GE 2007 Annual Report Download - page 47

ge 2007 annual report 45
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A more detailed analysis of differences between the U.S. federal
statutory rate and the consolidated rate, as well as other informa-
tion about our income tax provisions, is provided in note 7. 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, excluding GECS earnings from continuing operations,
were $12.8 billion, $11.7 billion and $11.0 billion for 2007, 2006
and 2005, respectively. On this basis, GE’s effective tax rate was
21.8% in 2007, 21.9% in 2006 and 24.3% in 2005.
Resolution of audit matters reduced the GE effective tax
rate throughout this period. The effects of such resolutions are
included in the following captions in note 7:
Audit resolutions — effect on
GE excluding GECS tax rate
2007 2006 2005
Tax on global activities including exports (2.7)% (0.8)% (0.4)%
All other — net (2.4) (0.8) (1.7)
(5.1)% (1.6)% (2.1)%
The GE effective tax rate declined slightly from 2006 to 2007
because the 3.5 percentage point higher 2007 benefi t from favor-
able audit resolutions was largely offset by a 3.3 percentage
point decrease in the benefi t in lower-taxed earnings from global
operations, excluding audit resolutions and the effect of tax law
changes. The 2006 benefi t from global operations included one-
time tax benefi ts from planning to use non- U.S. net operating
losses against profi table operations.
The GE rate decreased from 2005 to 2006 primarily from
growth in lower-taxed earnings from global operations, including
one-time tax benefi ts from planning to use non-U.S. net operat-
ing losses against profi table operations. These benefi ts, which
decreased the 2006 GE rate by 3.7 percentage points compared
with 2005, are included in note 7 in the line, “Tax on global activ-
ities including exports.” Partially offsetting these items was a
0.5 percentage point decrease in the benefi t from favorable audit
resolutions and the lack of a counterpart to the 2005 repatriation
of non-U.S. earnings at a reduced U.S. tax rate, discussed below,
which reduced the 2005 rate by 1.0 percentage point.
The 2005 GE rate refl ects audit resolutions and our 2005 repa-
triation of non-U.S. earnings at the reduced U.S. tax rate provided
in 2004 legislation.
The GECS effective tax rate was 9.7% in 2007, compared with
12.0% in 2006 and 11.3% in 2005. The GECS income tax rate
decreased from 2006 to 2007 as the tax benefi t on the disposi-
tion of our investment in SES and growth in lower-taxed global
earnings, which decreased the GECS effective tax rate 4.0 and 1.2
percentage points, respectively, were partially offset by higher net
tax expense related to U.S. and non-U.S. audit activity and from
the absence of the 2006 benefi t of the reorganization, discussed
below, of our aircraft leasing business which increased the rate
1.6 and 1.1 percentage points, respectively.
The GECS rate increased from 2005 to 2006 as increased
benefi ts from growth in lower-taxed earnings from global opera-
tions was more than offset by a smaller benefi t on the reorgani-
zation of our aircraft leasing business. The increased benefi ts
from lower-taxed earnings from global operations (1.1 percentage
points) and the lower benefi ts on the reorganization of our aircraft
leasing business (2.1 percentage points) are included in the line,
“Tax on global activities including exports” in note 7.
As a result of the repeal of the extraterritorial income (ETI)
taxing regime as part of the American Jobs Creation Act of 2004
(the Act), our aircraft leasing business no longer qualifi es for a
reduced U.S. tax rate. However, the Act also extended to aircraft
leasing the U.S. tax deferral benefi ts that were already available
to other GE non-U.S. active operations. These legislative changes,
coupled with a reorganization of our aircraft leasing business
and a favorable Irish ruling, decreased the GECS effective tax rate
1.1 percentage points in 2006, compared with 3.2 percentage
points in 2005.
Global Risk Management
A disciplined approach to risk is important in a diversifi ed organi-
zation such as ours in order to ensure that we are executing
according to our strategic objectives and that we only accept
risk for which we are adequately compensated. It is necessary
for us to manage risk at the individual transaction level, and to
consider aggregate risk at the customer, industry, geographic
and collateral-type levels, where appropriate.
The GE Board of Directors oversees the risk management
process through clearly established delegation of authority. Board
and committee meeting agendas are jointly developed with man-
agement to cover risk topics presented to our Corporate Risk
Committee, including environmental, compliance, liquidity, credit
and market risks.
The GECS Board of Directors oversees the risk management
process for fi nancial services, and approves all signifi cant acqui-
sitions and dispositions as well as borrowings and investments.
All participants in the risk management process must comply
with approval limits established by the Board.
The GECS Chief Risk Offi cer is responsible, with the Corporate
Risk Function, for establishing standards for the measurement,
reporting and limiting of risk; for managing and evaluating risk
managers; for approving risk management policies; and for
reviewing major risk exposures and concentrations across the
organization. The GECS Corporate Risk Function analyzes certain
business risks and assesses them in relation to aggregate risk
appetite and approval limits set by the GECS Board of Directors.
Threshold responsibility for identifying, quantifying and miti-
gating risks is assigned to our individual businesses. We employ
proprietary analytic models to allocate capital to our fi nancing
activities, to identify the primary sources of risk and to measure
the amount of risk we will take for each product line. This approach
allows us to develop early signals that monitor changes in risk
affecting portfolio performance and actively manage the portfolio.
Other corporate functions such as Financial Planning and Analysis,
Treasury, Legal and our Corporate Audit Staff support business-
level risk management. Businesses that, for example, hedge