3M 2010 Annual Report Download - page 75

69
Reconciliation of Effective Income Tax Rate
2010
2009
2008
Statutory U.S. tax rate ...................................................................
35.0
%
35.0
%
35.0
%
State income taxes — net of federal benefit .................................
1.2
1.0
0.8
International income taxes — net ..................................................
(7.1
)
(5.3
)
(4.1
)
U.S. research and development credit ..........................................
(0.2
)
(0.3
)
(0.5
)
Reserves for tax contingencies .....................................................
(0.5
)
0.8
0.8
Restructuring actions .....................................................................
—
—
0.4
Medicare Modernization Act ..........................................................
1.0
(0.2
)
(0.2
)
Domestic Manufacturer’s deduction ..............................................
(1.4
)
(0.5
)
(0.8
)
All other — net ...............................................................................
(0.3
)
(0.5
)
(0.3
)
Effective worldwide tax rate .......................................................
27.7
%
30.0
%
31.1
%
Under a Federal program (Medicare Modernization Act) that was established to encourage companies to provide
retiree prescription drug coverage, many companies, including 3M, received a tax-advantaged subsidy. The tax
advantage of the subsidy was eliminated by the Patient Protection and Affordable Care Act (H.R. 3590), including
modifications included in the Health Care and Education Reconciliation Act of 2010 (collectively, the “Act’), which
were enacted in March 2010. Although the elimination of this tax advantage does not take effect until 2013 under the
Act, 3M was required to recognize the full accounting impact in its financial statements in the period in which the Act
was signed. Because future anticipated retiree health care liabilities and related tax subsidies are already reflected in
3M’s financial statements, the change in law resulted in a reduction of the value of the company’s deferred tax asset
related to the subsidy. This reduction in value resulted in a one-time non-cash income tax charge to 3M’s earnings in
2010 of approximately $84 million, or 12 cents per diluted share.
While the preceding item increased the effective tax rate, the most significant item that decreased the effective tax
rate in both 2010 and 2009 related to international taxes. In 2010, this was due primarily to the 2010 tax benefits of
net operating losses partially offset by a valuation allowance resulting from the corporate alignment transactions that
allowed the Company to increase its ownership of a foreign subsidiary. The transactions are described in the section
of Note 6 entitled “Purchase of Subsidiary Shares and Transfers of Ownership Interest Involving Non-Wholly Owned
Subsidiaries”. Adjustments to income tax reserves and the Domestic Manufacturer’s deduction also benefited year-
on-year effective tax rates.
As of December 31, 2010, the Company had tax effected federal, state, and international operating loss carryovers of
approximately $15 million, $13 million, and $409 million (before valuation allowances). The federal operating loss
carryovers will expire after twenty years, the state after five to ten years, and the majority of international after seven
years with the remaining international expiring in one year or with an indefinite carryover period. The Company has
provided a $128 million valuation allowance against certain of these deferred tax assets based on management’s
determination that it is more-likely-than-not that the tax benefits related to these assets will not be realized.
The Company files income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions.
With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax
examinations by tax authorities for years before 2002.
The IRS completed its field examination of the Company’s U.S. federal income tax returns for the years 2005 through
2007 in the fourth quarter of 2009. The Company protested certain IRS positions within these tax years and entered
into the administrative appeals process with the IRS during the first quarter of 2010. During the first quarter of 2010,
the IRS completed its field examination of the Company’s U.S. federal income tax return for the 2008 year. The
Company protested certain IRS positions for 2008 and entered into the administrative appeals process with the IRS
during the second quarter of 2010. Currently, the Company is under examination by the IRS for its U.S. federal
income tax returns for the years 2009 and 2010. It is anticipated that the IRS will complete its examination of the
Company for 2009 by the end of the first quarter of 2011, and for 2010 by the end of the first quarter of 2012. As of
December 31, 2010, the IRS has not proposed any significant adjustments to the Company’s tax positions for which
the Company is not adequately reserved.
During the first quarter of 2010, the Company paid the agreed upon assessments for the 2005 tax year. During the
second quarter of 2010, the Company paid the agreed upon assessments for the 2008 tax year. Payments relating to
other proposed assessments arising from the 2005 through 2010 examinations may not be made until a final
agreement is reached between the Company and the IRS on such assessments or upon a final resolution resulting
from the administrative appeals process or judicial action. In addition to the U.S. federal examination, there is also
limited audit activity in several U.S. state and foreign jurisdictions.