Citrix 2006 Annual Report Download - page 101

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
Citrix Systems, Inc.  Annual Report
At December 31, 2006, the Company had research and
development tax credit carryforwards of approximately
$16.1 million that expire beginning in 2009. The Company
had foreign tax credit carryforwards of approximately
$19.1 million at December 31, 2006 that expire beginning
in 2010. Additionally, the Company has other general
business credits at December 31, 2006 of approximately
$0.9 million that expire 2025.
A reconciliation of the Company’s effective tax rate to the
statutory federal rate is as follows:
Year Ended December 31,
2006 2005 2004
(restated) (restated)
Federal statutory taxes 35.0% 35.0% 35.0%
State income taxes, net
of federal tax benefit 3.8 4.4 4.5
Foreign operations (20.9) (19.5) (27.0)
Permanent differences 5.4 2.2 5.0
Tax credits (2.0) (2.4) —
American Jobs Creation
Act dividend —6.9 —
SFAS No.123R expense 3.4 — —
Other —(0.4) 3.1
Change in valuation
allowance —— (0.5)
24.7% 26.2% 20.1%
The Company’s tax provision is based on expected
income, statutory tax rates and tax planning opportunities
available in the various jurisdictions in which the Company
operates. In the ordinary course of global business, there
are transactions for which the ultimate tax outcome is
uncertain, thus judgment is required in determining the
worldwide provision for income taxes and the associated
realizability of deferred tax assets and liabilities. The
Company establishes reserves when it becomes probable
that a tax return position may be challenged and that
the Company may not succeed in completely defending
that challenge. The Company adjusts these reserves in
light of changing facts and circumstances, such as the
settlement of a tax audit. The Company’s annual tax rate
includes the impact of reserve provisions and changes
to reserves. While it is often difficult to predict the final
outcome or the timing of resolution of any particular tax
matter, the Company believes that its reserves reflect the
probable outcome of known tax contingencies. As such,
included in the Company’s effective tax rate for 2006 is
the reduction of approximately $14.2 million in tax reserves
related to the conclusion of an Internal Revenue Service
examination for the 2001 tax year and the expiration of a
statute of limitations for the 2002 tax year partially offset
by an additional tax reserve of approximately $13.0 million
related to uncertainties arising in 2006. The net effect of
these contingencies, primarily relating to the taxability
of transactions between entities of the consolidated
Company, did not have a material impact on the
Company’s effective tax rate for 2006.
On October 22, 2004, the American Jobs Creation
Act (“AJCA”) was signed into law. The AJCA provides
for an 85% dividends received deduction on dividend
distributions of foreign earnings to a U.S. taxpayer, if
certain conditions are met. During the second quarter of
fiscal 2005, the Company completed its evaluation of the
effects of the repatriation provision of the AJCA, and the
Company’s Chief Executive Officer and Board of Directors
approved its DRP under the AJCA. On September 27,
2005, the Company repatriated approximately $503
million of certain foreign earnings, of which $500 million
qualified for the 85% dividends received deduction. During
2005, the Company recorded an estimated tax provision
of approximately $24.4 million related to the repatriation.
Additionally, during 2005, the Company recorded the
reversal of approximately $8.8 million for income taxes on
certain foreign earnings for which a deferred tax liability
had been previously recorded. Other than the one-time
repatriation provision under the AJCA, the Company does
not expect to remit earnings from its foreign subsidiaries.
In July 2006, the FASB issued FASB Interpretation
(“FIN”) No. 48, Accounting for Uncertainty in Income
Taxes – an interpretation of FASB Statement No. 109.
FIN No. 48 prescribes a comprehensive model for
recognizing, measuring , presenting and disclosing in the
financial statements tax positions taken or expected to
be taken on a tax return. FIN No. 48 is effective for fiscal
years beginning after December 15, 2006. If there are
changes in net assets as a result of application of FIN
No. 48 these will be accounted for as an adjustment to
retained earnings. The Company adopted FIN No. 48 on
January 1, 2007, as required. Upon adoption, the Company
recorded a cumulative adjustment to retained earnings of
approximately $12.4 million as a result of changes in net
assets that occurred due to the application of FIN No. 48 to