First Data 2012 Annual Report Download - page 31

benefits, discussed below, and state tax benefits. The 2012 effective income tax rate was negatively impacted by approximately 9
percentage points due to the current year cumulative correction of immaterial prior year errors.
The effective tax rate benefit in 2011 was greater than the statutory rate due primarily to net income attributable to
noncontrolling interests from pass through entities for which there was no tax expense provided, state tax benefits, lower tax earnings
and profits than book income for foreign entities, a decrease in the Company’s liability for unrecognized tax benefits, a net benefit
relating to tax effects of foreign exchange gains and losses on intercompany notes and prior year income tax return true-ups. These
positive adjustments were partially offset by an increase in the Company’s valuation allowance against foreign tax credits and the tax
impact of a contribution of the Company’s transportation business in exchange for a 30% interest in an alliance.
The effective tax rate benefit in 2010 was less than the statutory rate primarily due to an increase in the Company’s valuation
allowance against foreign tax credits. This negative adjustment was partially offset by state tax benefits, net income attributable to
noncontrolling interests for which there was no tax expense provided and a decrease in the Company’s liability for unrecognized tax
benefits.
As a result of the Company recording pretax losses in each of the periods, the favorable impacts caused increases to the
effective tax rate, while the unfavorable impacts caused decreases to the effective tax rate.
Subsequent to the merger and as part of the First Data Holdings, Inc. (“Holdings”) consolidated federal group and consolidated,
combined or unitary state groups for income tax purposes, the Company has been and continues to be in a tax net operating loss
position. The Company currently anticipates being able to utilize in the future most of its existing federal net operating loss
carryforwards due to the existence of significant deferred tax liabilities established in connection with purchase accounting for the
merger and the Company’s consideration of a tax planning strategy related to its investments in affiliates. Implementation of this tax
planning strategy would result in the immediate reversal of temporary differences associated with the excess of book basis over tax
basis in the investments. Accordingly, the Company has not established valuation allowances against these loss carryforwards. The
Company, however, may not be able to realize a benefit related to losses in most states and certain foreign countries, requiring the
establishment of valuation allowances. The Company currently anticipates that it will be required to establish a valuation allowance
against its federal net operating loss carryforwards in 2013.
Despite the net operating loss position discussed above, the Company continues to incur income taxes in states for which it files
returns on a separate entity basis and in certain foreign countries. Generally, these foreign income taxes would result in a foreign tax
credit in the U.S. to the extent of any U.S. income taxes on the income upon repatriation. However, the Company does not generate
sufficient foreign source income to be able to fully utilize its foreign tax credits. As a result, the Company has established valuation
allowances, including $182 million in 2010 upon enactment of federal legislation which changed tax law, against that portion of the
credits for which it is likely that no benefit will be realized in the future.
During the year ended December 31, 2012, the Company’s liability for unrecognized tax benefits was reduced by $52 million
upon closure of the 2003 and 2004 federal tax years and the resolution of certain state audit issues. As of December 31, 2012, the
Company anticipates it is reasonably possible that its liability for unrecognized tax benefits may decrease by approximately $126
million within the next twelve months as the result of the possible closure of its 2005 through 2007 federal tax years, potential
settlements with certain states and foreign countries and the lapse of the statute of limitations in various state and foreign
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urisdictions. The potential decrease relates to various federal, state and foreign tax benefits including research and experimentation
credits, transfer pricing adjustments and certain amortization and loss deductions.
The Company or one or more of its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state and
foreign jurisdictions. As of December 31, 2012, the Company was no longer subject to income tax examination by the U.S. federal
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urisdiction for years before 2005. State and local examinations are substantially complete through 2002. Foreign jurisdictions
generally remain subject to examination by their respective authorities from 2005 forward, none of which are considered major
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urisdictions.
Under the Tax Allocation Agreement executed at the time of the spin-off of The Western Union Company (“Western Union”)
on September 29, 2006, Western Union is responsible for and must indemnify the Company against all taxes, interest and penalties
that relate to Western Union for periods prior to the spin-off date. If Western Union were to agree to or be finally determined to owe
any amounts for such periods but were to default in its indemnification obligation under the Tax Allocation Agreement, the Company
as parent of the tax group during such periods generally would be required to pay the amounts to the relevant tax authority, resulting in
a potentially material adverse effect on the Company’s financial position and results of operations. As of December 31, 2012, the
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