Medtronic 2011 Annual Report Download - page 39

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Medtronic, Inc.
The effective tax rate of 16.8 percent decreased by 5.1
percentage points from fiscal year 2010 to fiscal year 2011. The
change in our effective tax rate was primarily due to the tax
benefits derived from the resolution of U.S. federal, state, and
foreign income tax audits, the retroactive renewal and extension
of the U.S. federal research and development tax credit,
finalization of certain tax returns, changes to uncertain tax
position reserves, foreign dividend distributions, the impact of
restructuring charges, certain litigation charges, net, acquisition-
related items, and the benefit associated with the Puerto Rico
excise tax. Our non-GAAP nominal tax rate for fiscal year 2011 was
17.1 percent compared to 21.5 percent from the prior fiscal year.
The decrease in our non-GAAP nominal tax rate for fiscal year
2011 as compared to the prior fiscal year was due to the
operational tax benefits described below and the impact of tax
benefits derived from our international operations.
During fiscal year 2011, we recorded $187 million in operational
tax benefits. This included a $67 million net benefit associated
with the resolution of U.S. federal, state, and foreign income tax
audits, finalization of certain tax returns, and changes to uncertain
tax position reserves. As a result of the retroactive renewal and
extension of the U.S. federal research and development tax credit,
a $27 million benefit was also recorded as an operational tax
benefit during the current fiscal year. In addition, we recorded a
$59 million benefit associated with foreign dividend distributions
and a $34 million U.S. tax credit associated with the recently
enacted Puerto Rico excise tax, which substantially offsets the
corresponding excise tax recorded within other expense, net in the
consolidated statement of earnings.
The fiscal year 2010 effective tax rate of 21.9 percent increased
by 6.7 percentage points from fiscal year 2009. The change in
our effective tax rate was primarily due to the impact of special
charges, restructuring charges, certain litigation charges, net,
acquisition-related items, and certain tax adjustments. The 5.6
percentage point increase in the impact from special charges,
restructuring charges, certain litigation charges, net, acquisition-
related items, and certain tax adjustments is largely due to the
$132 million benefit from the certain tax adjustment associated
with the reversal of excess tax accruals. This reversal related to the
settlement of certain issues reached with the IRS involving the
review of the Company’s fiscal year 2005 and fiscal year 2006
domestic income tax returns, the resolution of various state audit
proceedings covering fiscal years 1997 through 2007 and the
completion of foreign audits covering various years recorded in
fiscal year 2009. Our non-GAAP nominal tax rate for fiscal year
2010 was 21.5 percent compared to 20.4 percent from fiscal year
2009. The increase in our non-GAAP nominal tax rate for fiscal
year 2010 as compared to fiscal year 2009 was due to the
operational tax benefits in fiscal year 2009 described above and
the impact of tax benefits derived from our international
operations in fiscal year 2009.
During fiscal year 2010, we recorded $5 million in operational
tax benefits. This included a $20 million operational tax benefit
associated with certain Irish research and development credit
claims, the deductibility of a settlement expense, the finalization
of certain foreign and domestic tax returns and changes to
uncertain tax position reserves. This benefit was partially offset by
the $15 million tax cost associated with the U.S. health care reform
legislation eliminating the federal tax benefit for government
subsidies of retiree prescription drug benefits.
Tax audits associated with the allocation of income, and other
complex issues, may require an extended period of time to
resolve and may result in income tax adjustments if changes to
our allocation are required between jurisdictions with different
tax rates. Tax authorities periodically review our tax returns and
propose adjustments to our tax filings. The IRS has settled its
audits with us for all years through fiscal year 1999. Tax years
settled with the IRS may remain open for foreign tax audits
and competent authority proceedings. Competent authority
proceedings are a means to resolve intercompany pricing
disagreements between countries.
On December 7, 2010, we reached settlement with the IRS with
respect to the audits of fiscal years 1997, 1998, and 1999 and
the allocation of income between Medtronic, Inc. and its wholly-
owned subsidiary in Switzerland. The impact from this settlement
has been recorded in the provision for income taxes in the
consolidated statement of earnings for the fiscal year ended
April 29, 2011.
In September 2005, the IRS issued its audit report for fiscal
years 2000, 2001, and 2002. In addition, the IRS issued its audit
report for fiscal years 2003 and 2004 in March 2007. Following the
resolution on December 7, 2010 of the issue associated with the
allocation of income between Medtronic, Inc. and its wholly-
owned subsidiary in Switzerland, we have reached agreement
with the IRS on substantially all of the proposed adjustments
for fiscal years 2000 through 2004. The remaining open issues
are not significant and are expected to be resolved within the
next 12 months.