GE 2010 Annual Report Download - page 104

102 GE 2010 ANNUAL REPORT
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provided deferred U.S. taxes, would 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 $700 million in 2009.
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 billion, resulting in an
income tax benefit of $350 million.
Annually, we file over 6,400 income tax returns in over 250
global taxing jurisdictions. We are under examination or engaged
in tax litigation in many of these jurisdictions. During 2010, the IRS
completed the audit of our consolidated U.S. income tax returns
for 2003–2005. At December 31, 2010, the IRS was auditing our
consolidated U.S. income tax returns for 2006–2007. In addition,
certain other U.S. tax deficiency issues and refund claims for
previous years were unresolved. The IRS has disallowed the tax
loss on our 2003 disposition of ERC Life Reinsurance Corporation.
We expect to contest the disallowance of this loss. It is reasonably
possible that the 2006–2007 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 ben-
efits recognized in our financial statements. We believe that there
are no other jurisdictions 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.
Resolution of audit matters, including the IRS audit of our consoli-
dated U.S. income tax returns for 2003–2005, reduced our 2010
consolidated effective tax rate by 5.9 percentage points.
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) 2010 2009
Unrecognized tax benefits $6,139 $7,251
Portion that, if recognized, would
reduce tax expense and effective tax rate
(a) 4,114 4,918
Accrued interest on unrecognized tax benefits 1,200 1,369
Accrued penalties on unrecognized tax benefits 109 99
Reasonably possible reduction to the balance
of unrecognized tax benefits in succeeding
12 months 0–1,600 0–1,800
Portion that, if recognized, would
reduce tax expense and effective tax rate
(a) 0–650 0–1,400
(a) Some portion of such reduction might be reported as discontinued operations.
A reconciliation of the beginning and ending amounts of unrecog-
nized tax benefits is as follows:
(In millions) 2010 2009
Balance at January 1 $ 7,251 $6,692
Additions for tax positions of the current year 316 695
Additions for tax positions of prior years 596 289
Reductions for tax positions of prior years (1,788) (229)
Settlements with tax authorities (152) (146)
Expiration of the statute of limitations (84) (50)
Balance at December 31 $ 6,139 $7,251
federal income taxes were an expense of $2,099 million in 2010
and a benefit of $2,501 million and $836 million in 2009 and 2008,
respectively, and amounts applicable to non-U.S. jurisdictions of a
benefit of $1,167 million, $264 million and $499 million in 2010,
2009 and 2008, respectively.
Deferred income tax balances reflect 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 and credits by
assessing the adequacy of future expected taxable income from all
sources, including reversal of taxable temporary differences, fore-
casted 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.
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 reduc-
tion depends upon a provision of U.S. tax law that defers the
imposition of U.S. tax on certain active financial 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. financial services companies to compete more effec-
tively with foreign banks and other foreign financial institutions
in global markets. This provision, which expires at the end of
2011, has been scheduled to expire and has been extended by
Congress on six previous occasions, including in December of
2010, but there can be no assurance that it will continue to be
extended. In the event the provision is not extended after 2011,
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 2012.
We have not provided U.S. deferred taxes on cumulative
earnings of non-U.S. affiliates and associated companies that
have been reinvested indefinitely. These earnings relate to ongo-
ing operations and, at December 31, 2010, were approximately
$94 billion. Most of these earnings have been reinvested in active
non-U.S. business operations and we do not intend to repatriate
these earnings to fund 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 payable if such
earnings were not reinvested indefinitely. Deferred taxes are
provided for earnings of non-U.S. affiliates and associated compa-
nies when we plan to remit those earnings.
During 2009, following the change in our external credit rat-
ings, funding actions taken and 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