Cardinal Health 2008 Annual Report Download - page 60

are included in deferred income taxes and other liabilities in the consolidated balance sheets. For the fiscal year
ended June 30, 2008, the Company recognized $47 million of interest and penalties in the consolidated statement
of earnings.
The Company files income tax returns in the U.S. federal jurisdiction, various U.S. state jurisdictions and
various foreign jurisdictions. With few exceptions, the Company is subject to audit by taxing authorities for fiscal
years ending June 30, 2001 through the current fiscal year.
The Internal Revenue Service (“IRS”) currently has ongoing audits of fiscal years 2001 through 2005.
During the three months ended December 31, 2007, the Company was notified that the IRS has transferred
jurisdiction over fiscal years 2001 and 2002 from the Office of Appeals back to the Examinations level to
reconsider previously-unadjusted specific issues. During the three months ended March 31, 2008, the Company
received Notices of Proposed Adjustment (“NPAs”) from the IRS related to fiscal years 2001 through 2005
challenging deductions arising from the sale of trade receivables to a special purpose accounts receivable and
financing entity as described in more detail in Note 10 of “Notes to Consolidated Financial Statements.” The
amount of additional tax, excluding penalties and interest which may be significant, proposed by the IRS in these
notices was $179 million. The Company disagrees with the proposed adjustments and intends to vigorously
contest them. The Company anticipates that this transaction could be the subject of proposed adjustments by the
IRS in tax audits of fiscal years 2006 to present. The Company believes that it is adequately reserved for the
uncertain tax position relating to this arrangement; therefore, it has not adjusted the amount of previously
recorded unrecognized tax benefits related to this issue.
Subsequent to the fiscal year ended June 30, 2008, the Company received an IRS Revenue Agent’s Report
for tax years 2003 through 2005, which included the NPAs discussed above and new NPAs related to the
Company’s transfer pricing arrangements between foreign and domestic subsidiaries and the transfer of
intellectual property among subsidiaries of an acquired entity prior to its acquisition by the Company. The
amount of additional tax proposed by the IRS in the new notices totals $598 million, excluding penalties and
interest which may be significant. The Company disagrees with these proposed adjustments and intends to
vigorously contest them.
It is possible that there could be a change in the amount of unrecognized tax benefits within the next 12
months due to activities of the IRS or other taxing authorities, including proposed assessments of additional tax,
possible settlement of audit issues, or the expiration of applicable statutes of limitations. The Company estimates
that the range of the possible change in unrecognized tax benefits within the next twelve months is approximately
zero to $275 million, exclusive of penalties and interest, up to $125 million of which would not affect the
Company’s effective tax rate because it relates to acquired entities.
Provision for Income Taxes—Continuing Operations
The provisions for income taxes relative to earnings before income taxes and discontinued operations were
32.5%, 32.9% and 33.2% of pretax earnings in fiscal 2008, 2007 and 2006 respectively. Generally, fluctuations
in the effective tax rate are due to changes within international and U.S. state effective tax rates resulting from
the Company’s business mix and changes in the tax impact of special items, which may have unique tax
implications depending on the nature of the item and the taxing jurisdiction. The Company’s effective tax rate
reflects tax benefits derived from increasing operations outside the United States, which are generally taxed at
rates lower than the U.S. statutory rate of 35%. The Company has tax incentive agreements in several non-U.S.
tax jurisdictions which will expire in fiscal years 2009 through 2024 if not renewed. The Company expects the
corporate tax rate to increase in fiscal 2009 due to an anticipated shift in income from lower to higher tax
jurisdictions combined with the impact of certain expiring non-U.S. tax incentive agreements.
The Company’s fiscal 2008 provision for income taxes relative to earnings before income taxes and
discontinued operations was $634 million and the effective tax rate was 32.5%. The fiscal 2008 effective tax rate
was adversely impacted by 0.14 percentage points due to the non-deductibility of certain special items and
impairments.
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