Dell 2008 Annual Report Download - page 38

Table of Contents
exchange loss in Fiscal 2008 and Fiscal 2007 is mainly due to higher net losses on derivative instruments. The gain on sale of building relates to the
sale of a building in EMEA.
Income Taxes
Our effective tax rate was 25.4%, 23.0%, and 22.8% for Fiscal 2009, 2008, and 2007, respectively. The differences between our effective tax rate
and the U.S. federal statutory rate of 35% principally result from our geographical distribution of taxable income and permanent differences between
the book and tax treatment of certain items. The increase in our effective income tax rate for Fiscal 2009 from Fiscal 2008 is primarily due to an
increased mix of profits in higher tax rate jurisdictions. In the fourth quarter of Fiscal 2008, we were able to access $5.3 billion in cash from a
subsidiary outside of the U.S. to fund share repurchases, acquisitions, and the continued growth of DFS. Accessing the cash slightly increased our
effective tax rate in Fiscal 2008. The taxes related to accessing the foreign cash and nondeductibility of the in-process research and development
acquisition charges were offset primarily by the increase of our consolidated profitability in lower tax rate jurisdictions during Fiscal 2008. Our
foreign earnings are generally taxed at lower rates than in the United States. We do not expect our Fiscal 2010 effective tax rate to vary significantly
from our Fiscal 2009 effective tax rate.
Deferred tax assets and liabilities for the estimated tax impact of temporary differences between the tax and book basis of assets and liabilities are
recognized based on the enacted statutory tax rates for the year in which we expect the differences to reverse. A valuation allowance is established
against a deferred tax asset when it is more likely than not that the asset or any portion thereof will not be realized. Based upon all the available
evidence including expectation of future taxable income, we have determined that we will be able to realize all of our deferred tax assets, net of
valuation allowances.
We adopted Financial Accounting Standards Board (FASB) Interpretation No. 48, Accounting for Uncertainty in Income Taxes — an Interpretation
of FASB Statement No. 109 ("FIN 48") effective February 3, 2007. FIN 48 clarifies the accounting and reporting for uncertainties in income taxes
recognized in our financial statements in accordance with SFAS 109, Accounting for Income Taxes ("SFAS 109"). FIN 48 prescribes a
comprehensive model for the financial statement recognition, measurement, presentation, and disclosure of uncertain tax positions taken or expected
to be taken in income tax returns. FIN 48 provides that a tax benefit from an uncertain tax position may be recognized in the financial statements
only when it is more likely than not that the position will be sustained upon examination, including resolution of any related appeals or litigation
processes, based on the technical merits and a consideration of the relevant taxing authority's widely understood administrative practices and
precedents. Once the recognition threshold is met, the portion of the tax benefit that is recorded represents the largest amount of tax benefit that is
greater than 50 percent likely to be realized upon settlement with a taxing authority. The adoption of FIN 48 resulted in a decrease to stockholders'
equity of approximately $62 million in the first quarter of Fiscal 2008. For a further discussion of the impact of FIN 48, see Note 3 of Notes to
Consolidated Financial Statements included in "Part II — Item 8 — Financial Statements and Supplementary Data."
We are currently under income tax audits in various jurisdictions, including the United States. The tax periods open to examination by the major
taxing jurisdictions to which we are subject include fiscal years 1997 through 2009. As a result of these audits, we maintain ongoing discussions and
negotiations relating to tax matters with the taxing authorities in these various jurisdictions. Our U.S. Federal income tax returns for fiscal years
2004 through 2006 are under examination, and the Internal Revenue Service has proposed certain preliminary assessments primarily related to
transfer pricing matters. We anticipate this audit will take several years to resolve and continue to believe that we have provided adequate reserves
related to the matters under audit. However, should we experience an unfavorable outcome in this matter, it could have a material impact on our
financial statements. Although the timing of income tax audit resolution and negotiations with taxing authorities are highly uncertain, we do not
anticipate a significant change to the total amount of unrecognized income tax benefits within the next 12 months.
We take certain non-income tax positions in the jurisdictions in which we operate and have received certain non-income tax assessments from
various jurisdictions. We are also involved in related non-income tax litigation matters in various jurisdictions. We believe our positions are
supportable, a liability is not probable, and that we will ultimately prevail. However, significant judgment is required in determining the ultimate
outcome of these matters. In the normal course of business, our positions and conclusions related to our non-income taxes could be challenged and
assessments may be made. To the extent new information is obtained and our views on our positions, probable outcomes of assessments, or litigation
changes, changes in estimates to our accrued liabilities would be recorded in the period in which the determination is made.
Out of Period Adjustments
During Fiscal 2009, adjustments to correct items related to prior periods, in the aggregate, increased income before taxes and net income by
approximately $95 million and $33 million, respectively. Because these errors, both individually and in the aggregate, were not
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