GE 2008 Annual Report Download - page 71

ge 2008 annual report 69
notes to consolidated financial statements
Annually, we file over 7,500 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 consolidated
U.S. income tax returns for 2003 –2007. In addition, certain other
U.S. tax deficiency 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 benefits” —that is, the aggregate tax effect of differences
between tax return positions and the benefits recognized in our
financial statements. We believe that there are no other jurisdic-
tions in which the outcome of unresolved issues or claims is
likely to be material to our results of operations, financial position
or cash flows. We further believe that we have made adequate
provision for all income tax uncertainties.
The balance of unrecognized tax benefits, 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:
December 31 (In millions) 2008 2007
Unrecognized tax benefits $6,692 $6,331
Portion that, if recognized, would reduce tax
expense and effective tax rate (a) 4,453 4,268
Accrued interest on unrecognized tax benefits 1,204 923
Accrued penalties on unrecognized tax benefits 96 77
Reasonably possible reduction to the balance
of unrecognized tax benefits in succeeding
12 months 0 – 1,500 0 – 1,500
Portion that, if recognized, would reduce tax
expense and effective tax rate (a) 0 – 1,100 0 – 1,250
(a) Some portion of such reduction might be reported as discontinued operations.
A reconciliation of the beginning and ending amounts of unrec-
ognized tax benefits is as follows:
(In millions) 2008 2007
Balance at January 1 $6,331 $ 6,806
Additions for tax positions of the current year 553 434
Additions for tax positions of prior years 516 1,439
Reductions for tax positions of prior years (489) (1,939)
Settlements with tax authorities (173) (330)
Expiration of the statute of limitations (46) (79)
Balance at December 31 $6,692 $ 6,331
We classify interest on tax deficiencies as interest expense; we
classify income tax penalties as provision for income taxes. For the
year ended December 31, 2008, $268 million of interest expense
and $19 million of tax expense related to penalties were recognized
in the statement of earnings, compared with $(279) million and
$(34) million for the year ended December 31, 2007.
A reconciliation of the U.S. federal statutory income tax rate
to the actual income tax rate is provided below.
Our businesses are subject to regulation under a wide variety
of U.S. federal, state and foreign tax laws, regulations and policies.
Changes to these laws or regulations may affect our tax liability,
return on investments and business operations. For example,
GE’s effective tax rate is reduced because active business
income earned and indefinitely reinvested outside the United
States is taxed at less than the U.S. rate. A significant portion of
this reduction depends upon a provision of U.S. tax law that
defers the imposition of U.S. tax on certain active financial ser-
vices 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. financial services companies to compete
more effectively with foreign banks and other foreign financial
institutions in global markets. This provision, currently scheduled
to expire at the end of 2009, has been scheduled to expire on
five previous occasions, including October of 2008, but there can
be no assurance that it will continue to be extended. In the
event this provision is not extended after 2009, the current U.S.
tax imposed on active financial services income earned outside
the United States would increase, making it more difficult for U.S.
financial services companies to compete in global markets. If this
provision is not extended, we expect our effective tax rate to
increase significantly after 2010.
We have not provided U.S. deferred taxes on cumulative earn-
ings of non-U.S. affiliates and associated companies that have
been reinvested indefinitely. These earnings relate to ongoing
operations and, at December 31, 2008, were approximately
$75 billion. Most of these earnings have been reinvested in active
non-U.S. business operations and we do not intend to use these
earnings as a source of funding for U.S. operations. 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 pay-
able if such earnings were not reinvested indefinitely. Deferred
taxes are provided for earnings of non-U.S. affiliates and associ-
ated companies when we plan to remit those earnings. During
2008, because the use of foreign tax credits no longer required
the repatriation of prior-year earnings, we increased the amount
of prior-year earnings that were indefinitely reinvested outside
the U.S. by approximately $1.0 billion, resulting in a decrease to
the income tax provision of approximately $350 million.
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, an $89 million decrease in goodwill and a $40 million
decrease in income tax liability.