GE 2012 Annual Report Download - page 110

108 GE 2012 ANNUAL REPORT
notes to consolidated financial statements
Deferred income tax balances reflect the effects of tempo-
rary 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 recov-
ered. 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, forecasted operating earnings and available tax plan-
ning 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 had expired at the end of
2011, was reinstated in January 2013 retroactively for two years
through the end of 2013. The provision had been scheduled to
expire and had been extended by Congress on six previous occa-
sions, but there can be no assurance that it will continue to be
extended. In the event the provision is not extended after 2013,
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 2014.
We have not provided U.S. deferred taxes on cumulative earn-
ings of non-U.S. affiliates and associated companies that have
been reinvested indefinitely. These earnings relate to ongoing
operations and, at December 31, 2012 and December 31, 2011,
were approximately $108 billion and $102 billion, respectively.
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 companies when
we plan to remit those earnings.
Annually, we file over 5,900 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 consoli-
dated 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, 2012, the IRS was auditing our
consolidated U.S. income tax returns for 2008–2009. 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 reason-
ably possible that the unresolved items could be resolved during
the next 12 months, which could result in a decrease in our bal-
ance 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 opera-
tions, financial position or cash flows. We further believe that
we have made adequate provision for all income tax uncertain-
ties. 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 2.3 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 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) 2012 2011
Unrecognized tax benefits $5,445 $5,230
Portion that, if recognized, would reduce
tax expense and effective tax rate (a) 4,032 3,938
Accrued interest on unrecognized tax benefits 961 1,033
Accrued penalties on unrecognized tax benefits 173 121
Reasonably possible reduction to the balance
of unrecognized tax benefits in succeeding
12 months 0–800 0–900
Portion that, if recognized, would reduce
tax expense and effective tax rate (a) 0–700 0–500
(a) Some portion of such reduction might be reported as discontinued operations.
A reconciliation of the beginning and ending amounts of unrec-
ognized tax benefits is as follows:
(In millions) 2012 2011
Balance at January 1 $5,230 $ 6,139
Additions for tax positions of the current year 293 305
Additions for tax positions of prior years 882 817
Reductions for tax positions of prior years (723) (1,828)
Settlements with tax authorities (191) (127)
Expiration of the statute of limitations (46) (76)
Balance at December 31 $5,445 $ 5,230
We classify interest on tax deficiencies as interest expense; we
classify income tax penalties as provision for income taxes. For
the years ended December 31, 2012, 2011 and 2010, $(45) mil-
lion, $(197) million and $(75) million of interest expense (income),
respectively, and $33 million, $10 million and $5 million of tax
expense (income) related to penalties, respectively, were recog-
nized in the Statement of Earnings.