American Express 2008 Annual Report Download - page 23

2008 financial review
american express company
income taxes
Description Assumptions/Approach Used Effect if Actual Results Differ from Assumptions
The Company is subject to the income tax
laws of the United States, its states and
municipalities and those of the foreign
jurisdictions in which the Company operates.
These tax laws are complex, and the manner
in which they apply to the taxpayer’s facts
is sometimes open to interpretation. In
establishing a provision for income tax
expense, the Company must make judgments
about the application of these inherently
complex tax laws.
Unrecognized Tax Benefits
The Company establishes a liability for
unrecognized tax benefits, which are
the differences between a tax position
taken or expected to be taken in a tax
return and the benefit recognized in the
financial statements.
Deferred Taxes
Deferred tax assets and liabilities are
determined based on the differences between
the financial statement and tax bases of
assets and liabilities using the enacted tax
rates expected to be in effect for the years in
which the differences are expected to reverse.
A valuation allowance is established when
management determines that it is more
likely than not that all or some portion of
the benefit of the deferred tax asset will not
be realized.
Unrecognized Tax Benefits
In establishing a liability for an unrecognized
tax benefit, assumptions may be made
in determining whether a tax position
is more likely than not to be sustained
upon examination by the taxing authority
and also in determining the ultimate
amount that is likely to be realized. A tax
position is recognized only when, based
on management’s judgment regarding the
application of income tax laws, it is more
likely than not that the tax position will be
sustained upon examination. The amount
of tax benefit recognized is based on the
Company’s assessment of the most likely
outcome on ultimate settlement with the
taxing authority. This measurement is based
on many factors, including whether a tax
dispute may be settled through negotiation
with the taxing authority or is only subject
to review in the courts. As new information
becomes available, the Company evaluates its
tax positions, and adjusts its unrecognized tax
benefits, as appropriate.
Deferred Taxes
Since deferred taxes measure the future tax
effects of items recognized in the financial
statements, certain estimates and assumptions
are required to determine whether it is more
likely than not that all or some portion of
the benefit of a deferred tax asset will not
be realized. In making this assessment,
management analyzes and estimates the
impact of future taxable income, reversing
temporary differences and available tax
planning strategies. These assessments are
performed quarterly, taking into account any
new information.
Unrecognized Tax Benefits
If the tax benefit ultimately realized differs
from the amount previously recognized in
the income tax provision, the Company
recognizes an adjustment of the unrecognized
tax benefit through the income tax provision.
Deferred Taxes
Should a change in facts or circumstances
lead to a change in judgment about the
ultimate realizability of a deferred tax asset,
the Company records or adjusts the related
valuation allowance in the period that the
change in facts or circumstances occurs, along
with a corresponding increase or decrease to
the income tax provision.
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