Visa 2008 Annual Report Download - page 66

Table of Contents
Interest expense
The increase in interest expense in fiscal 2008 compared to the prior year comparable period was primarily due to interest accretion attributed to the
American Express settlement. See Note 23—Legal Matters to our consolidated financial statements included elsewhere in this report.
Investment income, net
The increase in investment income, net during fiscal 2008 compared to the prior year comparable period was primarily due to interest earned of
approximately $70 million on both the litigation escrow, and the portion of the IPO proceeds retained to redeem the shares of class C (series II) and class C
(series III) common stock. See Note 4—Visa Europe and Note 5—Retrospective Responsibility Plan to our consolidated financial statements included
elsewhere in this report. This increase was offset by net realized losses and other-than-temporary impairment of $68 million on investments and a money
market fund. See Liquidity and Capital Resources, below, and Note 6— Investments and Note 7—Prepaid Expenses and Other Assets to our consolidated
financial statements included elsewhere in this report. We expect that the level of interest income will decrease following the redemption of shares of class C
(series II) and class C (series III) common stock which took place in October 2008.
Other non-operating income
Other non-operating income in fiscal 2008 reflects a change in the fair market value of our liability under the Framework Agreement with Visa Europe
due to changes in the LIBOR interest rate. See Note 4—Visa Europe to our consolidated financial statements included elsewhere in this report.
Income Taxes
Our effective income tax rate is a combination of federal, state and foreign statutory rates and certain required adjustments to taxable income. The
effective income tax rate increased to 40% during the year ended September 30, 2008 from the pro forma 15% during the year ended September 30, 2007. The
increase in the effective tax rate is primarily due to tax reserves related to litigation, and the combined effect of the loss of the California special deduction
after the IPO, the change in state tax apportionment and a one-time benefit attributable to the remeasurement of deferred taxes.
Included in accrued litigation on our consolidated balance sheet on September 30, 2008 is approximately $3 billion associated with the American
Express settlement, the Discover litigation and other matters. For tax purposes, the deduction related to these matters is deferred until the payments are made
and thus, as of September 30, 2008, we have a deferred tax asset of $857 million related to these payments, which is net of a reserve to reflect management's
best estimate of the amount of the benefit to be realized.
Prior to our IPO, the State of California, where we are headquartered, historically did not tax a substantial portion of our reported income on the basis
that we operated on a cooperative or mutual basis and therefore were eligible for a special deduction. As a result of the IPO and consequent ownership by
parties other than our financial institution customers, we are no longer eligible to claim the special deduction, resulting in a tax increase. The tax increase was
partially offset by a tax decrease resulting from a change in our state tax apportionment. The change in state tax apportionment resulted in a $115 million one-
time tax benefit due to the remeasurement of deferred taxes.
In July 2008, we settled with the California Franchise Tax Board with respect to certain audit issues from 1990 to 2003, which include the eligibility to
claim certain items as special deductions, apportionment computation, and research and development credits. As a result of the settlement,
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