Seagate 2004 Annual Report Download - page 88

Table of Contents
SEAGATE TECHNOLOGY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
shareholder, New SAC. As a result, the Company’s pre-change net operating losses and tax credit carryforwards are subject to an annual
limitation based upon (i) the aggregate fair market value of U.S. business operations immediately before the ownership change multiplied by
(ii) the federal long-
term tax exempt rate (within the meaning of IRC Sec. 382(f)) in effect at that time. Based upon an independent valuation as
of January 3, 2005, the annual limitation is $44.8 million. This annual limitation is cumulative. Therefore, if not fully utilized in a year, it is
carried forward for utilization in future years in addition to the IRC Sec. 382 limitation for those years. To the extent management believes it is
more likely than not that the deferred tax assets consisting of the pre-change net operating losses and tax credit carryforwards will not be
realized, a valuation allowance has been provided. The impact of the IRC Sec. 382 limitation was to increase the Company’s current tax
expense related to the tax benefit of stock options credited to shareholders equity by approximately $15 million during the current fiscal year.
In future years, such limitation may cause certain pre-change net operating loss and tax credit carryforwards to expire before utilization. As of
July 1, 2005, $409 million of U.S. net operating loss carryforwards and $123 million of U.S. tax credit carryforwards were subject to the Sec.
382 limitation.
The applicable statutory rate in the Cayman Islands was zero for Seagate Technology for fiscal years ended July 1, 2005, July 2, 2004 and
June 27, 2003. For purposes of the reconciliation between the provision for (benefit from) income taxes at the statutory rate and the effective
tax rate, a notional U.S. 35% rate is applied as follows:
A substantial portion of the Company’s Asia Pacific manufacturing operations in China, Malaysia, Singapore and Thailand operate under
various tax holidays and tax incentive programs, which expire in whole or in part at various dates through 2015. Certain of the tax holidays
may be extended if specific conditions are met. The net impact of these tax holidays and tax incentive programs was to increase the Company’
s
net income by approximately $133 million in fiscal year 2005 ($0.26 per share, diluted), to increase the Company’s net income by
approximately $89 million ($0.18 per share, diluted) in fiscal year 2004, and to increase the Company’s net income by approximately $89
million ($0.19 per share, diluted) in fiscal year 2003.
As a result of the purchase of the operating assets of Seagate Delaware and the ensuing corporate structure, the Company consists of a
foreign parent holding company with various foreign and U.S. subsidiaries. Dividends received from the Company’s U.S. subsidiaries may be
subject to U.S. withholding taxes when, and if, distributed. Deferred tax liabilities have not been recorded on unremitted earnings of the
Company’s foreign subsidiaries, as these earnings will not be subject to tax in the Cayman Islands or U.S. federal income tax if remitted to the
foreign parent holding company.
84
Fiscal Year
Ended
July 1,
2005
Fiscal Year
Ended
July 2,
2004
Fiscal Year
Ended
June 27,
2003
(in millions)
Provision at U.S. notional statutory rate
$
256
$
150
$
231
State income tax provision (benefit), net of U.S. notional income tax benefit
3
—
(
3
)
Reversal of accrued income taxes
—
VERITAS indemnification
—
(
125
)
—
Reduction in previously accrued foreign income taxes
(13
)
—
—
Valuation allowance
11
13
(87
)
Foreign earnings not subject to U.S. notional income tax
(216
)
(139
)
(127
)
Use of current year U.S. tax credit
(16
)
—
—
Other individually immaterial items
—
—
5
Provision for (benefit from) income taxes
$
25
$
(101
)
$
19