American Express 2007 Annual Report Download - page 109

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN EXPRESS COMPANY
The Company adopted FASB Financial Interpretation
No. 48, “Accounting for Uncertainty in Income Taxes — an
interpretation of FASB Statement No. 109” (FIN 48) as of
January 1, 2007. The initial adoption of FIN 48 resulted in a
charge of approximately $127 million to the January 1, 2007
balance of retained earnings and an increase in the liability for
unrecognized tax benefits. The following table presents changes
in the unrecognized tax benefits:
(Millions) 2007
Balance, January 1 $1,143
Increases:
Current year tax positions 165
Tax positions related to prior years 95
Effects of foreign currency translations 1
Decreases:
Tax positions related to prior years (164)
Settlements with tax authorities (126)
Lapse of statute of limitations (2)
Balance, December 31 $1,112
Included in the $1.1 billion of unrecognized tax benefits at
December 31, 2007, are approximately $597 million that, if
recognized, would favorably affect the effective tax rate in a
future period and relates to the Company’s gross permanent
benefits and corresponding foreign tax credits and federal tax
effects.
The Company is under continuous examination by the
Internal Revenue Service (IRS) and tax authorities in other
countries and states in which the Company has significant
business operations. The tax years under examination and open
for examination vary by jurisdiction. The Company is currently
under examination by the IRS for the years 1997 – 2004.
Given the inherent complexities of the business and that
the Company is subject to taxation in a substantial number of
jurisdictions, the Company routinely assesses the likelihood
of additional assessments in each of the taxing jurisdictions
and has established a liability for unrecognized tax benefits
that management believes to be adequate. Once established,
unrecognized tax benefits are adjusted if more accurate
information is available, or a change in circumstance, or an event
occurs necessitating a change to the liability. The Company
believes that it is reasonably possible that the unrecognized tax
benefits will significantly decrease within the next 12 months in
the range of $0 to $500 million principally as a result of potential
resolutions through settlements of prior years’ tax items with
various taxing authorities. The items include unrecognized
tax benefits relating to the potential deductibility of certain
expenses or losses and the attribution of taxable income to a
particular jurisdiction or jurisdictions. Such resolutions could
include payments of additional taxes and the recognition of tax
benefits. Due to the inherent complexities and the number of tax
years currently open for examination in multiple jurisdictions, it
is not possible to quantify the impact such changes may have on
the effective tax rate and net income.
During the year ended December 31, 2007, the Company
recognized approximately $13 million of interest and penalties.
The Company has approximately $235 million accrued for the
payment of interest and penalties.
Accumulated earnings of certain non-U.S. subsidiaries,
which totaled approximately $4.9 billion at December 31, 2007,
are intended to be permanently reinvested outside the United
States. Accordingly, federal taxes, which would have aggregated
approximately $1.1 billion, have not been provided on those
earnings.
The Company records a deferred income tax (benefit)
provision when there are differences between assets and
liabilities measured for financial reporting and for income
tax return purposes. The significant components of deferred
tax assets and liabilities at December 31 are reflected in the
following table:
(Millions) 2007 2006
Deferred tax assets:
Reserves not yet deducted for tax
purposes $3,403 $2,790
Employee compensation and benefits 461 558
Other 206 54
Gross deferred tax assets 4,070 3,402
Valuation allowance (60) (51)
Deferred tax assets after valuation
allowance 4,010 3,351
Deferred tax liabilities:
Intangibles and fixed assets 633 585
Deferred revenue 499 380
Asset securitizations 335 323
Other 132 423
Gross deferred tax liabilities 1,599 1,711
Net deferred tax assets $2,411 $1,640
The valuation allowances at December 31, 2007 and 2006 relate
to deferred tax assets associated with non-U.S. operations.
Income taxes paid by the Company (including amounts
related to discontinued operations) during 2007, 2006, and
2005 were approximately $1.8 billion, $1.4 billion, and $1.7
billion, respectively. These amounts include estimated tax
payments and cash settlements relating to prior tax years.
The tax benefit realized for tax deductions from stock
option exercises which are recorded in additional paid-in capital
totaled $158 million, $128 million, and $234 million for the
years ended December 31, 2007, 2006 and 2005, respectively.
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