GE 2008 Annual Report Download - page 25

management’s discussion and analsis
ge 2008 annual report 23
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 qualifies for a
reduced U.S. tax rate. However, the Act also extended to aircraft
leasing the U.S. tax deferral benefits 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.
Global Risk Management
A disciplined approach to risk is important in a diversified 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 maintains overall responsibility
for risk oversight, with a focus on the most significant risks facing
GE. The Board’s Audit Committee oversees GE’s risk policies and
processes relating to the financial statements and financial
reporting process. The Board’s Public Responsibilities Committee
oversees risks involved in GE’s public policy initiatives, the
environment and similar matters. The Board’s Management
Development and Compensation Committee oversees risk related
to compensation.
The Board’s oversight process builds upon our management’s
risk management and assessment processes, which include long-
term strategic planning, executive development and evaluation,
regulatory and litigation compliance reviews, environmental
compliance reviews, GECS Corporate Risk Function and the
Corporate Risk Committee. Each year, management and the Board
jointly develop a list of major risks that GE plans to address.
Throughout the year, either the Board or one of its committees
dedicates a portion of their meetings to review and discuss
these risk topics in greater detail. Strategic and operational risks
are covered in the CEO’s report on operations to the Board at
regularly scheduled Board meetings. At least twice a year, the
Audit Committee receives a risk update from the GECS risk officer,
which focuses on GECS risk strategy and its financial services
portfolio, including its processes for managing credit and market
risk within its portfolio. In addition, each year, and in some years
more frequently, the Audit Committee receives a comprehensive
report from GE’s Treasurer on GECS capital markets exposure
and its liquidity and funding risks and a comprehensive report
from GE’s General Counsel covering compliance issues. Each year,
the Committee also reviews and discusses topics related to the
financial reporting process, including an update on information
technology, controllership, insurance, tax strategies and policies,
accounting and numerous reports on regulation, compliance,
litigation and investigations affecting GE businesses.
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
2008 2007 2006
Tax on global activities including exports — % (2.7)% (0.8)%
All other — net (0.6) (2.4) (0.8)
(0.6)% (5.1)% (1.6)%
The GE effective tax rate increased from 2007 to 2008 because of
the 4.5 percentage point lower 2008 benefit from favorable audit
resolutions, partially offset by a 1.0 percentage point increase in
the benefit in lower-taxed earnings from global operations,
excluding audit resolutions.
The GE effective tax rate declined slightly from 2006 to 2007
because the 3.5 percentage point higher 2007 benefit from
favorable audit resolutions was largely offset by a 3.3 percentage
point decrease in the benefit in lower-taxed earnings from global
operations, excluding audit resolutions and the effect of tax law
changes. The 2006 benefit from global operations included tax
benefits from planning to use non-U.S. net operating losses
against profitable operations.
The 2006 GE rate reflects the favorable audit resolutions
shown above and the benefit of lower-taxed earnings from global
operations including tax benefits from planning to use non-U.S.
net operating losses against profitable operations.
The GECS effective tax rate was (44.0)% in 2008, compared with
9.9% in 2007 and 12.0% in 2006. GE and GECS file a consolidated
U.S. federal income tax return that enables GE to use GECS tax
deductions and credits to reduce the tax that otherwise would
have been payable by GE. The GECS effective tax rate for each
period reflects the benefit of these tax reductions. GE makes cash
payments to GECS for these tax reductions at the time GE’s tax
payments are due.
The GECS rate decreased from 2007 to 2008 primarily
because of a reduction during 2008 of income in higher-taxed
jurisdictions. This increased the relative effect of tax benefits
from lower-taxed global operations on the tax rate, reducing the
rate 32.7 percentage points. In addition, earnings from lower-
taxed global operations increased from 2007 to 2008, causing
an additional 20.7 percentage point rate reduction. The increase
in the benefit from lower-taxed global operations includes
6.5 percentage points from the 2008 decision to indefinitely
reinvest, outside the U.S., prior-year earnings because the use of
foreign tax credits no longer required the repatriation of those
prior-year earnings.
The GECS income tax rate decreased from 2006 to 2007 as
the tax benefit on the disposition of its investment in SES and
growth in lower-taxed global earnings, which decreased the
GECS effective tax rate 4.0 and 1.0 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
benefit of the reorganization, discussed below, of our aircraft
leasing business, which increased the rate 1.6 and 1.1 percentage
points, respectively.