Baker Hughes 2007 Annual Report Download - page 136

2007 Form 10-K 53
tax benefits (e.g. tax deductions or credits) claimed or expected
to be claimed on a tax return should be recorded in the finan-
cial statements as a reduction to income tax expense and
related income tax liabilities. Under FIN 48, the tax benefit
from an uncertain tax position is to be recognized as a reduc-
tion to income tax expense when it is more likely than not,
based on the technical merits of the position, that the posi-
tion will be sustained on examination by the taxing authori-
ties including resolution of any related appeals or litigation
processes. Additionally, the amount of the tax benefit to be
recognized is the largest amount of tax benefit that has a
greater than fifty percent likelihood of being realized upon
ultimate settlement with the taxing authorities. FIN 48 also
provides guidance on derecognition, measurement, classifi-
cation, interest and penalties, accounting in interim periods,
disclosure and transition.
We adopted FIN 48 on January 1, 2007, pursuant to which
we recognized a $78.5 million increase in the gross liability
for unrecognized tax benefits which included $17.3 million
of interest and penalties. As a result of the implementation
of FIN 48, we recognized the following adjustments to our
accounts as of January 1, 2007.
Increase (Decrease)
Beginning retained earnings $ (64.2)
Deferred tax assets (0.6)
Non-current tax receivables 14.9
Tax liabilities 78.5
As of January 1, 2007, we had $422.8 million of tax liabili-
ties for gross unrecognized tax benefits, which includes liabilities
for interest and penalties of $50.4 million and $18.1 million
respectively. If we were to prevail on all uncertain tax positions,
the net effect would be a benefit to our effective tax rate of
approximately $339.2 million. The remaining approximately
$83.6 million, which is recorded as a deferred tax asset, repre-
sents tax benefits that would be received in different taxing
jurisdictions in the event that we did not prevail on all uncertain
tax positions.
As of December 31, 2007, we had $456.9 million of tax
liabilities for gross unrecognized tax benefits, which includes
liabilities for interest and penalties of $71.4 million and $22.1 mil-
lion, respectively. Our gross unrecognized tax benefits include
$9.3 million of additional taxes and related interest and penal-
ties, recorded in 2007, that are associated with disallowed tax
deductions taken in previous years, arising from the resolution
of investigations with the Securities and Exchange Commission
(“SEC”) and the Department of Justice (“DOJ”). If we were to
prevail on all uncertain tax positions, the net effect would be a
benefit to our effective tax rate of approximately $373.3 million.
The remaining approximately $83.6 million, which is recorded
as a deferred tax asset, represents tax benefits that would be
received in different taxing jurisdictions in the event that we
did not prevail on all uncertain tax positions.
We have elected under FIN 48 to continue with our prior
policy to classify interest and penalties related to unrecognized
tax benefits as income taxes in our financial statements. For
the year ended December 31, 2007, we recognized $25.0 mil-
lion of interest and penalties expense related to unrecognized
tax benefits in the consolidated statement of operations.
The following presents a rollforward of our unrecognized
tax benefits and associated interest and penalties included in
the balance sheet.
Gross Unrecognized Tax Benefits, Interest and Total Gross
Excluding Interest and Penalties Penalties Unrecognized Tax Benefits
Balance at January 1, 2007 $ 354.3 $ 68.5 $ 422.8
Increase in prior year tax positions 2.8 21.1 23.9
Increase in current year tax positions 20.1 5.3 25.4
Decrease related to settlements with taxing authorities
and lapse of statute of limitations (21.6) (5.5) (27.1)
Increase due to effects of foreign currency translation 7.8 4.1 11.9
Balance at December 31, 2007 $ 363.4 $ 93.5 $ 456.9
It is expected that the amount of unrecognized tax benefits will change in the next twelve months due to expiring statutes, audit
activity, tax payments, competent authority proceedings related to transfer pricing, or final decisions in matters that are the subject
of litigation in various taxing jurisdictions in which we operate. At December 31, 2007, current taxes payable included approximately
$105.5 million of gross unrecognized tax benefits, which we expect to settle within the next twelve months primarily as the result of
audit settlements or statute expirations in several taxing jurisdictions. The most significant uncertainties are due to possible transfer
pricing adjustments related to goods and services provided across borders in various countries.
At December 31, 2007, approximately $351.4 million of gross unrecognized tax benefits were included in the non-current por-
tion of our income tax liabilities, for which the settlement period cannot be determined; however, it is not expected to be within the
next twelve months.