Adaptec 2008 Annual Report Download - page 38

liability arising from the examination of our existing transfer pricing practices prior to the settlement noted
above, $28.1 million of income tax from normal operations (offset by investment tax credits of $19.5 million),
$5.8 million deferred tax expense from an unrealized gain arising from foreign currency translation pertaining to
a foreign subsidiary, and $4.5 million increase in tax from various items, including deferred taxes, minimum
taxes and revisions of prior estimates.
Our provision for income taxes for the year ended December 30, 2007 was $16.8 million, resulting in an
effective tax rate of 52% on a net loss of $32.3 million. Despite this net loss, income taxes were incurred
primarily from a $28.0 million additional accrual relating to an ongoing FIN 48 liability arising from the
examination of our historic transfer pricing policies and practices of certain companies within the PMC Group by
a certain tax authority. Of the $28.0 million increase in our FIN 48 liability, $13.0 million is related to arrears
interest. Our FIN 48 liability is partially offset by available investment tax credits of $18.0 million. The
remainder of the provision for income taxes primarily relates to $6.0 million of deferred taxes recorded with
respect to a past acquisition and net $1.0 million due to various items, including revisions of prior estimates.
Our provision for income taxes for the year ended December 31, 2006 was $49.2 million on a net loss
before taxes of $50.7 million, or 97% of the net loss before taxes, compared to a United States federal statutory
tax rate of 35%. Our effective tax rate represents a rate that is applicable to all of our operations crossing multiple
tax jurisdictions with tax rates that are different than the United States federal statutory tax rate. A significant
portion of our net loss for 2006 consisted of expenses that have no associated tax benefits due to their
non-deductibility and the fact that deferred tax assets primarily relating to the operating loss carryforwards in the
U.S. are fully offset by a valuation allowance. These expenses include amortization of non-deductible intangible
assets and in-process research and development, and stock-based compensation. Our effective tax rate in all years
presented reflects recoveries and refunds of prior year taxes paid and tax credits received by our Canadian
subsidiary for research and development expenses incurred, offset by valuation allowances on losses carried
forward.
Our estimated tax provision rate increased significantly at the end of 2006 due to an increase in our
estimated tax liability following receipt in 2007 of a written communication from a tax authority examining the
historical transfer pricing policies and practices of certain companies within the PMC-Sierra group. As a result,
we increased our provision for periods prior to 2006 by $29.9 million. We recorded $7.1 million tax expense in
the first quarter of 2006 for withholding and other taxes on the repatriation of funds used to purchase the Storage
Semiconductor Business and recorded $3.8 million in net deferred tax expense associated with both of the
acquisitions of the Storage Semiconductor Business and Passave, Inc..
See Note 15 to the Consolidated Financial Statements for additional information regarding income taxes.
Critical Accounting Policies and Estimates
General
Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our
Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements requires us to make estimates and
assumptions that affect the amounts we report as assets, liabilities, revenue and expenses, and the related
disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on
various other assumptions that are reasonable in the circumstances. These estimates could change under different
assumptions or conditions.
Our significant accounting policies are outlined in Note 1 to the Consolidated Financial Statements. In
management’s opinion the following critical accounting policies require the most significant judgment and
involve complex estimation. We also have other policies that we consider to be key accounting policies, such as
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