Medtronic 2013 Annual Report Download - page 118

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Table of Contents
Medtronic, Inc.
Notes to Consolidated Financial Statements (Continued)
The Company had $1.068 billion, $917 million, and $769 million of gross unrecognized tax benefits as of April 26, 2013, April 27,
2012, and April 29, 2011, respectively. A reconciliation of the beginning and ending amount of unrecognized tax benefits for fiscal
years 2013, 2012, and 2011 is as follows:
Fiscal Year
(in millions) 2013 2012 2011
Gross unrecognized tax benefits at beginning of fiscal year $ 917 $ 769 $ 538
Gross increases:
Prior year tax positions 12 47 151
Current year tax positions 169 171 172
Gross decreases:
Prior year tax positions (21) (53) (57)
Settlements (6) (4) (32)
Statute of limitation lapses (3) (13) (3)
Gross unrecognized tax benefits at end of fiscal year $ 1,068 $ 917 $ 769
If all of the Company’s unrecognized tax benefits as of April 26, 2013, April 27, 2012, and April 29, 2011 were recognized, $1.028
billion, $858 million, and $685 million would impact the Company’s effective tax rate, respectively. Although the Company
believes that it has adequately provided for liabilities resulting from tax assessments by taxing authorities, positions taken by these
tax authorities could have a material impact on the Company’s effective tax rate in future periods. The Company has recorded the
gross unrecognized tax benefits as a long-term liability, as it does not expect significant payments to occur or the total amount of
unrecognized tax benefits to change significantly over the next 12 months.
The Company recognizes interest and penalties related to income tax matters in the provision for income taxes in the consolidated
statements of earnings and records the liability in the current or long-term accrued income taxes in the consolidated balance sheets,
as appropriate. The Company had $88 million, $120 million, and $80 million of accrued gross interest and penalties as of April 26,
2013, April 27, 2012, and April 29, 2011, respectively. During the fiscal years ended April 26, 2013, April 27, 2012, and April 29,
2011, the Company recognized gross interest expense of approximately $33 million, $32 million, and $18 million in the provision
for income taxes in the consolidated statements of earnings, respectively.
Tax audits associated with the allocation of income, and other complex issues, may require an extended period of time to resolve
and may result in income tax adjustments if changes to the Company’s allocation are required between jurisdictions with different
tax rates. Tax authorities periodically review the Company’s tax returns and propose adjustments to the Company’s tax filings.
The IRS has settled its audits with the Company for all years through fiscal year 2004. Tax years settled with the IRS may remain
open for foreign tax audits and competent authority proceedings. Competent authority proceedings are a means to resolve
intercompany pricing disagreements between countries. The major foreign jurisdictions where the Company conducts business
have generally concluded all material tax matters through fiscal year 2004. In addition, substantially all material state and local
tax matters have been concluded through fiscal year 2004.
In March 2009, the IRS issued its audit report for fiscal years 2005 and 2006. The Company reached agreement with the IRS on
some, but not all matters related to these fiscal years. On December 23, 2010, the IRS issued a statutory notice of deficiency with
respect to the remaining issues. The Company filed a Petition with the U.S. Tax Court on March 21, 2011 objecting to the deficiency.
During October and November 2012, the Company reached resolution with the IRS on various matters, including the deductibility
of a settlement payment. The remaining unresolved issues relate to the allocation of income between Medtronic, Inc. and its wholly-
owned subsidiary operating in Puerto Rico, which is one of the Company's key manufacturing sites.
In October 2011, the IRS issued its audit report for fiscal years 2007 and 2008. The Company reached agreement with the IRS on
some but not all matters related to these fiscal years. The significant issues that remain unresolved relate to the allocation of income
between Medtronic, Inc. and its wholly-owned subsidiary operating in Puerto Rico, and proposed adjustments associated with the
tax effects of the Company's acquisition of Kyphon. Associated with the Kyphon acquisition, Medtronic entered into an
intercompany transaction whereby the Kyphon U.S. tangible assets were sold to another wholly-owned Medtronic subsidiary in
a taxable transaction. The IRS has disagreed with the Company's valuation of these assets and proposed that all U.S. goodwill,
the value of the ongoing business, and the value of the workforce in place related to the Kyphon acquisition be included in the
tangible asset sale. The Company disagrees that these items were sold, as well as with the IRS valuation of these items. The IRS
continues to evaluate the overall transaction that Medtronic entered into and because a foreign subsidiary acquired part of Kyphon
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