Western Union 2008 Annual Report Download - page 67

6565
Notes to Consolidated
Financial Statements
A substantial portion of the Company’s unrecognized tax
benefits relate to the 2003 restructuring of the Company’s
international operations whereby the Company’s income
from certain foreign-to-foreign money transfer transactions
has been taxed at relatively low foreign tax rates compared
to the Company’s combined federal and state tax rates in
the United States. The total amount of unrecognized tax
benefits that, if recognized, would affect the effective tax rate
was $352.4 million and $243.2 million as of December 31,
2008 and 2007, respectively, excluding interest and
penalties.
The Company recognizes interest and penalties with
respect to unrecognized tax benefits in income tax expense
and records the associated liability in “Income taxes pay-
able” in its Consolidated Balance Sheets. The Company
recognized $11.6 million, $13.5 million and $5.6 million in
interest and penalties during the years ended December 31,
2008, 2007 and 2006, respectively. The Company has
accrued $35.8 million and $24.8 million for the payment
of interest and penalties at December 31, 2008 and 2007,
respectively.
The Company has identified no uncertain tax position
for which it is reasonably possible that the total amount
of unrecognized tax benefits will significantly increase or
decrease within 12 months, except for recurring accruals on
existing uncertain tax positions. The change in unrecog-
nized tax benefits during the years ended December 31,
2008 and 2007 is substantially attributable to such
recurring accruals and the resolution of certain tax Spin-
off matters with First Data.
The Company and its subsidiaries file tax returns for
the United States, for multiple states and localities, and for
various non-United States jurisdictions, and the Company
has identified the United States and Ireland as its two
major tax jurisdictions. The United States federal income
tax returns of First Data, which include the Company, are
eligible to be examined for the years 2002 through 2006.
The Company’s United States federal income tax returns
since the Spin-off are also eligible to be examined. The
United States Internal Revenue Service (“IRS”) has issued a
report of the results of its examination of the United States
federal consolidated income tax return of First Data for
2002, and the Company believes that the resolution of
the adjustments that affect the Company proposed in the
report will not result in a material change to the Company’s
financial position. In addition, the IRS completed its exami-
nation of the United States federal consolidated income tax
returns of First Data for 2003 and 2004, which included the
Company, and issued a Notice of Deficiency in December
2008. The Notice of Deficiency alleges significant addi-
tional taxes, interest and penalties owed with respect to
a variety of adjustments involving the Company and its
subsidiaries, and the Company generally has responsibility
for taxes associated with these potential Company-related
adjustments under the tax allocation agreement with First
Data executed at the time of the Spin-off. The Company
agrees with a number of the adjustments in the Notice of
Deficiency; however, the Company does not agree with
the Notice of Deficiency regarding several substantial
adjustments representing total alleged additional tax
and penalties due of approximately $114 million. As of
December 31, 2008, interest on the alleged amounts
due for unagreed adjustments would be approximately
$23 million. A substantial part of the alleged amounts due
for these unagreed adjustments relates to the Company’s
international restructuring, which took effect in the fourth
quarter 2003, and, accordingly, the alleged amounts due
related to such restructuring largely are attributable to
2004. The Company expects to contest those adjustments
with which it does not agree with by filing a petition in the
United States Tax Court. The Company believes its overall
reserves are adequate, including those associated with
the adjustments alleged in the Notice of Deficiency. If the
IRS’ position in the Notice of Deficiency is sustained, the
Company’s tax provision related to 2003 and later years
would materially increase. The Irish income tax returns
of certain subsidiaries for the years 2004 and forward
are eligible to be examined by the Irish tax authorities,
although no examinations have commenced.
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 indefi-
nitely. Upon distribution of those earnings to the United
States in the form of actual or constructive dividends, the
Company 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. Determination of this amount
of unrecognized deferred United States tax liability is not
practicable because of the complexities associated with
its hypothetical calculation.
Tax Allocation Agreement with First Data
The Company and First Data each are liable for taxes
imposed on their respective businesses both prior to and
after the Spin-off. If such taxes have not been appropri-
ately apportioned between First Data and the Company,
subsequent adjustments may occur that may impact the
Company’s financial position or results of operations.
Also under the tax allocation agreement, with respect
to taxes and other liabilities that result from a final deter-
mination that is inconsistent with the anticipated tax con-
sequences of the Spin-off (as set forth in the private letter
ruling and relevant tax opinion), (“Spin-off Related Taxes”),
the Company will be liable to First Data for any such Spin-
off Related Taxes attributable solely to actions taken by or
with respect to the Company. In addition, the Company
will also be liable for 50% of any Spin-off Related Taxes (i)
that would not have been imposed but for the existence
of both an action by the Company and an action by First
Data or (ii) where the Company and First Data each take
actions that, standing alone, would have resulted in the
imposition of such Spin-off Related Taxes. The Company
may be similarly liable if it breaches certain representations
or covenants set forth in the tax allocation agreement. If
the Company is 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
the Company’s business, financial position and results of
operations. First Data generally will be liable for all Spin-
off Related Taxes, other than those described above.