Medtronic 2014 Annual Report Download - page 60

tax adjustments. We believe that the resulting non-GAAP financial measure provides useful information to investors
because it excludes the effect of these discrete items so that investors can compare our recurring results over
multiple periods. Investors should consider this non-GAAP measure in addition to, and not as a substitute for, financial
performance measures prepared in accordance with U.S. GAAP. In addition, this non-GAAP financial measure may not
be the same or similar to measures presented by other companies.
Our effective tax rate from continuing operations of 17.3 percent decreased by 1.1 percentage points from fiscal year 2013 to
fiscal year 2014. The decrease in our effective tax rate was primarily due to the tax impact of special charges, restructuring
charges, net, certain litigation charges, net, acquisition-related items, the certain tax adjustments recorded during fiscal year
2014, and other factors impacting our non-GAAP nominal rate as discussed below.
Our non-GAAP nominal tax rate for fiscal year 2014 was 18.0 percent compared to 17.9 percent in the prior fiscal year. The
increase in our non-GAAP nominal tax rate for fiscal year 2014 as compared to the prior fiscal year was primarily due to the
impact of the extension of the U.S. federal research and development tax credit on January 2, 2013 for calendar years 2012 and
2013 and the expiration of such extension on December 31, 2013, the finalization of certain income tax returns, changes to
uncertain tax position reserves, the restoration of tax basis on certain assets for which depreciation and amortization deductions
were previously limited, the tax impact of foreign dividend distributions, and year-over-year changes in operational results by
jurisdiction.
During fiscal year 2014, we recorded $42 million in operational tax benefits. This included a $23 million benefit associated with
the restoration of tax basis on certain assets for which depreciation and amortization deductions were previously limited and a
$19 million net benefit associated with the resolution of certain foreign and state income tax audits, finalization of certain tax
returns, and changes to uncertain tax position reserves.
The fiscal year 2013 effective tax rate from continuing operations of 18.4 percent increased by 0.8 of a percentage point from
the prior fiscal year. The increase in our effective tax rate was due to the net tax impact of restructuring charges, net,
acquisition-related items, certain litigation charges, net, and the impact of operational tax benefits described below. Our non-
GAAP nominal tax rate for fiscal year 2013 was 17.9 percent compared to 18.1 percent in the prior fiscal year. The decrease in
our non-GAAP nominal tax rate for fiscal year 2013 as compared to the prior fiscal year was primarily due to the impact of
operational tax benefits.
During fiscal year 2013, we recorded $72 million in operational tax benefits. This included a $30 million net benefit associated
with the resolution of U.S. federal, state, and foreign income tax audits, finalization of certain tax returns, and changes to
uncertain tax position reserves. As a result of the retroactive renewal and extension of the U.S. federal research and
development tax credit, a $12 million benefit was also recorded as an operational tax benefit during fiscal year 2013. In
addition, we recorded a $24 million benefit associated with foreign dividend distributions and a $6 million benefit associated
with the release of a valuation allowance associated with the usage of a capital loss carryover.
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 our allocation are required between jurisdictions with different
tax rates. Tax authorities periodically review our tax returns and propose adjustments to our tax filings. The IRS has settled its
audits with us 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. We 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. We filed a Petition with the U.S. Tax Court on March 21, 2011 objecting to the deficiency. During
October and November 2012, we 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 our key manufacturing sites.
In October 2011, the IRS issued its audit report for fiscal years 2007 and 2008. We 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
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