McKesson 2014 Annual Report Download - page 83

McKESSON CORPORATION
FINANCIAL NOTES (Continued)
80
Income tax expense included $94 million of net discrete tax expense in 2014, and $29 million and $66 million of net discrete
tax benefit in 2013 and 2012. Discrete tax expense for 2014 primarily related to a $122 million charge regarding an unfavorable
decision from the Tax Court of Canada with respect to transfer pricing issues. Included in the 2012 discrete tax benefit is a
$31 million credit to income tax expense as a result of the reversal of an unrecognized tax benefit relating to our AWP litigation.
The 2013 federal and state current income tax expense reflects the utilization of alternative minimum tax credit carryforwards.
We have received reassessments from the Canada Revenue Agency (“CRA”) for a total of $219 million related to a transfer
pricing matter impacting years 2003 through 2009. We previously appealed the reassessment for 2003 to the Tax Court of Canada
and have filed a notice of objection for 2004 through 2009. On December 13, 2013, the Tax Court of Canada dismissed our appeal
of the reassessment with respect to 2003. On January 10, 2014, we filed a Notice of Appeal to the Federal Court of Appeal in
response to the judgment of the Tax Court of Canada. As a result of the unfavorable Tax Court Decision relating to 2003, we
recognized a discrete tax expense of $122 million in the third quarter of 2014, which includes tax and interest, for the years 2003
through 2013. The ultimate resolution of these issues could result in an increase or decrease to income tax expense.
We have received tax assessments of $98 million from the U.S. Internal Revenue Service (“IRS”) relating to 2003 through
2006. We are pursuing administrative relief through the appeals process. We continue to believe in the merits of our tax positions
and that we have adequately provided for any potential adverse results relating to these examinations in our financial statements.
The IRS is currently examining our U.S. corporation income tax returns for 2007 through 2009. The CRA is currently
examining our Canadian income tax returns for 2010 through 2013. In nearly all jurisdictions, the tax years prior to 2003 are no
longer subject to examination.
Significant judgments and estimates are required in determining the consolidated income tax provision and evaluating income
tax uncertainties. Although our major taxing jurisdictions are the U.S. and Canada, we are subject to income taxes in numerous
foreign jurisdictions. Our income tax expense, deferred tax assets and liabilities and uncertain tax liabilities reflect management’s
best assessment of estimated current and future taxes to be paid. We believe that we have made adequate provision for all income
tax uncertainties.
The reconciliation between our effective tax rate on income from continuing operations and statutory tax rate is as follows:
Years Ended March 31,
(In millions) 2014 2013 2012
Income tax expense at federal statutory rate $ 734 $ 670 $ 670
State income taxes net of federal tax benefit 57 58 56
Foreign income taxed at various rates (166)(136)(174)
Canadian litigation 122 — —
Unrecognized tax benefits and settlements (6) 1 (18)
Tax credits (6)(13)(13)
Other, net 7 1 (7)
Income tax expense $ 742 $ 581 $ 514
At March 31, 2014 undistributed earnings of our foreign operations totaling $4.2 billion were considered to be permanently
reinvested. No deferred tax liability has been recognized on the basis difference created by such earnings since it is our intention
to utilize those earnings in the foreign operations as well as to fund certain research and development activities for an indefinite
period of time. The determination of the amount of deferred taxes on these earnings is not practicable because the computation
would depend on a number of factors that cannot be known until a decision to repatriate the earnings is made.