Xerox 2012 Annual Report Download - page 103

101Xerox 2012 Annual Report
Total income tax expense (benefit) was allocated as follows:
Year Ended December 31,
2012 2011 2010
Pre-tax income $ 277 $ 386 $ 256
Common shareholders’ equity:
Changes in defined benefit plans (233) (277) 12
Stock option and incentive plans, net (5) 1 (6)
Cash flow hedges (24) 3 5
Translation adjustments (9) 2 6
Total Income Tax Expense (Benefit) $ 6 $ 115 $ 273
Unrecognized Tax Benefits and Audit Resolutions
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, 2012, 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.
A reconciliation of the beginning and ending amount of unrecognized
tax benefits is as follows:
2012 2011 2010
Balance at January 1 $ 225 $ 186 $ 148
Additions from acquisitions – – 46
Additions related to current year 28 43 38
Additions related to prior years positions 5 38 24
Reductions related to prior years positions (36) (17) (16)
Settlements with taxing authorities (1) (13) (14) (19)
Reductions related to lapse of
statute of limitations (8) (8) (35)
Currency – (3) –
Balance at December 31 $ 201 $ 225 $ 186
(1) Majority of settlements did not result in the utilization of cash.
Included in the balances at December 31, 2012, 2011 and 2010 are
$16, $36 and $39, respectively, of tax positions that are highly certain
of realizability but for which there is uncertainty about the timing
or that they 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 recognized interest and penalties accrued on unrecognized tax
benefits, as well as interest received from favorable settlements within
income tax expense. We had $20, $28 and $31 accrued for the
payment of interest and penalties associated with unrecognized tax
benefits at December 31, 2012, 2011 and 2010, respectively.
In the U.S., with the exception of ACS, we are no longer subject to
U.S. federal income tax examinations for years before 2007. ACS is
no longer subject to such examinations for years before 2005. With
respect to our major foreign jurisdictions, we are no longer subject to
tax examinations by tax authorities for years before 2000.
Deferred Income Taxes
We had undistributed earnings of foreign subsidiaries and other
foreign investments carried at equity at December 31, 2012 of
approximately $8.8 billion. We have provided deferred taxes on
approximately $500 of those earnings due to their anticipated
repatriation to the U.S. The remaining $8.3 billion of undistributed
earnings have been indefinitely reinvested and we currently do not
plan to initiate any action that would precipitate a deferred tax impact.
We do not believe it is practical to calculate the potential deferred tax
impact, as there is a significant amount of uncertainty with respect to
determining the amount of foreign tax credits as well as any additional
local withholding tax and other indirect tax consequences that may
arise from the distribution of these earnings. In addition, because such
earnings have been indefinitely reinvested in our foreign operations,
repatriation would require liquidation of those investments or a
recapitalization of our foreign subsidiaries, the impacts and effects of
which are not readily determinable.