American Express 2012 Annual Report Download - page 98

AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Net income taxes paid by the Company (including amounts
related to discontinued operations) during 2012, 2011 and 2010,
were approximately $1.9 billion, $0.7 billion and $0.8 billion,
respectively. These amounts include estimated tax payments and
cash settlements relating to prior tax years.
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. Given these inherent
complexities, the Company must make judgments in assessing
the likelihood that a tax position will be sustained upon
examination by the taxing authorities based on the technical
merits of the tax position. 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
benefit recognized for financial reporting purposes is based on
management’s best judgment of the largest amount of benefit
that is more likely than not to be realized on ultimate settlement
with the taxing authority given the facts, circumstances and
information available at the reporting date. The Company
adjusts the level of unrecognized tax benefits when there is new
information available to assess the likelihood of the outcome.
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 IRS has completed its
field examination of the Company’s federal tax returns for years
through 2004; however, refund claims for those years continue to
be reviewed by the IRS. In addition, the Company is currently
under examination by the IRS for the years 2005 through 2007.
The following table presents changes in unrecognized tax
benefits:
(Millions) 2012 2011 2010
Balance, January 1 $ 1,223 $ 1,377 $ 1,081
Increases:
Current year tax positions 51 77 182
Tax positions related to prior years 64 247 403
Decreases:
Tax positions related to prior years (44) (457) (145)
Settlements with tax authorities (25) (2) (138)
Lapse of statute of limitations (37) (19) (6)
Effects of foreign currency translations (2) ——
Balance, December 31 $ 1,230 $ 1,223 $ 1,377
Included in the unrecognized tax benefits of $1.2 billion for both
December 31, 2012 and 2011 and $1.4 billion for December 31,
2010, are approximately $452 million, $440 million and $476
million, respectively, that, if recognized, would favorably affect
theeffectivetaxrateinafutureperiod.
The Company believes it is reasonably possible that its
unrecognized tax benefits could decrease within the next
12 months by as much as $971 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 deductibility of certain expenses or losses
and the attribution of taxable income to a particular jurisdiction
or jurisdictions. Of the $971 million of unrecognized tax
benefits, approximately $667 million relates to amounts that if
recognized would be recorded to shareholders’ equity and would
not impact the effective tax rate. With respect to the remaining
$304 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 the income tax provision. During the years ended
December 31, 2012, 2011 and 2010, the Company recognized
approximately $(8) million, $(63) million and $31 million,
respectively, of interest and penalties. The Company has
approximately $155 million and $163 million accrued for the
payment of interest and penalties as of December 31, 2012 and
2011, respectively.
Discontinued operations for 2011 included the impact of a $36
million tax benefit related to the favorable resolution of certain
prior years’ tax items related to American Express Bank, Ltd.,
which was sold to Standard Chartered PLC during the quarter
ended March 31, 2008.
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