Adaptec 2010 Annual Report Download - page 82

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During 2008, PMC recognized a $124.1 million tax benefit resulting from one of the foreign subsidiaries settling several
ongoing tax matters for less than had been accrued as part of its liability for unrecognized tax benefits. This accrual was initiated in
2000 and relates to transfer pricing matters pertaining to a foreign subsidiary’s year 2000 and subsequent tax years. The initial accrual
for unrecognized tax benefits was based on various assumptions about potential tax exposures which were consistently applied from
the initiation of the accrual and were substantially consistent with the underlying basis of the proposed adjustment for the 2000 tax
year received from the foreign tax authority in March 2008.
Further information regarding the history of amounts and basis of the accrual is as follows:
Tax years 2000-2006 of this foreign subsidiary were settled in June 2008. Under the settlement, the Company agreed to pay $18
million in cash and utilize $31.6 million in investment tax credits. These settlement amounts, and the corresponding gain on
recognition of tax benefits of $124.1 million, were recorded in the second quarter of 2008. The revenue earned by the foreign
subsidiary reached a peak in 2000 and in settling the liability for the 2000-2006 tax years, the Company factored in the operating
losses of the foreign subsidiary of years 2001 and 2002 and thereby substantially reduced the settlement in comparison to the amount
accrued as an unrecognized tax benefit. Another factor causing the settlement for these tax years to be lower than the accrued
unrecognized tax benefit was the use of a different methodology from that which formed the basis of the foreign tax authority’s notice
of proposed adjustment. Until the second quarter of 2008, PMC did not expect to reach a settlement on these matters with the foreign
tax authority. The gain recorded in the second quarter of 2008 was triggered by the settlement agreements signed with the foreign tax
authority on June 18, 2008.
81
•
$179.4 million balance as at 2007 year-end
—
was initially accrued for in 2000, as previously noted. The accrual
accumulated to $179.4 million in 2007 and was based on consistent assumptions underlying the exposures and factored in
the o
p
eratin
g
income of the forei
g
n subsidiar
y
u
p
to the 2007
y
ear-end.
•
$204.6 million balance at the end of the first quarter of 2008
—
the increase in the accrual during this quarter was based on
the same assumptions used in prior periods, plus an increase of $28 million as a result of receiving notice of a proposed
adjustment from the foreign tax authority pertaining to the year 2000, based on which PMC modified its assessment of a
s
p
ecific ex
p
osure.
•
$33 million balance at the end of the second quarter of 2008
—
after the settlement in June 2008 for tax years 2000
–
2006.
This balance after settlement relates to various potential exposures for the post-settlement period to the end of the second
q
uarter of 2008.