Pfizer 2007 Annual Report Download - page 53

2007 Financial Report 51
Notes to Consolidated Financial Statements
Pfizer Inc and Subsidiary Companies
We operate manufacturing subsidiaries in Puerto Rico, Ireland and
Singapore. We benefit from Puerto Rican incentive grants that
expire between 2017 and 2027. Under the grants, we are partially
exempt from income, property and municipal taxes. Under Section
936 of the U.S. Internal Revenue Code, Pfizer was a “grandfathered”
entity and was entitled to the benefits under such statute until
September 30, 2006. In Ireland, we benefit from an incentive tax rate
effective through 2010 on income from manufacturing operations.
In Singapore, we benefit from incentive tax rates effective through
2031 on income from manufacturing operations.
The U.S. research tax credit was effective through December 31,
2007. For a discussion about the repatriation of foreign earnings and
the tax legislation impact, see Note 8B. Taxes on Income: Taxes on
Income. For a discussion about the resolution of certain tax positions,
see Note 8E. Taxes on Income: Tax Contingencies. The charges for
acquired IPR&D in 2007, 2006 and 2005 are not deductible.
D. Deferred Taxes
Deferred taxes arise because of different timing treatment
between financial statement accounting and tax accounting,
known as “temporary differences.” We record the tax effect of
these temporary differences as “deferred tax assets” (generally
items that can be used as a tax deduction or credit in future
periods) or “deferred tax liabilities” (generally items for which we
received a tax deduction, but that have not yet been recorded in
the consolidated statement of income).
The tax effect of the major items recorded as deferred tax assets and
liabilities, shown before jurisdictional netting, as of December 31,
is as follows:
2007 2006
DEFERRED TAX DEFERRED TAX
_____________________________ _____________________________
(MILLIONS OF DOLLARS) ASSETS (LIABILITIES) ASSETS (LIABILITIES)
Prepaid/deferred
items $1,315 $ (431) $1,164 $ (312)
Intangibles 897 (6,737) 841 (7,704)
Property, plant
and equipment 300 (957) 104 (1,105)
Employee
benefits 2,552 (740) 3,141 (804)
Restructurings
and other
charges 717 (11) 573 (19)
Net operating
loss/credit
carryforwards 1,842 — 1,061 —
Unremitted
earnings — (3,550) — (3,567)
State and local tax
adjustments(a) 529 — ——
All other 848 (37) 912 (392)
Subtotal 9,000 (12,463) 7,796 (13,903)
Valuation
allowance (158) — (194) —
Total deferred
taxes $8,842 $(12,463) $7,602 $(13,903)
Net deferred
tax liability $ (3,621) $ (6,301)
(a) Reclassified as a result of the adoption of a new accounting standard.
The reduction in the net deferred tax liability position in 2007
compared to 2006 is primarily due to amortization of deferred tax
liabilities related to identifiable intangibles in connection with our
acquisition of Pharmacia in 2003, partially offset by an increase
in noncurrent deferred tax assets related to the impairment of
Exubera. (See Note 4. Asset Impairment Charges and Other Costs
Associated with Exiting Exubera.)
We have carryforwards primarily related to foreign tax credit
carryovers and net operating losses, which are available to reduce
future U.S. federal and state, as well as international, income with
either an indefinite life or expiring at various times between
2008 and 2026. Certain of our U.S. net operating losses are subject
to limitations under Internal Revenue Code Section 382.
Valuation allowances are provided when we believe that our
deferred tax assets are not recoverable, based on an assessment
of estimated future taxable income that incorporates ongoing,
prudent, feasible tax planning strategies.
Deferred tax assets and liabilities in the preceding table, netted
by taxing jurisdiction, are in the following captions in our
consolidated balance sheets:
AS OF DEC. 31,
__________________________________
(MILLIONS OF DOLLARS) 2007 2006
Current deferred tax asset(a) $ 1,664 $ 1,384
Noncurrent deferred tax assets(b) 2,441 354
Current deferred tax liability(c) (30) (24)
Noncurrent deferred tax liability(d) (7,696) (8,015)
Net deferred tax liability $(3,621) $(6,301)
(a) Included in
Prepaid expenses and taxes .
(b) Included in
Other assets, deferred taxes and deferred charges .
(c) Included in
Other current liabilities .
(d) Included in
Deferred taxes .
E. Tax Contingencies
We are subject to income tax in many jurisdictions and a certain
degree of estimation is required in recording the assets and
liabilities related to income taxes. For a description of our
accounting policy associated with accounting for income tax
contingencies, see Note 1D. Significant Accounting Policies: New
Accounting Standards. All of our tax positions are subject to audit
by the local taxing authorities in each tax jurisdiction. Tax audits
can involve complex issues and the resolution of issues may span
multiple years, particularly if subject to negotiation or litigation.
The United States is one of our major tax jurisdictions and the IRS
is currently conducting audits of the Pfizer Inc. tax returns for the
years 2002, 2003 and 2004. The 2005, 2006 and 2007 tax years are
also currently under audit as part of the IRS Compliance Assurance
Process (CAP), a real-time audit process. All other tax years in the
U.S. for Pfizer Inc. are closed under the statute of limitations. With
respect to Pharmacia Corporation, the IRS is currently conducting
an audit for the year 2003 through the date of merger with
Pfizer (April 16, 2003). In addition to the open audit years in the
U.S., we have open audit years in other major tax jurisdictions, such
as Canada (1998-2006), Japan (2006), Europe (1996-2006, primarily
reflecting Ireland, the U.K., France, Italy, Spain and Germany), and
Puerto Rico (2003-2006).