Eli Lilly 2007 Annual Report Download - page 50

FINANCIALS
48
of ICOS. See Note 3 for further discussion.
Domestic and Puerto Rican companies contributed approximately 7 percent, 18 percent, and 43 percent in
2007, 2006, and 2005, respectively, to consolidated income before income taxes and cumulative effect of a change
in accounting principle. We have a subsidiary operating in Puerto Rico under a tax incentive grant. The current tax
incentive grant will not expire prior to 2017.
The American Jobs Creation Act of 2004 (AJCA) created a temporary incentive for U.S. corporations to repa-
triate undistributed income earned abroad by providing an 85 percent dividends received deduction for certain
dividends from controlled foreign corporations in 2005. We recorded a related tax liability of $465.0 million as of
December 31, 2004, and subsequently repatriated $8.00 billion in incentive dividends, as defi ned in the AJCA, dur-
ing 2005. At December 31, 2007, we had an aggregate of $8.79 billion of unremitted earnings of foreign subsidiaries
that have been or are intended to be permanently reinvested for continued use in foreign operations and that, if
distributed, would result in taxes at approximately the U.S. statutory rate.
Cash payments of income taxes totaled $1.01 billion, $864.0 million, and $1.78 billion in 2007, 2006, and 2005,
respectively. The higher cash payments of income taxes in 2005 are primarily attributable to the tax liability asso-
ciated with the implementation of the AJCA and the resolution of an IRS examination for the years 1998 to 2000.
Following is a reconciliation of the effective income tax rate applicable to income before income taxes and
cumulative effect of a change in accounting principle:
2007 2006 2005
United States federal statutory tax rate . . . . . . . . . . . . . . . . . . . . . . . . 35.0% 35.0% 35.0%
Add (deduct)
International operations, including Puerto Rico . . . . . . . . . . . . . . . (11.6) (6.7) (4.8)
Non-deductible acquired in-process research and
development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.4 — —
General business credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1.6) (1.4) (1.5)
Sundry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3.4) (4.8) (2.4)
Effective income tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23.8% 22.1% 26.3%
We adopted FIN 48 on January 1, 2007. FIN 48 prescribes a recognition threshold and measurement attribute
for the fi nancial statement recognition and measurement of a tax position taken or expected to be taken in a tax
return. As a result of the implementation of FIN 48, we reclassifi ed $921.4 million of income taxes payable from
current to non-current liabilities. We also recognized an increase of $8.6 million in the liability for unrecognized
tax benefi ts, and an offsetting reduction to the January 1, 2007 balance of retained earnings. A reconciliation of the
beginning and ending amount of gross unrecognized tax benefi ts is as follows:
Beginning balance at January 1, 2007. . . . . . . . . . . . . . . . . . . . . . . . . . $1,340.7
Additions based on tax positions related to the current year . . . . . . . 206.4
Additions for tax positions of prior years . . . . . . . . . . . . . . . . . . . . . . . 35.6
Reductions for tax positions of prior years. . . . . . . . . . . . . . . . . . . . . . (15.1)
Settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2.3)
Balance at December 31, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,565.3
The total amount of unrecognized tax benefi ts that, if recognized, would affect our effective tax rate was
$1.46 billion at December 31, 2007.
We fi le income tax returns in the U.S. federal jurisdiction and various state, local, and non-U.S. jurisdictions.
We are no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations in major taxing
jurisdictions for years before 2001. We are currently under audit by the Internal Revenue Service (IRS) for tax
years 2001-2004, and management believes it is reasonably possible that a substantial portion of this audit will
conclude within the next 12 months; however, the ultimate resolution of all issues in the audit period is dependent
upon a number of factors, including the potential for formal administrative and legal proceedings. Resolution of a
substantial portion of the audit would bring certainty to specifi c tax positions addressed in the audit, allowing for a
reduction in gross unrecognized tax benefi ts. If such resolution is reached within the next 12 months, we estimate
a reduction in gross unrecognized tax benefi ts in the range of $600 million to $700 million. As a result, our consoli-
dated results of operations could benefi t up to $190 million through a reduction in income tax expense. The majori-
ty of this reduction in unrecognized tax benefi ts relates to intercompany pricing positions that were agreed with the
IRS in a prior audit cycle for which a prepayment of tax was made in 2005. We anticipate that any tax due upon such