GE 2007 Annual Report Download - page 83

    
ge 2007 annual report 81
GE and GECS fi le a consolidated U.S. federal income tax return.
The GECS provision for current tax expense includes its effect on
the consolidated return.
Consolidated U.S. earnings from continuing operations before
income taxes were $8,840 million in 2007, $9,954 million in 2006
and $10,296 million in 2005. The corresponding amounts for non-
U.S.-based operations were $17,758 million in 2007, $13,376 million
in 2006 and $10,882 million in 2005.
Consolidated current tax expense includes amounts appli-
cable to U.S. federal income taxes of $87 million, $514 million
and $2,755 million in 2007, 2006 and 2005, respectively, and
amounts applicable to non-U.S. jurisdictions of $3,029 million,
$1,500 million and $1,910 million in 2007, 2006 and 2005,
respectively. Consolidated deferred taxes related to U.S. federal
income taxes were expenses of $769 million and $1,544 million in
2007 and 2006, respectively, and a benefi t of $238 million in 2005.
Deferred income tax balances refl ect the effects of temporary
differences between the carrying amounts of assets and liabilities
and their tax bases, as well as from net operating loss and tax
credit carryforwards, and are stated at enacted tax rates expected
to be in effect when taxes are actually paid or recovered. Deferred
income tax assets represent amounts available to reduce income
taxes payable on taxable income in future years. We evaluate the
recoverability of these future tax deductions by assessing the
adequacy of future expected taxable income from all sources,
including reversal of taxable temporary differences, forecasted
operating earnings and available tax planning strategies. To the
extent we do not consider it more likely than not that a deferred
tax asset will be recovered, a valuation allowance is established.
See note 20.
Our businesses are subject to a wide variety of U.S. federal,
state and foreign tax laws and regulations. Changes to these
laws or regulations may affect our tax liability, return on invest-
ments and business operations. For example, GE’s effective tax
rate is reduced because active business income earned and
indefi nitely reinvested outside the United States is taxed at less
than the U.S. rate. A signifi cant portion of this reduction depends
upon a provision of U.S. tax law that defers the imposition of U.S.
tax on certain active fi nancial services income until that income
is repatriated to the United States as a dividend. This provision is
consistent with international tax norms and permits U.S. fi nancial
services companies to compete more effectively with foreign
banks and other foreign fi nancial institutions in global markets.
This provision, which is scheduled to expire at the end of 2008,
has been scheduled to expire on four previous occasions, and
each time it has been extended by Congress. If this provision is
not extended, the current U.S. tax imposed on active fi nancial
services income earned outside the United States would increase,
making it more diffi cult for U.S. fi nancial services companies to
compete in global markets. If this provision were not extended,
we expect our effective tax rate to increase after 2010.
We have not provided U.S. deferred taxes on cumulative
earnings of non-U.S. affi liates and associated companies that have
been reinvested indefi nitely. These earnings relate to ongoing
operations and, at December 31, 2007, were approximately
$62 billion. Because of the availability of U.S. foreign tax credits,
it is not practicable to determine the U.S. federal income tax
liability that would be payable if such earnings were not rein-
vested indefi nitely. Deferred taxes are provided for earnings of
non-U.S. affi liates and associated companies when we plan to
remit those earnings.
The American Jobs Creation Act of 2004 (the Act) allowed U.S.
companies a one-time opportunity to repatriate non-U.S. earn-
ings through 2005 at a 5.25% rate of tax rather than the normal
U.S. tax rate of 35%, provided that certain criteria, including
qualifi ed U.S. reinvestment of those earnings, were met. Available
U.S. foreign tax credits related to the repatriation are reduced
under provisions of the Act. Because the vast majority of our
non-U.S. earnings have been permanently reinvested in active
business operations, we repatriated only $1.2 billion of non-U.S.
earnings. Because a U.S. tax provision at normal tax rates had
been provided on the majority of this amount, the result was a
reduction of the 2005 consolidated tax rates of approximately
0.5 percentage points.
As discussed in note 1, on January 1, 2007, we adopted a new
accounting standard, FIN 48, Accounting for Uncertainty in
Income Taxes, resulting in a $49 million decrease in retained
earnings, a $89 million decrease in goodwill and a $40 million
decrease in income tax liability.
Annually, we fi le over 6,500 income tax returns in over 250
global taxing jurisdictions. We are under examination or engaged
in tax litigation in many of these jurisdictions. During 2007, the
IRS completed the audit of our consolidated U.S. income tax
returns for 2000 – 2002. The IRS is currently auditing our consoli-
dated U.S. income tax returns for 2003 – 2005. In addition, certain
other U.S. tax defi ciency issues and refund claims for previous
years remain unresolved. It is reasonably possible that the 2003 –
2005 U.S. audit cycle will be completed during the next 12 months,
which could result in a decrease in our balance of “unrecognized
tax benefi ts” — that is, the aggregate tax effect of differences
between tax return positions and the benefi ts recognized in our
fi nancial statements. We believe that there are no other juris-
dictions in which the outcome of unresolved issues or claims is
likely to be material to our results of operations, fi nancial position
or cash fl ows. We further believe that we have made adequate
provision for all income tax uncertainties.
The balance of unrecognized tax benefi ts, the amount of
related interest and penalties we have provided and what we
believe to be the range of reasonably possible changes in the
next 12 months, were:
2007
(In millions) December 31 January 1
Unrecognized tax benefi ts $ 6,331 $ 6,806
Portion that, if recognized, would reduce
tax expense and effective tax rate
(a) 4,268 4,302
Accrued interest on unrecognized tax benefi ts 923 1,281
Accrued penalties on unrecognized tax benefi ts 77 121
Reasonably possible reduction to the balance
of unrecognized tax benefi ts in succeeding
12 months 0 – 1,500 0 – 1,900
Portion that, if recognized, would reduce tax
expense and effective tax rate
(a) 0 – 1,250 0 – 900
(a) Some portion of such reduction might be reported as discontinued operations.