GE 2012 Annual Report Download - page 40

management’s discussion and analsis
38 GE 2012 ANNUAL REPORT
Cash income taxes paid in 2012 were $3.2 billion, reflecting
the effects of changes to temporary differences between the car-
rying amount of assets and liabilities and their tax bases and the
timing of tax payments to governments.
The increase in the consolidated effective tax rate from 2010
to 2011 was due in significant part to the high effective tax rate
on the pre-tax gain on the NBCU transaction with Comcast dis-
cussed above and in Note 2. The effective tax rate was also higher
because of the increase in 2011 of income in higher taxed juris-
dictions. This decreased the relative effect of our tax benefits
from lower-taxed global operations. In addition, the consolidated
income tax rate increased from 2010 to 2011 due to the decrease,
discussed above, in the benefit from lower-taxed global opera-
tions and the lower benefit from audit resolutions.
On January 2, 2013, the American Taxpayer Relief Act of 2012
was enacted and the law extended several provisions, including
a two year extension of the U.S. tax provision deferring tax on
active financial services income retroactive to January 1, 2012.
Under accounting rules, a tax law change is taken into account
in calculating the income tax provision in the period in which
enacted. Because the extension was enacted into law after the
end of 2012, tax expense for 2012 does not reflect retroactive
extension of expired provisions.
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 differs for GE and for GECC 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 GECC
net earnings from continuing operations, as GE tax expense does
not include taxes on GECC earnings. GE pre-tax earnings from
continuing operations, excluding GECC earnings from continu-
ing operations, were $9.5 billion, $12.6 billion and $12.0 billion
for 2012, 2011 and 2010, respectively. The decrease in earnings
reflects the non-repeat of the pre-tax gain on sale of NBCU and
higher loss amortization related to our principal pension plans.
On this basis, GE’s effective tax rate was 21.3% in 2012, 38.3% in
2011 and 16.8% in 2010.
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 GECC earnings
2012 2011 2010
Tax on global activities
including exports (0.7)% (0.9)% (3.3)%
U.S. business credits —(0.4) (0.5)
All other—net (0.9) (0.7) (0.8)
(1.6)% (2.0)% (4.6)%
The GE effective tax rate decreased from 2011 to 2012 primarily
because of the high effective tax rate in 2011 on the pre-tax gain
on the NBCU transaction with Comcast reflecting the low tax
basis in our investments in the NBCU business and the recogni-
tion of deferred tax liabilities related to our 49% investment in
NBCUniversal LLC (NBCU LLC) (see Note 2). This gain increased the
2011 GE effective tax rate by 19.7 percentage points. Partially
offsetting this decrease was an increase in the GE effective tax
rate from 2011 to 2012 due to higher pre-tax income and to the
decrease in the benefit from audit resolutions shown above.
The GE effective tax rate increased from 2010 to 2011 pri-
marily because of the high effective tax rate on the pre-tax gain
on the NBCU transaction with Comcast discussed above and in
Note 2. In addition, the effective tax rate increased because of the
decrease in the benefit from audit resolutions shown above.
The GECC effective income tax rate is lower than the U.S.
statutory rate primarily because of benefits from lower-taxed
global operations, including the use of global funding structures.
There is a tax 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 rein-
vested 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 GECC 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 the expiration of the U.S. tax law provision
deferring tax on active financial services income, as discussed in
Note 14. In addition, since this benefit depends on management’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 GECC file a consolidated U.S. federal
income tax return. This enables GE to use GECC tax deductions
and credits to reduce the tax that otherwise would have been
payable by GE. The GECC effective tax rate for each period reflects
the benefit of these tax reductions in the consolidated return.
GE makes cash payments to GECC for these tax reductions at
the time GE’s tax payments are due. The effect of GECC on the
amount of the consolidated tax liability from the formation of
the NBCU joint venture will be settled in cash no later than when
GECC tax deductions and credits otherwise would have reduced
the liability of the group absent the tax on joint venture formation.
The GECC effective tax rate was 6.2% in 2012, compared
with 11.8 % in 2011 and (45.8)% in 2010. Comparing a tax ben-
efit to pre-tax income resulted in a negative tax rate in 2010.
Our tax expense of $0.5 billion in 2012 decreased by $0.4 billion
from $0.9 billion in 2011. The lower 2012 tax expense resulted