American Express 2008 Annual Report Download - page 112

notes to consolidated financial statements
american express company
110
The following table presents changes in the unrecognized tax
benefits:
(Millions) 2008 2007
Balance, January 1 $1,112 $1,143
Increases:
Current year tax positions 81 165
Tax positions related to prior years 409 95
Effects of foreign currency translations —1
Decreases:
Tax positions related to prior years (208) (164)
Settlements with tax authorities (213) (126)
Lapse of statute of limitations (3) (2)
Effects of foreign currency translations (2) —
Balance, December 31 $1,176 $1,112
Included in the $1.2 billion and $1.1 billion of unrecognized
tax benefits at December 31, 2008 and December 31, 2007,
respectively, are approximately $452 million and $597 million,
respectively that, if recognized, would favorably affect the
effective tax rate in a future period. These benefits primarily
relate 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. In June 2008, the IRS
completed its field examination of the Company’s federal tax
returns for the years 1997 through 2002. However, these years
continue to remain open as a consequence of certain issues
under appeal. The Company is currently under examination by
the IRS for the years 2003 and 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 could decrease within the next
12 months by as much as $574 million principally as a result of
potential resolutions of prior years’ tax items with various taxing
authorities. The prior years’ tax items include unrecognized tax
benefits relating to the timing of recognition of certain gross
income, the deductibility of certain expenses or losses, and
the attribution of taxable income to a particular jurisdiction
or jurisdictions. Of the $574 million of unrecognized tax
benefits, approximately $474 million are temporary differences
that, if recognized, would only impact the effective rate due to
net interest assessments and state tax rate differentials. With
respect to the remaining decrease of $100 million, it is not
possible to quantify the impact that the decrease could have
on the effective tax rate and net income due to the inherent
complexities and the number of tax years open for examination
in multiple jurisdictions. Resolution of the prior years’ items
that comprise this remaining amount could have an impact
on the effective tax rate and on net income, either favorably
(principally as a result of settlements that are less than the
liability for unrecognized tax benefits) or unfavorably (if such
settlements exceed the liability for unrecognized tax benefits).
Interest and penalties relating to unrecognized tax benefits
are reported in income tax provision. During the years ended
December 31, 2008 and December 31, 2007, the Company
recognized approximately $44 million and $13 million,
respectively, of interest and penalties. The Company has
approximately $265 million and $235 million accrued for the
payment of interest and penalties at December 31, 2008 and
December 31, 2007, respectively.
Accumulated earnings of certain non-U.S. subsidiaries,
which totaled approximately $5.6 billion at December 31, 2008,
are intended to be permanently reinvested outside the United
States. Accordingly, federal taxes, which would have aggregated
approximately $1.3 billion, have not been provided on
those earnings.