Western Union 2008 Annual Report Download - page 38

WESTERN UNION
2008 Annual Report
3636
DESCRIPTION
Income Taxes
Reinvestment of foreign earnings
Income taxes, as reported in our consolidated financial
statements, repres ent the net amount of income taxes we
expect to pay to various taxing jurisdictions in connection
with our operations. We provide for income taxes based
on amounts that we believe we will ultimately owe after
applying the analyses and judgments required under
the provisions of SFAS No. 109, “Accounting for Income
Taxes,” and FIN 48.
JUDGEMENTS AND UNCERTAINTIES
With respect to earnings in certain foreign jurisdictions,
we have provided for income taxes on such earnings at
a more favorable income tax rate than the combined
United States federal and state income tax rates because
we expect to reinvest these earnings outside of the United
States indefinitely.
EFFECT IF ACTUAL RESULTS DIFFER FROM ASSUMPTIONS
At December 31, 2008, no provision had been made
for United States federal and state income taxes on for-
eign earnings of approximately $1.6 billion, which are
expected to be reinvested outside the United States
indefinitely.
Upon distribution of those earnings to the United
States in the form of actual or constructive dividends, we
would be subject to United States income taxes (subject to
an adjustment for foreign tax credits), state income taxes
and possible withholding taxes payable to various foreign
countries which could result in a material impact to our
financial position, results of operations and cash flows in
the period such distribution occurred. Determination of
the amount of unrecognized deferred United States tax
liability is not practicable because of the complexities
associated with its hypothetical calculation.
Income tax contingencies
Under the provisions of FIN 48, we recognize the tax
benefit from an uncertain tax position only when it is
more likely than not, based on the technical merits of
the position, that the tax position will be sustained upon
examination, including the resolution of any related
appeals or litigation. The tax benefits recognized in the
consolidated financial statements from such a position
are measured as the largest benefit that has a greater
than fifty percent likelihood of being realized upon ulti-
mate resolution.
We have established contingency reserves for material,
known tax exposures, a substantial portion of which
relate to potential tax audit adjustments with respect to
our international operations, which were restructured in
2003, whereby our income from certain foreign-to-foreign
money transfer transactions has been taxed at relatively
low foreign tax rates compared to our combined federal
and state tax rates in the United States.
The Internal Revenue Service (“IRS”) has completed
audits of the United States federal consolidated income
tax returns of First Data for the years 2002 through 2004,
which include our taxable results for those years. Refer
to Note 10 to our consolidated financial statements for
a detailed discussion of these audits.
Our tax contingency reserves for our uncertain tax posi-
tions as of December 31, 2008 were $397.0 million includ-
ing interest and penalties. While we believe that our
reserves are adequate to cover reasonably expected tax
risks, in the event that the ultimate resolution of our uncer-
tain tax positions differ from our estimates, particularly
with respect to our 2003 restructuring of our international
operations, we may be exposed to material increases in
income tax expense, which could materially impact our
financial position, results of operations and cash flows.
Pursuant to the tax allocation agreement signed in
connection with the spin-off from First Data, we believe
we have appropriately apportioned the taxes between
First Data and us through 2008. If we are required to
indemnify First Data for taxes incurred as a result of the
spin-off being taxable to First Data, it likely would have
a material adverse effect on our business, financial posi-
tion, results of operations and cash flows.