Medtronic 2008 Annual Report Download - page 82

on the Company’s tax return but has not yet been recognized as an
expense in the consolidated statements of earnings. Deferred tax
assets/(liabilities) are comprised of the following:
April 25,
2008
April 27,
2007
Deferred tax assets:
Allowance for doubtful accounts $ 24 $ 52
Inventory (intercompany profit in inventory
and excess of tax over book valuation) 265 235
Unrealized loss on available for sale securities
and derivative financial instruments 186 37
Unrealized loss on equity investments 14 11
Accrued liabilities 128 109
Warranty reserves 15 13
Convertible debt interest 254 314
Accrued legal reserves 90 —
Pension and post-retirement benefits —29
Stock-based compensation 130 71
Federal and state benefit on uncertain
tax positions 112 —
O t h e r 119 105
Total deferred tax assets (net of
valuation allowance) 1,337 976
Deferred tax liabilities:
Intangible assets (488) (280)
Accumulated depreciation (8) (13)
Pension and post-retirement benefits (8) —
Realized loss on derivative financial instruments (103) (48)
O t h e r (27) (26)
Total deferred tax liabilities (634) (367)
Deferred tax assets, net
$ 703
$ 609
The Company’s effective income tax rate varied from the U.S. Federal
statutory tax rate as follows:
Fiscal Year
2008 2007 2006
U.S. Federal statutory tax rate 35.0
% 35.0 % 35.0 %
Increase (decrease) in tax rate resulting from:
U.S. state taxes, net of Federal tax benefit 1.1 1.2 0.9
Research and development credit (0.6) (0.4) (0.4)
Domestic production activities (0.4) (0.2) —
International (18.3 ) (12.9 ) (10.9 )
Impact of special, restructuring, certain
litigation and IPR&D charges 5.9 0.3 1.9
Reversal of excess tax accruals —(3.7) (7.1)
Other, net —1.0 —
Effective tax rate
22.7
%
20.3
%
19.4
%
In fiscal year 2007, the Company recorded a $129 certain tax benefit
associated with the reversal of excess tax accruals in connection with
the settlement reached with the U.S. Internal Revenue Service (IRS)
involving the review of the Company’s fiscal year 2003 and fiscal year
2004 domestic income tax returns, and the resolution of competent
authority issues for fiscal year 1992 through fiscal year 2000. The $129
certain tax benefit was recorded in the provision for income taxes in the
consolidated statement of earnings for fiscal year 2007.
In fiscal year 2006, the Company reversed excess tax accruals of $225
associated with the favorable agreements reached with the IRS involving
the review of the Company’s fiscal years 1997 through 2002 domestic
income tax returns. The $225 certain tax adjustment was recorded in
provision for income taxes in the consolidated statement of earnings for
fiscal year 2006. As a result of the agreements reached with the IRS, the
Company made approximately $326 of incremental tax payments
during the third quarter of fiscal year 2006.
The Company has not provided U.S. income taxes on certain of its
non-U.S. subsidiaries’ undistributed earnings as such amounts are
permanently reinvested outside the U.S. At April 25, 2008, and April 27,
2007, such earnings were approximately $8,338 and $6,573, respectively.
Currently, the Company’s operations in Puerto Rico, Switzerland and
Ireland have various tax incentive grants. Unless these grants are
extended, they will expire between fiscal years 2010 and 2027.
As a result of the implementation of FASB Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes” (FIN No. 48), effective
April 28, 2007, the Company recognized a $1 decrease in its existing
liabilities for uncertain tax positions which has been recorded as an
increase to the opening balance of retained earnings. As of the adoption
date, the Company had $408 of gross unrecognized tax benefits. A
reconciliation of the beginning and ending amount of unrecognized
tax benefits is as follows:
Gross unrecognized tax benefits at April 28, 2007 $ 408
Gross increases:
Prior year tax positions 21
Current year tax positions 51
Gross decreases:
Prior year tax positions (23)
Settlements (2)
Statute of limitation lapses —
Gross unrecognized tax benefits at April 25, 2008
$ 455
Notes to Consolidated Financial Statements
(continued)
(dollars in millions, except per share data)
78 Medtronic, Inc.