Xerox 2008 Annual Report Download - page 82

Notes to the Consolidated
Financial Statements
(in millions, except per share data and
unless otherwise indicated)
Total income tax (benefit) expense for the three years ended
December 31, 2008 was allocated as follows:
2008 2007 2006
Pre-tax income $(231) $ 400 $(288)
Common shareholders’ equity:
Defined benefit plans/minimum
pension liability (183) 222 (432)
Stock option and incentive plans, net (2) (22) (25)
Translation adjustments and other 10 24 (9)
Total $(406) $624 $(754)
Unrecognized Tax Benefits and Audit Resolutions
In 2006, the FASB issued Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes – an Interpretation of FASB
Statement No. 109” (“FIN 48”) which we adopted on January 1,
2007. FIN 48 clarifies the accounting for uncertainty in income
taxes by prescribing a minimum recognition threshold for a tax
position taken or expected to be taken in a tax return that is
required to be met before being recognized in the financial
statements. FIN 48 also provides guidance on derecognition,
measurement, classification, interest and penalties, accounting in
interim periods, disclosure and transition. The cumulative effect of
adopting FIN 48 of $2 was recorded as a reduction to Retained
earnings. The total amount of unrecognized tax benefits as of the
date of adoption was $287.
Due to the extensive geographical scope of our operations, we are
subject to ongoing tax examinations in numerous jurisdictions.
Accordingly, we may record incremental tax expense based upon
the more-likely-than-not outcomes of any uncertain tax positions.
In addition, when applicable, we adjust the previously recorded tax
expense to reflect examination results when the position is
effectively settled. Our ongoing assessments of the more-likely-
than-not outcomes of the examinations and related tax positions
require judgment and can increase or decrease our effective tax
rate, as well as impact our operating results. The specific timing of
when the resolution of each tax position will be reached is
uncertain. As of December 31, 2008, we do not believe that there
are any positions for which it is reasonably possible that the total
amount of unrecognized tax benefits will significantly increase or
decrease within the next 12 months.
Unrecognized Tax Benefits
A reconciliation of the beginning and ending amount of
unrecognized tax benefits is as follows:
2008 2007
Balance at January 1 $303 $287
Additions from acquisitions —4
Additions related to current year 12 33
Additions related to prior years positions 13 78
Reductions related to prior years positions (65) (33)
Settlements with taxing authorities (1) (28) (66)
Reductions related to lapse of statute of
limitations (45) (14)
Currency (20) 14
Balance at December 31 $170 $303
(1) Majority of settlements did not result in the utilization of cash.
Included in the balance at December 31, 2008 and 2007 are $67
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 for the possible incurrence of 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.
We recognized interest and penalties accrued on unrecognized tax
benefits as well as interest received from favorable settlements
within income tax expense. We had $22 and $23 accrued for the
payment of interest and penalties associated with unrecognized
tax benefits at December 31, 2008 and 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 2007. With respect to our major foreign jurisdictions, we are
no longer subject to tax examinations by tax authorities before
2000.
80 Xerox 2008 Annual Report