Xerox 2009 Annual Report Download - page 80

78 Xerox 2009 Annual Report
Notes to the Consolidated
Financial Statements
Dollars in millions, except per-share data and unless otherwise indicated.
Unrecognized Tax Benefits
A reconciliation of the beginning and ending amount of unrecognized
tax benefits is as follows:
2009 2008 2007
Balance at January 1 $ 170 $ 303 $ 287
Additions from acquisitions — — 4
Additions related to current year 6 12 33
Additions related to prior
years’ positions 27 13 78
Reductions related to prior
years’ positions (33) (65) (33)
Settlements with taxing
authorities(1) (7) (28) (66)
Reductions related to lapse of
statute of limitations (29) (45) (14)
Currency 14 (20) 14
Balance at December 31 $ 148 $ 170 $ 303
(1) Majority of settlements did not result in the utilization of cash.
Included in the balances at December 31, 2009, 2008 and 2007 are
$67, $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 $13, $22 and $23 accrued for the payment
of interest and penalties associated with unrecognized tax benefits at
December 31, 2009, 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 for years before 2000.
A reconciliation of the U.S. federal statutory income tax rate to the
consolidated effective income tax rate for the three years ended
December 31, 2009 was as follows:
2009 2008 2007
U.S. federal statutory income
tax rate 35.0% 35.0% 35.0%
Nondeductible expenses 3.2 (19.5) 0.9
Effect of tax law changes — 16.1 1.1
Change in valuation allowance
for deferred tax assets (1.7) (21.0) 0.9
State taxes, net of federal benefit (0.2) 36.7 1.2
Audit and other tax return
adjustments (8.7) 84.4 (4.1)
Tax-exempt income (0.5) 8.5 (0.6)
Other foreign, including earnings
taxed at different rates (3.7) 148.9 (7.3)
Other 0.8 3.3 0.1
Effective Income Tax Rate 24.2% 292.4% 27.2%
On a consolidated basis, we paid a total of $78, $194 and $104 in
income taxes to federal, foreign and state jurisdictions during the
three years ended December 31, 2009, 2008 and 2007, respectively.
Total income tax expense (benefit) for the three years ended
December 31, 2009 was allocated as follows:
2009 2008 2007
Pre-tax income $ 152 $ (231) $ 400
Common shareholders’ equity:
Changes in defined benefit plans (61) (183) 222
Stock option and incentive
plans, net 21 (2) (22)
Translation adjustments
and other (13) 10 24
Total Income Tax Expense
(Benefit) $ 99 $ (406) $ 624
Unrecognized Tax Benefits and Audit Resolutions
Due to the extensive geographical scope of our operations, we are sub-
ject 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, 2009, 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.