Baker Hughes 2007 Annual Report Download - page 135

52 Baker Hughes Incorporated
The provision for income taxes differs from the amount
computed by applying the U.S. statutory income tax rate to
income from continuing operations before income taxes for
the reasons set forth below for the years ended December 31:
2007 2006 2005
Statutory income
tax at 35% $ 789.9 $ 1,307.9 $ 447.7
Effect of sale of
interest in affiliate – 98.1 –
Effect of
foreign operations (84.0) (86.9) (46.0)
Net tax (benefit) charge
related to foreign losses (0.8) (2.7) 5.5
State income taxes –
net of U.S. tax benefit 17.9 12.1 8.8
Cumulative tax effect
of SRP – – (10.6)
Other – net 19.8 9.7 (0.6)
Provision for
income taxes $ 742.8 $ 1,338.2 $ 404.8
During 2006, we provided $708.3 million for taxes related
to the sale of our interest in WesternGeco. Approximately
$98.1 million of this tax provision is in excess of the U.S. stat-
utory income tax rate due to taxes provided on the expected
repatriation of the non-U.S. proceeds received in the transaction
and a larger U.S. tax gain due to lower tax basis compared to
book basis.
In 2005, we recognized a $10.6 million deferred tax asset
attributable to the cumulative temporary difference between
the carrying values of our Supplemental Retirement Plan (“SRP”)
for financial reporting and income tax purposes, which had
the effect of reducing tax expense.
Deferred income taxes reflect the net tax effects of tempo-
rary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts
used for income tax purposes, as well as operating loss and
tax credit carryforwards. The tax effects of our temporary dif-
ferences and carryforwards are as follows at December 31:
2007 2006
Deferred tax assets:
Receivables $ 6.3 $ 9.9
Inventory 160.5 138.3
Property 49.7 53.3
Employee benefits 28.6 63.4
Other accrued expenses 45.2 46.9
Operating loss carryforwards 43.5 41.1
Tax credit carryforwards 31.3 20.7
Capitalized research and
development costs 27.6 39.2
Other 38.8 29.6
Subtotal 431.5 442.4
Valuation allowances (66.8) (50.7)
Total 364.7 391.7
Deferred tax liabilities:
Goodwill 133.0 130.8
Undistributed earnings of
foreign subsidiaries 98.9 150.3
Other 48.4 30.4
Total 280.3 311.5
Net deferred tax asset $ 84.4 $ 80.2
We record a valuation allowance when it is more likely
than not that some portion or all of the deferred tax assets
will not be realized. The ultimate realization of the deferred
tax assets depends on the ability to generate sufficient taxable
income of the appropriate character in the future and in the
appropriate taxing jurisdictions. We have provided a valuation
allowance for operating loss carryforwards in certain non-U.S.
jurisdictions where our operations have decreased, currently
ceased or we have withdrawn entirely.
We have provided for U.S. and additional foreign taxes for
the anticipated repatriation of certain earnings of our foreign
subsidiaries. We consider the undistributed earnings of our
foreign subsidiaries above the amount for which taxes have
already been provided to be indefinitely reinvested, as we have
no intention to repatriate these earnings. As such, deferred
income taxes are not provided for temporary differences of
approximately $1.6 billion, $0.8 billion and $0.4 billion as of
December 31, 2007, 2006 and 2005, respectively, representing
earnings of non-U.S. subsidiaries intended to be permanently
reinvested. These additional foreign earnings could become
subject to additional tax if remitted, or deemed remitted, as
a dividend. Computation of the potential deferred tax liability
associated with these undistributed earnings and other basis
difference is not practicable.
At December 31, 2007, we had approximately $28.5 mil-
lion of foreign tax credits which may be carried forward indefi-
nitely under applicable foreign law and $2.8 million of state tax
credits expiring in varying amounts between 2016 and 2021.
The operating loss carryforwards without a valuation allowance
will expire in varying amounts over the next twenty years.
In June 2006, the FASB issued FIN 48, Accounting for
Uncertainty in Income Taxes – an interpretation of FASB State-
ment No. 109. FIN 48 addresses the determination of whether