United Technologies 2011 Annual Report Download - page 72

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Climate, Controls & Security and the UTC Propulsion &
Aerospace Systems organizations as described above and
are a component of our ongoing efforts to improve business
efficiency.
The sources of income before income taxes are:
(Dollars in millions) 2011 2010 2009
United States $3,293 $2,655 $2,584
Foreign 4,312 3,883 3,176
$7,605 $6,538 $5,760
With few exceptions, 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 outside the U.S. 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 rate are as follows:
2011 2010 2009
Statutory U.S. federal income tax rate 35.0 % 35.0 % 35.0 %
Tax on international activities (4.3)% (7.6)% (6.9)%
Tax audit settlements (0.8)% —(0.7)%
Other (0.6)% 0.5 % —
Effective income tax rate 29.3 % 27.9 % 27.4 %
The 2011 effective tax rate increased as compared to 2010
due to the absence of the repatriation of high taxed
dividends which had a net favorable impact in 2010. The 2011
effective tax rate reflects approximately $63 million of
favorable income tax adjustments related to the settlement of
two refund claims for years prior to 2004, as well as a
favorable tax impact of $17 million related to a U.K. tax rate
reduction enacted in 2011. These favorable tax adjustments
are partially offset by non-deductible charges accrued in 2011.
The 2010 effective tax rate reflects a non-recurring tax
expense reduction associated with management’s decision to
repatriate additional high tax dividends from the current year
to the U.S. in 2010 as a result of U.S. tax legislation enacted at
the time. This is partially offset by the non-deductibility of
impairment charges, the adverse impact from the health care
legislation related to the Medicare Part D program and other
increases to our effective tax rate.
The 2009 effective tax rate reflects approximately $38 million
of tax expense reductions relating to re-evaluation of our
liabilities and contingencies based on global examination
activity, including the IRS’s completion of 2004 and 2005
examination fieldwork and our related protest filing. As a
result of the global examination activity, we recognized
approximately $18 million of associated pre-tax interest
income adjustments during 2009.
At December 31, 2011, tax credit carryforwards, principally
state and federal, and tax loss carryforwards, principally state
and foreign, were as follows:
(Dollars in millions)
Tax Credit
Carryforwards
Tax Loss
Carryforwards
Expiration period:
2012-2016 $ 22 $ 523
2017-2021 164 125
2022-2031 308 397
Indefinite 753 2,157
Total $1,247 $3,202
At December 31, 2011, we had gross tax-effected
unrecognized tax benefits of $946 million, all of which, if
recognized, would impact the effective tax rate. A
reconciliation of the beginning and ending amounts of
unrecognized tax benefits and interest expense related to
unrecognized tax benefits for the years ended December 31,
2011, 2010, and 2009 is as follows:
(Dollars in millions) 2011 2010 2009
Balance at January 1 $891 $793 $ 773
Additions for tax positions related to the
current year 71 115 90
Additions for tax positions of prior years 71 80 174
Reductions for tax positions of prior
years (24) (81) (20)
Settlements (63) (16) (224)
Balance at December 31 $946 $891 $ 793
Gross interest expense related to
unrecognized tax benefits $23 $27 $ 21
Total accrued interest balance at
December 31 $165 $ 144 $ 142
Included in the balance at December 31, 2009 was $57 million
of tax positions whose tax characterization was highly certain
but for which there was uncertainty about the timing of tax
return inclusion. During 2010, the uncertainty was removed as
a result of an accounting method change approved by the
Internal Revenue Service (IRS).
During 2011, we reached final resolution with the IRS on two
refund claims that had been pending with respect to
pre-2004 tax years and refunds were received in accordance
with the resolutions. A reduction in tax expense in the
amount of $63 million and pretax interest income in the
amount of $89 million was recognized during 2011 associated
with the resolution of these claims.
Tax years 2004 – 2005 are currently before the Appeals
Division of the IRS for resolution discussions regarding certain
proposed tax adjustments with which we do not agree. Tax
years 2006 – 2008 are currently under review by the
Examination Division of the IRS. It is possible that both the
2004 – 2005 appeals activity as well as 2006 – 2008
examination activity may conclude before the end of the
second quarter of 2012. The Company expects the IRS to
commence their review of the 2009 and 2010 tax years in the
first quarter of 2012.
70 UNITED TECHNOLOGIES CORPORATION