Raytheon 2012 Annual Report Download - page 126

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
118
The expense for income taxes differs from the U.S. statutory rate due to the following:
2012 2011 2010
Statutory tax rate 35.0 % 35.0 % 35.0 %
Research and development (R&D) tax credit —% (1.0)% (1.1)%
Tax settlements and refund claims (0.8)% (2.6)% (8.0)%
Domestic manufacturing deduction benefit (1.9)% (1.8)% (1.7)%
Foreign income tax rate differential 0.3 % 0.2 % 0.8 %
Other, net (1.0)% (0.4)% (0.8)%
Effective tax rate 31.6 % 29.4 % 24.2 %
We are subject to income taxes in the U.S. and numerous foreign jurisdictions. During 2012, we received final approval from
the IRS and the U.S. Congressional Joint Committee on Taxation of an IRS Appeals Division settlement for the 2006–2008
IRS examination cycle (2012 Tax Settlement). As a result, our unrecognized tax benefits decreased by approximately $24
million, inclusive of $2 million of interest, all of which increased our income from continuing operations. In 2011, we received
final approval from the IRS and the U.S. Congressional Joint Committee on Taxation of a Minimum Tax Refund claim for
the 2006–2008 IRS examination cycle, which related to items not included in the 2012 Tax Settlement (2011 Tax Settlement).
As a result, our unrecognized tax benefits decreased by approximately $60 million, inclusive of $14 million of interest, all
of which increased our income from continuing operations. In 2010, we received final approval from the IRS and the U.S.
Congressional Joint Committee on Taxation of a Minimum Tax Refund claim for the 1998–2005 IRS examination cycle (2010
Tax Settlement). As a result, our unrecognized tax benefits from continuing and discontinued operations decreased by
approximately $281 million, which decreased our tax expense by $259 million, including $170 million from continuing
operations and $89 million from discontinued operations. The decrease in tax expense in 2010 included $56 million related
to interest.
We are currently under IRS examination for the 2009 and 2010 tax years. The issues under audit include the R&D tax credit
and the timing and amount of certain deductions. We expect to receive the IRS Revenue Agent's report for the 2009 and 2010
cycles in the first quarter of 2013. The IRS selected us to participate in the Compliance Assurance Process (CAP) program
for 2011–2013. We are also under audit by multiple state and foreign tax authorities.
Domestic income from continuing operations before taxes was $2,630 million, $2,574 million and $2,701 million in 2012,
2011 and 2010, respectively, and foreign income (loss) from continuing operations before taxes was $149 million, $86 million
and $(267) million in 2012, 2011 and 2010, respectively. At December 31, 2012, foreign earnings of approximately $420
million have been retained by foreign subsidiaries for reinvestment. No provision has been made for deferred taxes on
undistributed earnings of non-U.S. subsidiaries as these earnings have been indefinitely invested. Determination of the amount
of unrecognized deferred tax liability on these undistributed earnings is not practicable because of the complexity of laws and
regulations, the varying tax treatment of alternative repatriation scenarios, and the variation due to multiple potential
assumptions relating to the timing of any future repatriation. Total federal and foreign tax payments, net of refunds and credits,
were $839 million, $426 million and $337 million in 2012, 2011 and 2010, respectively.
We believe that our income tax reserves are adequate; however, amounts asserted by taxing authorities could be greater or
less than amounts accrued and reflected in our consolidated balance sheets. Accordingly, we could record adjustments to the
amounts for federal, foreign and state tax-related liabilities in the future as we revise estimates or we settle or otherwise resolve
the underlying matters.
The balance of unrecognized tax benefits at December 31, 2012, exclusive of interest, was $129 million, the majority of which
would affect earnings if recognized. The balance of unrecognized tax benefits at December 31, 2011, exclusive of interest,
was $167 million, the majority of which would affect earnings if recognized. During 2012, the $38 million net decrease in
the balance of our unrecognized tax benefits is primarily a result of substantial completion of audits of certain years in certain
jurisdictions and the 2012 Tax Settlement. During 2011, the $21 million decrease to our unrecognized tax benefits was primarily
due to the 2011 Tax Settlement.