McKesson 2008 Annual Report Download - page 42

McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
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Interest Expense: Interest expense increased in the last two years primarily due to $1.0 billion of long-term debt
issued in the fourth quarter of 2007 to fund our acquisition of Per-Se. Refer to our discussion under the caption
“Credit Resources” within this Financial Review for additional information regarding our financing for the Per-Se
acquisition.
Income Taxes: Our reported tax rates were 32.1%, 25.4% and 36.4% in 2008, 2007 and 2006. In addition to
the items noted below, fluctuations in our reported tax rate are primarily due to changes within state and foreign tax
rates resulting from our business mix, including varying proportions of income attributable to foreign countries that
have lower income tax rates.
In 2008, the U.S. Internal Revenue Service (“IRS”) completed an examination of our consolidated income tax
returns for 2000 to 2002 resulting in a signed Revenue Agent Report (“RAR”), which was approved by the Joint
Committee on Taxation during the third quarter. The IRS and the Company have agreed to certain adjustments,
primarily related to transfer pricing and income tax credits. As a result of the approved RAR, we recognized
approximately $25 million of net federal and state income tax benefits. We are in the process of amending state
income tax returns for 2000 to 2002 to reflect the IRS settlement. We recorded the anticipated state tax impact of
the IRS examination in our 2008 income tax provision and do not anticipate any material impact when the final
amended state tax returns have been completed. In Canada, we received an assessment from the Canada Revenue
Agency for a total of $9 million related to transfer pricing for 2003. We plan to further pursue this issue and will
appeal the assessment. We believe we have adequately provided for any potential adverse results for 2003 and
future years. During 2008, we have also favorably concluded various foreign examinations, which resulted in the
recognition of approximately $4 million of income tax benefits. In nearly all jurisdictions, the tax years prior to
1999 are no longer subject to examination. We believe that we have made adequate provision for all remaining
income tax uncertainties. Income tax expense for 2008 was also impacted by a non-tax deductible $13 million
increase in a legal reserve.
In 2007, we recorded a credit to current income tax expense of $83 million, which primarily pertained to our
receipt of a private letter ruling from the IRS holding that our payment of approximately $960 million to settle our
Consolidated Securities Litigation Action (refer to Financial Note 17, “Other Commitments and Contingent
Liabilities” of the accompanying consolidated financial statements) is fully tax-deductible. We previously
established tax reserves to reflect the lack of certainty regarding the tax deductibility of settlement amounts paid in
the Consolidated Securities Litigation Action and related litigation. In 2007, we also recorded $24 million in
income tax benefits arising primarily from settlements and adjustments with various taxing authorities and research
and development investment tax credits from our Canadian operations.
In 2006, we made a $960 million payment into an escrow account relating to the Consolidated Securities
Litigation Action. This payment was deducted in our 2006 income tax returns and as a result, our current tax
expense decreased and our deferred tax expense increased in 2006 primarily reflecting the utilization of the deferred
tax assets associated with the Consolidated Securities Litigation Action. In 2006, we also recorded a $14 million
income tax expense, which primarily related to a basis adjustment in an investment and adjustments with various
taxing authorities.