GE 2009 Annual Report Download - page 33

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GE 2009 ANNUAL REPORT 31
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 14. 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 $12.6 billion, $14.2 billion and $13.5 billion for 2009, 2008
and 2007, respectively. On this basis, GE’s effective tax rate was
21.8% in 2009, 24.2% in 2008 and 20.6% in 2007.
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 14.
Audit resolutions —
effect on GE tax rate,
excluding GECS earnings
2009 2008 2007
Tax on global activities including exports (0.4)% —% (2.6)%
All other — net (0.2) (0.6) (2.3)
(0.6)% (0.6)% (4.9)%
The GE effective tax rate decreased from 2008 to 2009 primarily
because of the 3.6 percentage point increase in the benefit from
lower-taxed earnings from global operations, excluding audit
resolutions.
The GE effective tax rate increased from 2007 to 2008
because of the 4.3 percentage point lower 2008 benefit from
favorable audit resolutions, partially offset by a 1.2 percentage
point increase in the benefit in lower-taxed earnings from global
operations, excluding audit resolutions.
The 2007 GE rate reflects the favorable audit resolutions
shown above and the benefit of lower-taxed earnings from
global operations.
The GECS effective tax rate was 173.4% in 2009, compared
with (42.2)% in 2008 and 9.7% in 2007. GE and GECS file a con-
solidated 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.
Comparing a tax benefit to pre-tax income resulted in a
negative GECS tax rate in 2008 and comparing a tax benefit to
pre-tax loss results in the positive GECS tax rate in 2009. The
GECS tax rate increased from 2008 to 2009 primarily because of
a reduction during 2009 of income in higher-taxed jurisdictions.
This had the effect of increasing the relative impact on the rate
of tax benefits from lower-taxed global operations, increasing the
rate 253.2 percentage points. This more than offset the decline
in those benefits decreasing the rate 68.1 percentage points.
The decline in tax benefits from lower-taxed global operations
includes an offset of 15.9 percentage points for increased benefits
from management’s decision (discussed below) in 2009 to
indefinitely reinvest prior-year earnings outside the U.S. that was
larger than the 2008 decision to indefinitely reinvest prior-year
earnings outside the U.S.
During 2009, following the change in our external credit
ratings, funding actions taken and our continued review of our
operations, liquidity and funding, we determined that undistributed
prior-year earnings of non-U.S. subsidiaries of GECS, on which
we had previously provided deferred U.S. taxes, would now be
indefinitely reinvested outside the U.S. This change increased the
amount of prior-year earnings indefinitely reinvested outside the
U.S. by approximately $2 billion, resulting in an income tax benefit
of $0.7 billion in 2009.
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 30.8 percentage points. In addition, earnings from lower-
taxed global operations increased from 2007 to 2008, causing an
additional 19.9 percentage point rate reduction. The increase in
the benefit from lower taxed global operations includes 6.2 per-
centage points from the 2008 decision to indefinitely reinvest
prior-year earnings outside the U.S. because the use of foreign
tax credits no longer required the repatriation of those prior-year
earnings.
Global Risk Management
A disciplined approach to risk is important in a diversified orga-
nization 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. We evaluate risk
at the individual transaction level, and evaluate aggregate risk at
the customer, industry, geographic and collateral-type levels,
where appropriate.
The GE Board of Directors (Board) has overall responsibility for
risk oversight with a focus on the most significant risks facing the
company. At the end of each year, management and the Board
jointly develop a list of major risks that GE plans to prioritize in the
next year. Throughout the year, the Board and the committees to
which it has delegated responsibility dedicate a portion of their
meetings to review and discuss specific risk topics in greater
detail. Strategic and operational risks are presented and discussed
in the context of the CEO’s report on operations to the Board at
regularly scheduled Board meetings and at presentations to the
Board and its committees by the vice chairmen, general counsel
and other officers. The Board has delegated responsibility for the
oversight of specific risks to Board committees as follows:
• The Audit Committee oversees GE’s risk policies and processes
relating to the financial statements and financial reporting
processes, and key credit risks, liquidity risks, market risks,
compliance and the guidelines, policies and processes for
monitoring and mitigating those risks. As part of its risk
oversight responsibilities for GE overall, the Audit Committee
also oversees risks related to GECS. At least two times a year,
the Audit Committee receives a risk update, which focuses
on the principal risks affecting GE as well as reporting on the
company’s risk assessment and risk management guidelines,
policies and processes; and the Audit Committee annually
conducts an assessment of compliance issues and programs.