GE 2011 Annual Report Download - page 110

108 GE 2011 ANNUAL REPORT
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We have not provided U.S. deferred taxes on cumulative earn-
ings of non-U.S. affi liates and associated companies that have been
reinvested indefi nitely. These earnings relate to ongoing operations
and, at December 31, 2011 and December 31, 2010, were approxi-
mately $102 billion and $94 billion, respectively. Most of these
earnings have been reinvested in active non-U.S. business opera-
tions 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 indefi -
nitely. Deferred taxes are provided for earnings of non-U.S. affi liates
and associated companies 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 pro-
vided deferred U.S. taxes, would be indefi nitely reinvested outside
the U.S. This change increased the amount of prior-year earnings
indefi nitely reinvested outside the U.S. by approximately $2 billion,
resulting in an income tax benefi t of $700 million in 2009.
Annually, we fi le over 6,500 income tax returns in over
250 global taxing jurisdictions. We are under examination or
engaged in tax litigation in many of these jurisdictions. During
2011, the Internal Revenue Service (IRS) completed the audit of our
consolidated U.S. income tax returns for 2006–2007, except for
certain issues that remain under examination. During 2010, the IRS
completed the audit of our consolidated U.S. income tax returns for
2003–2005. At December 31, 2011, the IRS was auditing our consol-
idated U.S. income tax returns for 2008–2009. In addition, certain
other U.S. tax defi ciency 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. In January 2012, the U.S.
Court of Appeals for the Second Circuit reversed the district court
decision which allowed GE’s $62 million refund claim with the IRS
regarding the taxation of the Castle Harbour aircraft leasing part-
nership from 1993–1998. Because a liability had been provided for
this matter, this decision has no effect on our results of operations
for 2011 or 2012. It is reasonably possible that the unresolved items
could be resolved during the next 12 months, which could result
in a decrease in our balance of “unrecognized tax benefi ts”—that
is, the aggregate tax effect of differences between tax return posi-
tions and the benefi ts recognized in our fi nancial 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, fi nancial position or cash fl ows. We further believe
that we have made adequate provision for all income tax uncer-
tainties. Resolution of audit matters, including the IRS audit of
our consolidated U.S. income tax returns for 2006–2007, reduced
our 2011 consolidated income tax rate by 2.4 percentage points.
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 benefi ts, 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) 2011 2010
Unrecognized tax benefits $5,230 $6,139
Portion that, if recognized, would reduce
tax expense and effective tax rate (a) 3,938 4,114
Accrued interest on unrecognized tax benefits 1,033 1,200
Accrued penalties on unrecognized tax benefits 121 109
Reasonably possible reduction to the balance
of unrecognized tax benefits in succeeding
12 months 0–900 0–1,600
Portion that, if recognized, would reduce
tax expense and effective tax rate (a) 0–500 0–650
(a) Some portion of such reduction might be reported as discontinued operations.
A reconciliation of the beginning and ending amounts of unrecog-
nized tax benefi ts is as follows:
(In millions) 2011 2010
Balance at January 1 $ 6,139 $ 7,251
Additions for tax positions of the current year 305 316
Additions for tax positions of prior years 817 596
Reductions for tax positions of prior years (1,828) (1,788)
Settlements with tax authorities (127) (152)
Expiration of the statute of limitations (76) (84)
Balance at December 31 $ 5,230 $ 6,139
We classify interest on tax defi ciencies as interest expense; we
classify income tax penalties as provision for income taxes. For
the years ended December 31, 2011, 2010 and 2009, $197 million
and $75 million of interest income and $172 million of interest
expense, respectively, and $10 million, $5 million and $14 million
of tax expenses related to penalties, respectively, were recog-
nized in the Statement of Earnings.