Xerox 2007 Annual Report Download - page 119

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per-share data and unless otherwise indicated)
Included in the balance at January 1, 2007 and as of
December 31, 2007 are $93 and $137, respectively, of tax
positions that are highly certain of realizability but for
which there is uncertainty about the timing or may be
reduced through an indirect benefit from other taxing
jurisdictions. Because of the impact of deferred tax
accounting, other than interest and penalties, the
disallowance of these positions would not affect the
annual effective tax rate.
We have filed claims in certain jurisdictions to assert
our position should the law be clarified by judicial means.
At this point in time, we believe it is unlikely that we will
receive any benefit from these types of claims but we will
continue to analyze as the issues develop. Accordingly, we
have not included any benefit for these types of claims in
the amount of unrecognized tax benefits.
Upon the adoption of FIN 48, we recognize interest
and penalties accrued on unrecognized tax benefits as
well as interest received from favorable settlements within
income tax expense. In 2007, net interest and penalties
were less than $1. We had $28 and $23 accrued for the
payment of interest and penalties associated with
unrecognized tax benefits at January 1, 2007 and
December 31, 2007, respectively.
We file income tax returns in the U.S. federal
jurisdiction and various foreign jurisdictions. In the U.S. we
are no longer subject to U.S. federal income tax
examinations by tax authorities for years before 2006.
With respect to our major foreign jurisdictions, we are no
longer subject to tax examinations by tax authorities
before 2000.
2006 Audit Resolution: In the first quarter 2006, we
recognized an income tax benefit of $24 from the
favorable resolution of certain tax issues associated with
our 1999-2003 Internal Revenue Service (“IRS”) audit
which at the time had not yet been finalized. In the
second quarter 2006, we recognized an income tax
benefit of $46 related to the favorable resolution of
certain tax matters associated with the finalization of
foreign tax audits. In the third quarter 2006, we received
notice that the U.S. Joint Committee on Taxation had
completed its review of our 1999-2003 IRS audit and as a
result of that review our audit for those years had been
finalized. Accordingly, we recorded an aggregate income
tax benefit of $448 associated with the favorable
resolution of certain tax matters from this audit. The
recorded benefit did not result in a significant cash refund,
but it did increase tax credit carryforwards and reduce
taxes otherwise potentially due.
2005 Audit Resolution: In the second quarter of
2005, the 1996-1998 IRS audit was finalized. As a
result, we recorded an aggregate second quarter 2005
net income benefit of $343. $260 of this benefit, which
includes an after-tax benefit of $33 for interest ($54
pre-tax benefit), is the result of a change in tax law
that allowed us to recognize a benefit for $1.2 billion of
capital losses associated with the disposition of our
insurance group operations in those years. The claim of
additional losses and related tax benefits required
review by the U.S. Joint Committee on Taxation, which
was completed in June 2005. The benefit did not result
in a significant cash refund, but increased tax credit
carryforwards and reduced taxes otherwise potentially
due.
Deferred Income Taxes
In substantially all instances, deferred income
taxes have not been provided on the undistributed
earnings of foreign subsidiaries and other foreign
investments carried at equity. The amount of such
earnings included in consolidated retained earnings at
December 31, 2007 was approximately $7.5 billion.
These earnings have been indefinitely reinvested and
we currently do not plan to initiate any action that
would precipitate the payment of income taxes
thereon. It is not practicable to estimate the amount of
additional tax that might be payable on the foreign
earnings. Our 2001 sale of half of our ownership
interest in Fuji Xerox resulted in our investment no
longer qualifying as a foreign corporate joint venture.
Accordingly, deferred taxes are required to be provided
on the undistributed earnings of Fuji Xerox, arising
subsequent to such date, as we no longer have the
ability to ensure indefinite reinvestment.
Xerox Annual Report 2007 117