GE 2011 Annual Report Download - page 40

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38 GE 2011 ANNUAL REPORT
Our consolidated income tax rate increased from 2009 to 2010
primarily because of an increase during 2010 of income in higher-
taxed jurisdictions. This decreased the relative effect of our tax
benefi ts from lower-taxed global operations. In addition, the con-
solidated income tax rate increased from 2009 to 2010 due to the
decrease, discussed above, in the benefi t from lower-taxed global
operations. These effects were partially offset by an increase in
the benefi t from audit resolutions, primarily a decrease in the bal-
ance of our unrecognized tax benefi ts from the completion of our
2003–2005 audit with the Internal Revenue Service (IRS).
A more detailed analysis of differences between the U.S. fed-
eral 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.
We believe that the GE effective tax rate is best analyzed in
relation to GE earnings before income taxes excluding the GECS
net earnings from continuing operations, as GE tax expense does
not include taxes on GECS earnings. GE pre-tax earnings from
continuing operations, excluding GECS earnings from continuing
operations, were $12.6 billion, $12.0 billion and $12.6 billion for
2011, 2010 and 2009, respectively. On this basis, GE’s effective tax
rate was 38.3% in 2011, 16.8% in 2010 and 21.8% in 2009.
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
2011 2010 2009
Tax on global activities
including exports (0.9)% (3.3)% (0.4)%
U.S. business credits (0.4) (0.5) —
All other—net (0.7) (0.8) (0.2)
(2.0)% (4.6)% (0.6)%
The GE effective tax rate increased from 2010 to 2011 primarily
because of the high effective tax rate on the pre-tax gain on the
NBCU transaction with Comcast refl ecting the low tax basis in our
investments in the NBCU business and the recognition of deferred
tax liabilities related to our 49% investment in NBCUniversal LLC
(NBCU LLC). See Note 2. This gain increased the GE effective tax
rate by 19.7 percentage points. In addition, the effective tax rate
increased because of the 2.6 percentage point decrease in the
benefi t from audit resolutions shown above.
The GE effective tax rate decreased from 2009 to 2010 primar-
ily because of the 4.0 percentage point increase in the benefi t
from audit resolutions shown above.
The GECS effective income tax rate is lower than the U.S. stat-
utory rate primarily because of benefi ts from lower-taxed global
operations, including the use of global funding structures. There
is a tax benefi t from global operations as non-U.S. income is sub-
ject to local country tax rates that are signifi cantly below the 35%
U.S. statutory rate. These non-U.S. earnings have been indefi nitely
reinvested outside the U.S. and are not subject to current U.S.
income tax. The rate of tax on our indefi nitely reinvested non-
U.S. earnings is below the 35% U.S. statutory rate because we
have signifi cant 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 benefi t 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 expiration of
the U.S. tax law provision deferring tax on active fi nancial services
income. In addition, since this benefi t depends on management’s
intention to indefi nitely reinvest amounts outside the U.S., our tax
provision will increase to the extent we no longer indefi nitely rein-
vest foreign earnings.
As noted above, GE and GECS fi le 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 refl ects
the benefi t 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 GECS tax deduc-
tions and credits otherwise would have reduced the liability of the
group absent the tax on joint venture formation.
The GECS effective tax rate was 12.0% in 2011, compared with
(48.4)% in 2010 and 144.3% in 2009. Comparing a tax benefi t to
pre-tax income resulted in a negative tax rate in 2010. Comparing
a tax benefi t to a pre-tax loss resulted in the positive tax rate in
2009. The GECS tax expense of $0.9 billion in 2011 increased by
$1.9 billion from a $1.0 billion benefi t in 2010. The higher 2011
tax expense resulted principally from higher pre-tax income
in 2011 than in 2010, which increased pre-tax income $5.4 bil-
lion and increased the expense ($1.9 billion). Also increasing the
expense was a benefi t from resolution of the 2006–2007 IRS audit
($0.2 billion) that was less than the benefi t from resolution of the
2003–2005 IRS audit ($0.3 billion) both of which are reported in
the caption “All other—net” in the effective tax rate reconciliation
in Note 14.
The GECS tax benefi t of $3.9 billion in 2009 decreased by
$2.9 billion to $1.0 billion in 2010. The lower 2010 tax benefi t
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 benefi t ($1.7 billion), the non-repeat
of the one-time benefi t related to the 2009 decision to indefi nitely
reinvest undistributed prior year non-U.S. earnings ($0.7 billion),
and a decrease in lower-taxed global operations in 2010 as com-
pared to 2009 ($0.6 billion) caused in part by an increase in losses
for which there was not a full tax benefi t, 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 benefi ts were partially offset by the benefi t from the
resolution of the 2003–2005 IRS audit ($0.3 billion).