Johnson Controls 2014 Annual Report Download - page 30

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tax consequences of business divestitures, significant restructuring and impairment costs, the change in assertion over reinvestment
of foreign undistributed earnings related to the Global Workplace Solutions business and valuation allowance adjustments. The
effective rate is above the U.S. statutory rate for fiscal 2013 primarily due to the tax consequences of significant restructuring and
impairment costs, and valuation allowance and uncertain tax position adjustments, partially offset by favorable tax audit resolutions,
the benefits of continuing global tax planning initiatives and income in certain non-U.S. jurisdictions with a tax rate lower than
the U.S. statutory tax rate. Refer to Note 18, "Income Taxes," of the notes to consolidated financial statements for further details.
Valuation Allowances
The Company reviews the realizability of its deferred tax asset valuation allowances on a quarterly basis, or whenever events or
changes in circumstances indicate that a review is required. In determining the requirement for a valuation allowance, the historical
and projected financial results of the legal entity or consolidated group recording the net deferred tax asset are considered, along
with any other positive or negative evidence. Since future financial results may differ from previous estimates, periodic adjustments
to the Company’s valuation allowances may be necessary.
In the fourth quarter of fiscal 2014, the Company performed an analysis related to the realizability of its worldwide deferred tax
assets. As a result, and after considering tax planning initiatives and other positive and negative evidence, the Company determined
that it was more likely than not that deferred tax assets within Italy would not be realized. Therefore, the Company recorded $34
million of net valuation allowances as income tax expense in the three month period ended September 30, 2014.
In the first quarter of fiscal 2014, the Company determined that it was more likely than not that the deferred tax asset associated
with a capital loss in Mexico would not be utilized. Therefore, the Company recorded a $21 million valuation allowance as income
tax expense.
In the fourth quarter of fiscal 2013, the Company determined that it was more likely than not that deferred tax assets within Germany
and Poland would not be realized. The Company also determined that it was more likely than not that the deferred tax assets within
two French Power Solutions entities would be realized. Therefore, the Company recorded $145 million of net valuation allowances
as income tax expense in the three month period ended September 30, 2013.
In the second quarter of fiscal 2013, the Company determined that it was more likely than not that a portion of the deferred tax
assets within Brazil and Germany would not be realized. Therefore, the Company recorded $94 million of valuation allowances
as income tax expense.
Uncertain Tax Positions
The Company is subject to income taxes in the U.S. and numerous foreign jurisdictions. Judgment is required in determining its
worldwide provision for income taxes and recording the related assets and liabilities. In the ordinary course of the Company’s
business, there are many transactions and calculations where the ultimate tax determination is uncertain. The Company is regularly
under audit by tax authorities.
In the third quarter of fiscal 2013, tax audit resolutions resulted in a net $79 million benefit to income tax expense.
As a result of foreign law changes during the second quarter of fiscal 2013, the Company increased its total reserve for uncertain
tax positions, resulting in income tax expense of $17 million.
The Company’s federal income tax returns and certain non-U.S. income tax returns for various fiscal years remain under various
stages of audit by the Internal Revenue Service and respective non-U.S. tax authorities. Although the outcome of tax audits is
always uncertain, management believes that it has appropriate support for the positions taken on its tax returns and that its annual
tax provisions included amounts sufficient to pay assessments, if any, which may be proposed by the taxing authorities. At September
30, 2014, the Company had recorded a liability for its best estimate of the probable loss on certain of its tax positions, the majority
of which is included in other noncurrent liabilities in the consolidated statements of financial position. Nonetheless, the amounts
ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ materially from the amounts accrued
for each year.
It is reasonably possible that certain tax examinations, appellate proceedings and/or tax litigation will conclude within the next
twelve months, the impact of which could be up to a $50 million adjustment to tax expense.