Western Digital 2012 Annual Report Download - page 83

WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Effective Tax Rate
Reconciliation of the U.S. Federal statutory rate to the Company’s effective tax rate is as follows for the three
years ended June 29, 2012:
2012 2011 2010
U.S. Federal statutory rate ............................................. 35% 35% 35%
Tax rate differential on international income ............................... (29) (26) (26)
Tax effect of U.S. permanent differences .................................. 3 3 1
State income tax, net of federal tax ....................................... 1 (1) —
Income tax credits ................................................... (2) (4) (1)
Effective tax rate .................................................... 8% 7% 9%
Tax Holidays and Carryforwards
A substantial portion of the Company’s manufacturing operations in Malaysia, the Philippines, Singapore and
Thailand operate under various tax holidays and tax incentive programs which will expire in whole or in part at vari-
ous dates through 2025. Certain of the holidays may be extended if specific conditions are met. The net impact of
these tax holidays and tax incentives was to increase the Company’s net earnings by $729 million ($2.98 per diluted
share), $362 million ($1.54 per diluted share), and $560 million ($2.40 per diluted share) in 2012, 2011, and 2010,
respectively.
As of June 29, 2012, the Company had federal and state NOL carryforwards of $240 million and $151 million,
respectively. In addition, as of June 29, 2012, the Company had various federal and state tax credit carryforwards of
$236 million combined. The NOL carryforwards available to offset future federal and state taxable income expire at
various dates from 2020 to 2032 and 2016 to 2032, respectively. Approximately $108 million of the credit carryfor-
wards available to offset future taxable income expire at various dates from 2016 to 2032. The remaining amount is
available indefinitely. NOLs and credits relating to Komag, Incorporated (“Komag”), which was acquired by the
Company on September 5, 2007, are subject to limitations under Section 382 and 383 of the Internal Revenue Code.
The Company does not expect these limitations to result in a reduction in the total amount of NOLs and credits ulti-
mately realized. NOLs and credits relating to HGST, which was acquired by the Company on March 8, 2012, are
subject to limitations under Section 382 and 383 of the Internal Revenue Code. The Company does not expect these
limitations to result in a reduction in the total amount of NOLs ultimately realized. However, the Company expects
the total amount of credits ultimately realized will be reduced by $9 million.
Uncertain Tax Positions
The Company recognizes liabilities for uncertain tax positions based on a two-step process. First, the tax position
is evaluated for recognition by determining if it is more likely than not that the position will be sustained on audit,
including resolution of related appeals or litigation processes, if any. If the tax position is deemed more-likely-
than-not to be sustained, the tax position is then assessed to determine the amount of benefit to be recognized in the
financial statements. The amount of the benefit that may be recognized is the largest amount that has a greater than
50% likelihood of being realized upon ultimate settlement. With the exception of certain unrecognized tax benefits
that are directly associated with the tax position taken, unrecognized tax benefits are presented gross in the Company’s
balance sheet. Interest and penalties related to unrecognized tax benefits are recognized on liabilities recorded for
uncertain tax positions and are recorded in the provision for income taxes. As of June 29, 2012, such interest and
penalties were not material.
As of June 29, 2012, the Company had $280 million of unrecognized tax benefits.
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