Baker Hughes 2009 Annual Report Download - page 122

48 Baker Hughes Incorporated
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
differences and carryforwards are as follows at December 31:
2009 2008
Deferred tax assets:
Receivables $ 29 $ 9
Inventory 233 206
Property 51 71
Employee benefits 131 124
Other accrued expenses 49 35
Operating loss carryforwards 76 36
Tax credit carryforwards 171 54
Capitalized research and
development costs 8 16
Other 63 55
Subtotal 811 606
Valuation allowances (142) (77)
Total 669 529
Deferred tax liabilities:
Goodwill 142 139
Undistributed earnings of
foreign subsidiaries 64 124
Other 43 45
Total 249 308
Net deferred tax asset $ 420 $ 221
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 and foreign tax credit carryforwards in certain
non-U.S. jurisdictions. Of the $65 million net increase in valua-
tion allowance in 2009, $38 million represents net tax charges
related to foreign losses, $28 million pertains to a change in
our ability to fully utilize deferred tax assets in Venezuela offset
by a $12 million reduction in valuation allowance related to
deferred tax assets in Brazil. The remaining $11 million net
increase represents various items none of which are individually
significant. The operating loss carryforwards without a valua-
tion allowance will expire in varying amounts over the next
twenty years.
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 $2.3 billion, $2.2 billion and $1.6 billion as of
December 31, 2009, 2008 and 2007, 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, 2009, we had approximately $55 million
of foreign tax credits which may be carried forward indefinitely
under applicable foreign law and $115 million of foreign tax
credits available to offset future payments of federal income
taxes, expiring in 2018 and 2019. In addition, at December 31,
2009, we had approximately $1 million of state tax credits
expiring in varying amounts between 2016 and 2021.
As of December 31, 2009, we had $339 million of tax
liabilities for gross unrecognized tax benefits, which includes
liabilities for interest and penalties of $72 million and $17 mil-
lion, 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 $288 million. The remaining approxi-
mately $51 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 classify interest and penalties related to unrecognized
tax benefits as income taxes in our financial statements.
For the year ended December 31, 2009, we recognized tax
provision of $11 million for interest and penalties related
to unrecognized tax benefits in the consolidated statement
of operations.