Federal Express 2009 Annual Report Download - page 58

FEDEX CORPORATION
56
A reconciliation of the statutory federal income tax rate to
the effective income tax rate for the years ended May 31 was
as follows:
2009 2008 2007
Statutory U.S. income tax rate 35.0% 35.0% 35.0%
Increase resulting from:
Goodwill impairment 48.0 6.8 –
State and local income taxes,
net of federal benefi t 1.9 2.1 2.0
Other, net 0.7 0.3 0.3
Effective tax rate 85.6% 44.2% 37.3%
Our 2009 and 2008 effective tax rates were signifi cantly impacted
by goodwill impairment charges related to the Kinko’s acquisi-
tion, which are not deductible for income tax purposes. Our 2007
tax rate was favorably impacted by the conclusion of various
state and federal tax audits and appeals. The 2007 rate reduc-
tion was partially offset by tax charges incurred as a result of a
reorganization in Asia associated with our acquisition in China,
as described in Note 3.
The signifi cant components of deferred tax assets and liabilities
as of May 31 were as follows (in millions):
2009 2008
Deferred Deferred Deferred Deferred
Tax Assets Tax Liabilities Tax Assets Tax Liabilities
Property, equipment,
leases and intangibles $ 406 $ 1,862 $ 321 $ 1,650
Employee benefi ts 384 143 401 364
Self-insurance accruals 392 – 359 –
Other 491 222 426 224
Net operating loss/credit
carryforwards 131 – 135 –
Valuation allowances (137) – (124) –
$ 1,667 $ 2,227 $ 1,518 $ 2,238
The net deferred tax liabilities as of May 31 have been classifi ed
in the balance sheets as follows (in millions):
2009 2008
Current deferred tax asset $ 511 $ 544
Noncurrent deferred tax liability (1,071) (1,264)
$ (560) $ (720)
We have $385 million of net operating loss carryovers in vari-
ous foreign jurisdictions and $450 million of state operating loss
carryovers. The valuation allowances primarily represent amounts
reserved for operating loss and tax credit carryforwards, which
expire over varying periods starting in 2010. As a result of this
and other factors, we believe that a substantial portion of these
deferred tax assets may not be realized.
Unremitted earnings of our foreign subsidiaries amounted to
$191 million in 2009 and $147 million in 2008. We have not recog-
nized deferred taxes for U.S. federal income tax purposes on the
unremitted earnings of our foreign subsidiaries that are deemed
to be permanently reinvested. Upon distribution, in the form of
dividends or otherwise, these unremitted earnings would be sub-
ject to U.S. federal income tax. Unrecognized foreign tax credits
would be available to reduce a portion, if not all, of the U.S. tax
liability. Determination of the amount of unrecognized deferred
U.S. income tax liability is not practicable.
Our liabilities recorded under FIN 48 totaled $72 million at May 31,
2009 and $88 million at May 31, 2008, including $59 million at May
31, 2009 and $68 million at May 31, 2008 associated with positions
that if favorably resolved would provide a benefi t to our effective
tax rate. The change from the prior year relates primarily to the
resolution of an immaterial state income tax matter during the
second quarter of 2009. We classify interest related to income
tax liabilities as interest expense, and if applicable, penalties are
recognized as a component of income tax expense. The balance
of accrued interest and penalties was $19 million on May 31,
2009 and $25 million on May 31, 2008. Total interest and penalties
included in our statement of operations is immaterial.
We fi le income tax returns in the U.S., various U.S. states, and
various foreign jurisdictions. During 2009, the Internal Revenue
Service (“IRS” ) completed its audit of our consolidated U.S.
income tax returns for the 2004 through 2006 tax years. The
completion of the audit did not have a material effect on our con-
solidated fi nancial statements. We are no longer subject to U.S.
federal income tax examination for years through 2006 except
for specifi c U.S. federal income tax positions that are in various
stages of appeal and/or litigation. No resolution date can be rea-
sonably estimated at this time for these appeals and litigation, but
their resolution is not expected to have a material effect on our
consolidated fi nancial statements. We are also subject to ongo-
ing audits in state, local and foreign tax jurisdictions throughout
the world.
A reconciliation of the beginning and ending amount of unrecog-
nized tax benefi ts is as follows (in millions):
Balance at June 1, 2007 $ 72
Increases for tax positions taken in the current year 16
Increases for tax positions taken in prior years 12
Decreases for tax positions taken in prior years (9)
Settlements (3)
Balance at May 31, 2008 $ 88
Increases for tax positions taken in the current year 7
Increases for tax positions taken in prior years 10
Decreases for tax positions taken in prior years (30)
Settlements (3)
Balance at May 31, 2009 $ 72
Included in the May 31, 2009 and May 31, 2008 balances are $7
million and $8 million, respectively, of tax positions for which the
ultimate deductibility or income inclusion is certain but for which
there may be uncertainty about the timing of such deductibility or
income inclusion. It is diffi cult to predict the ultimate outcome or
the timing of resolution for tax positions under FIN 48. Changes
may result from the conclusion of ongoing audits, appeals or
litigation in state, local, federal and foreign tax jurisdictions, or
from the resolution of various proceedings between the U.S. and
foreign tax authorities. Our liability for tax positions under FIN
48 includes no matters that are individually material to us. It is
reasonably possible that the amount of the benefi t with respect
to certain of our unrecognized tax positions will increase or
decrease within the next 12 months, but an estimate of the range
of the reasonably possible changes cannot be made. However,
we do not expect that the resolution of any of our tax positions
under FIN 48 will be material.