Raytheon 2005 Annual Report Download - page 95

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The provision for income taxes differs from the U.S. statutory rate due to the following:
2005 2004 2003
Statutory tax rate 35.0% 35.0% 35.0%
Extraterritorial income exclusion/foreign sales corporation tax benefit (1.4) (3.4) (3.1)
Research and development tax credit (1.1) (0.9) (0.8)
ESOP dividend deduction benefit (1.0) (2.3) (1.7)
Foreign tax credit benefit —(5.5) —
Non-deductible costs 1.4 1.7 0.8
Federal tax cost of repatriation under the American Jobs Creation Act 0.4 ——
Other, net 1.3 (0.4) (0.4)
Effective tax rate 34.6% 24.2% 29.8%
In 2005, 2004, and 2003, domestic income before taxes was $1,364 million, $559 million, and $754 million, respectively,
and foreign income before taxes was $76 million, $20 million, and $8 million, respectively. Income reported for federal
and foreign tax purposes differs from pretax accounting income due to differences between U.S. Internal Revenue Code
or foreign tax law requirements and the Company’s accounting practices. No provision has been made for deferred taxes
on undistributed earnings of non-U.S. subsidiaries as these earnings have been indefinitely reinvested. Determination of
the amount of unrecognized deferred tax liability on these undistributed earnings is not practicable. Total net cash
payments were approximately $56 million, $5 million, and $13 million in 2005, 2004, and 2003, respectively.
The Company is currently under examination by the Internal Revenue Service (IRS) for the years 1998 through 2002. IRS
examinations have been completed for tax years through 1997. The Company has protested certain positions taken by the
IRS examination team on certain items related to the years 1995 through 1997 and those items are now being considered
by the Appeals Division (Appeals) of the IRS.
In addition, the Company’s federal research tax credit refund claim for the years 1984 through 1990 remains under
examination, and certain items regarding the Company’s Foreign Sales Corporation (FSC) benefit for the years 1989
through 1997 are also at Appeals. The Company believes adequate provisions for all outstanding issues have been made
for all open years.
Amounts accrued for potential tax assessments totaled $247 million at December 31, 2005 and were recorded in
non-current liabilities. Amounts accrued at December 31, 2004 totaled $225 million. Accruals relate to U.S. federal tax
matters and taxation of foreign earnings and include items such as the tax benefits from the FSC and Extraterritorial
Income (ETI) regimes, the amount of research tax credits, allocation of income among various tax jurisdictions, issues
related to various acquisitions and divestitures, and various other federal and foreign tax issues. Amounts asserted by
taxing authorities could be greater than the Company’s accrued position. Accordingly, additional provisions on federal
and foreign tax related matters could be recorded in the future as revised estimates are made or the underlying matters
are settled.
The American Jobs Creation Act of 2004 (the “Act”) repealed and provided transitional relief for the ETI regime for
transactions after December 31, 2004. The Act also provides a deduction for income derived from qualifying domestic
production activities that is phased in over the 2005 – 2010 period. The deduction is equal to 3% of qualifying income in
2005 and 2006, 6% in 2007, 2008, and 2009, and 9% thereafter. The introduction of legislation proposing a technical
correction to the Act accompanied by language in recently issued proposed regulations consistent with the technical
correction have substantially diminished concerns existing in prior periods that U.S. government contractors might be
denied full benefits under the domestic production activities incentive. The Act also extended the carryover period for
foreign tax credits from 5 to 10 years and reinstated the research and development tax credit. The Company recorded a
tax benefit of $42 million in 2004 primarily related to the extension of the carryover period.
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