GE 2010 Annual Report Download - page 38

management’s discussion and analsis
36 GE 2010 ANNUAL REPORT
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
2010 2009 2008
Tax on global activities
including exports (3.3)% (0.4)% —%
U.S. business credits (0.5) — —
All other—net (0.8) (0.2) (0.6)
(4.6)% (0.6)% (0.6)%
The GE effective tax rate decreased from 2009 to 2010 primarily
because of the 4.0 percentage point increase in the benefit from
audit resolutions shown above.
The GE effective tax rate decreased from 2008 to 2009 pri-
marily because of the 3.6 percentage point increase in the benefit
from lower-taxed earnings from global operations, excluding
audit resolutions. The 2008 GE rate reflects the benefit of lower-
taxed earnings from global operations.
The GECS effective income tax rate is lower than the U.S. statu-
tory rate primarily because of benefits from lower-taxed global
operations, including the use of global funding structures. There is
a benefit from global operations as non-U.S. income is subject to
local country tax rates that are significantly below the 35% U.S.
statutory rate. These non-U.S. earnings have been indefinitely
reinvested outside the U.S. and are not subject to current U.S.
income tax. The rate of tax on our indefinitely reinvested non-U.S.
earnings is below the 35% U.S. statutory rate because we have
significant business operations subject to tax in countries where
the tax on that income is lower than the U.S. statutory rate and
because GECS funds the majority of its non-U.S. operations
through foreign companies that are subject to low foreign taxes.
We expect our ability to benefit from non-U.S. income taxed at
less than the U.S. rate to continue subject to changes of U.S. or
foreign law, including, as discussed in Note 14, the possible expi-
ration of the U.S. tax law provision deferring tax on active financial
services income. In addition, since this benefit depends on man-
agement’s intention to indefinitely reinvest amounts outside the
U.S., our tax provision will increase to the extent we no longer
indefinitely reinvest foreign earnings.
As noted above, GE and GECS file a consolidated U.S. federal
income tax return. This 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 in the consolidated return.
GE makes cash payments to GECS for these tax reductions at the
time GE’s tax payments are due. The effect of GECS on the amount
of the consolidated tax liability from the formation of the NBCU
joint venture will be settled in cash when it otherwise would have
reduced the liability of the group absent the tax on joint
venture formation.
The GECS effective tax rate was (44.8)% in 2010, compared
with 152.0% in 2009 and (41.4)% in 2008. Comparing a tax benefit
to pre-tax income resulted in a negative tax rate in 2010 and 2008.
Comparing a tax benefit to pre-tax loss results in the positive tax
rate in 2009. The GECS tax benefit of $3.9 billion in 2009 decreased
by $2.9 billion to $1.0 billion in 2010. The lower 2010 tax benefit
resulted in large part from the change from a pre-tax loss in 2009
to pre-tax income in 2010, which increased pre-tax income
$4.7 billion and decreased the benefit ($1.7 billion), the non-repeat
of the one-time benefit related to the 2009 decision (discussed
below) to indefinitely reinvest undistributed prior year non-U.S.
earnings ($0.7 billion), and a decrease in lower-taxed global opera-
tions in 2010 as compared to 2009 ($0.6 billion) caused in part by
an increase in losses for which there was not a full tax benefit,
including an increase in the valuation allowance associated with
the deferred tax asset related to the 2008 loss on the sale of
GE Money Japan ($0.2 billion). These lower benefits were partially
offset by the benefit from resolution of the 2003–2005 IRS audit
($0.3 billion), which is reported in the caption “All other—net” in
the effective tax rate reconciliation in Note 14.
The GECS tax benefit of $2.3 billion in 2008 increased by
$1.6 billion to $3.9 billion in 2009. The higher benefit resulted in
large part from the change from pre-tax income in 2008 to a
pre-tax loss in 2009, which decreased pre-tax income $8.2 billion
and increased the benefit ($2.9 billion) and the one-time benefit
related to the 2009 decision (discussed below) to indefinitely
reinvest undistributed prior-year non-U.S. earnings that was
larger than the 2008 decision to indefinitely reinvest prior-year
non-U.S. earnings ($0.4 billion). These increases in benefits were
significantly offset by a decrease in 2009 benefits from lower-
taxed global operations as compared to 2008 ($1.9 billion),
substantially as a result of the impact in 2009 of lower interest
rates and foreign exchange on the funding of our non-U.S. opera-
tions through companies that are subject to a low rate of tax.
During 2009, following the change in GECS external credit
ratings, funding actions taken and our continued review of our
operations, liquidity and funding, we determined that undistrib-
uted prior-year earnings of non-U.S. subsidiaries of GECS, on
which we had previously 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 $0.7 billion in 2009.
The GECS 2008 rate reflects a reduction during 2008 of income
in higher-taxed jurisdictions which increased the relative effect of
tax benefits from lower-taxed global operations on the tax rate.
Global Risk Management
A disciplined approach to risk is important in a diversified orga-
nization like 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 aggregated
risk at the customer, industry, geographic and collateral-type
levels, where appropriate.
Risk assessment and risk management are the responsibility
of management. The GE Board of Directors (Board) has overall
responsibility for risk oversight with a focus on the most