be
repatriated would be substantially offset by U.S. foreign tax credits.
Differences between effective income tax rates and the statutory U.S. federal income tax rates
are as follows:
2008 2007 2006
Statutory U.S. federal income tax rate 35.0% 35.0% 35.0%
Tax on international activities (6.9)% (5.2)% (7.8)%
Tax audit settlements (0.8)% (0.6)% (0.6)%
Other (0.2)% (0.4)% 0.6%
Effective income tax rate 27.1% 28.8% 27.2%
The effective tax rates for 2008, 2007 and 2006 reflect the tax benefits associated with lower tax
rates on international earnings, which we intend to permanently reinvest outside the United
States. The 2008 effective tax rate reflects $62 million of tax expense reductions, principally
related to the resolution of disputes with the Appeals Division of the IRS for tax years 2000
through 2003.
The 2007 effective tax rate reflects approximately $80 million of tax expense reductions,
principally relating to re-evaluation of our liabilities and contingencies based upon global
examination activity including IRS completion of 2000 through 2003 examination fieldwork
and related protest filing, and development of claims for research and development tax credits.
Principal adverse tax impacts to the 2007 effective tax rate related to the EU Fine and enacted
tax law changes outside the United States.
In 2006, a residual disputed issue related to the 1999 disposition of a business segment was
settled with the Appeals Division of the IRS and was reviewed by the U.S. Congress Joint
Committee on Taxation. The settlement resulted in an approximately $35 million reduction in
tax expense.
In the normal course of business, various tax authorities examine us, including the IRS. The
IRS examination of tax years 2004 and 2005 is ongoing. Although the outcome of these matters
cannot be currently determined, we believe adequate provision has been made for any
potential unfavorable financial statement impact.
At December 31, 2008, tax credit carryforwards, principally state and federal, were $1,125
million, of which $541 million expire as follows: $23 million expire from 2009–2013, $403
million from 2014–2018, and $115 million from 2019–2028.
At December 31, 2008, tax loss carryforwards, principally state and foreign, were $2,726
million, of which $843 million expire as follows: $452 million from 2009-2013, $151 million
from 2014-2018, and $240 million from 2019-2028.
76 United Technologies Corporation