Xerox 2008 Annual Report Download - page 83

Notes to the Consolidated
Financial Statements
(in millions, except per share data and
unless otherwise indicated)
Audit Resolution
In 2006, we recognized an income tax benefits of $472 from the
favorable resolution of certain tax issues associated with the
finalization of our 1999-2003 Internal Revenue Service (“IRS”)
audit as well as an income tax benefits of $46 related to the
favorable resolution of certain tax matters associated with the
finalization of foreign tax audits. The recorded benefits did not
result in a significant cash refund, but it did increase 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, 2008 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.
The tax effects of temporary differences that give rise to
significant portions of the deferred taxes at December 31, 2008
and 2007 were as follows:
2008 2007
Tax effect of future tax deductions
Research and development $ 930 $ 895
Post-retirement medical benefits 392 577
Depreciation 249 292
Net operating losses 486 576
Other operating reserves 249 216
Tax credit carryforwards 552 434
Deferred compensation 248 249
Allowance for doubtful accounts 84 100
Restructuring reserves 88 15
Pension 373 58
Other 182 181
3,833 3,593
Valuation allowance (628) (747)
Total $ 3,205 $ 2,846
Tax effect of future taxable income
Unearned income and installment
sales $(1,119) $(1,283)
Intangibles and goodwill (160) (142)
Other (53) (40)
Total (1,332) (1,465)
Total deferred taxes, net $ 1,873 $ 1,381
The above amounts are classified as current or long-term in the
Consolidated Balance Sheets in accordance with the asset or
liability to which they relate or, when applicable, based on the
expected timing of the reversal. Current deferred tax assets at
December 31, 2008 and 2007 amounted to $305 and $200,
respectively.
The deferred tax assets for the respective periods were assessed for
recoverability and, where applicable, a valuation allowance was
recorded to reduce the total deferred tax asset to an amount that
will, more-likely-than-not, be realized in the future. The net change
in the total valuation allowance for the years ended December 31,
2008 and 2007 was a decrease of $119 and an increase of $100,
respectively. The valuation allowance relates primarily to certain
net operating loss carryforwards, tax credit carryforwards and
deductible temporary differences for which we have concluded it is
more-likely-than-not that these items will not be realized in the
ordinary course of operations.
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