GE 2005 Annual Report Download - page 34

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Income taxes on consolidated earnings from continuing operations before accounting changes were 18.0%
in 2005, compared with 18.2% in 2004 and 22.4% in 2003. Our consolidated income tax rate was essentially
unchanged in 2005 from 2004 because the 2005 tax benefits from a reorganization of our aircraft leasing business
and from the growth in lower-taxed global operations were about the same as the 2004 tax benefits from favorable
U.S. Internal Revenue Service (IRS) settlements, the NBC Universal combination, the 2004 reorganization of our
aircraft leasing business and a lower tax rate on the sale of a portion of Gecis, our business process outsourcing
operation (now Genpact). Our consolidated income tax rate decreased by 4.2 percentage points in 2004 as the
benefits listed above for 2004 were greater than the tax benefits from certain business dispositions in 2003. A more
detailed analysis of differences between the U.S. federal statutory rate and the consolidated rate, as well as other
information about our income tax provisions, is provided in note 8. The nature of business activities and associated
income taxes differ for GE and for GECS and a separate analysis of each is presented in the paragraphs that follow.
Because GE tax expense does not include taxes on GECS earnings, the GE effective tax rate is best
analyzed in relation to GE earnings excluding GECS. GE pre-tax earnings from continuing operations before
accounting changes excluding GECS earnings from continuing operations before accounting changes were $11.9
billion, $10.4 billion and $10.7 billion for 2005, 2004 and 2003, respectively. On this basis, GE’ s effective tax rate
was 23.1% in 2005, 19.0% in 2004 and 26.7% in 2003. The increase in the 2005 rate over the 2004 rate was
primarily attributable to the lack of current-year counterparts to the 2004 settlements with the IRS and 2004 tax
benefits associated with the NBC Universal combination, both discussed below, that together reduced the 2004 rate
by 7.2 percentage points. Partially offsetting this increase were the favorable impact of a number of audit resolutions
with taxing authorities and our 2005 repatriation of earnings at the reduced U.S. tax rate provided in 2004 legislation
(together representing a 3.2 percentage point reduction of the GE tax rate). These 2005 tax benefits are reflected in
note 8 in the lines “All other – net” (1.6 percentage points) and “Tax on global activities including exports” (1.6
percentage points).
The 2004 rate reduction was primarily a result of two items that decreased the 2004 GE tax rate by 7.2
percentage points-settling several issues with the IRS for the years 1985 through 1999 and tax benefits associated
with the NBC Universal combination. As part of the IRS settlements, we closed two significant issues: the 1997 tax-
free exchange of the Lockheed Martin convertible preferred stock we received on the disposition of our Aerospace
business in 1993, and a 1998 tax loss on the sale of a Puerto Rican subsidiary. The tax portion of these settlements is
included in the line “IRS settlements of Lockheed Martin tax-free exchange/Puerto Rico subsidiary loss” in note 8.
The tax benefits associated with the NBC Universal combination are included in the line “All other – net” in note 8.
The 2004 GE effective tax rate also reflects lower pre-tax income primarily from lower earnings in the Energy
business and higher costs related to our principal pension plans. Partially offsetting these changes was the non-
recurrence of certain 2003 tax benefits.
GECS effective tax rate decreased to 12.3% in 2005 from 17.5% in 2004 and 16.1% in 2003. The 2005
GECS rate reflects the net benefits, discussed below, of a reorganization of our aircraft leasing business; and an
increase in lower-taxed earnings from global operations. Together, these items more than account for the 6.6
percentage point decrease in rate from 2004 reflected in the line “Tax on global activities including exports” in note
8. Partially offsetting these benefits was the nonrecurrence of the benefits from 2004 favorable settlements with the
IRS and the low-taxed disposition of a majority interest in Genpact. The lack of counterparts to these items
increased the 2005 GECS tax rate by 1.7 percentage points.