Medtronic 2014 Annual Report Download - page 117

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Medtronic, Inc.
Notes to Consolidated Financial Statements (Continued)
The Company had $1.172 billion, $1.068 billion, and $917 million of gross unrecognized tax benefits as of April 25, 2014,
April 26, 2013, and April 27, 2012, respectively. A reconciliation of the beginning and ending amount of unrecognized tax
benefits for fiscal years 2014, 2013, and 2012 is as follows:
Fiscal Year
(in millions) 2014 2013 2012
Gross unrecognized tax benefits at beginning of fiscal year $ 1,068 $ 917 $ 769
Gross increases:
Prior year tax positions 64 12 47
Current year tax positions 166 169 171
Gross decreases:
Prior year tax positions (58) (21) (53)
Settlements (66) (6) (4)
Statute of limitation lapses (2) (3) (13)
Gross unrecognized tax benefits at end of fiscal year $ 1,172 $ 1,068 $ 917
If all of the Company’s unrecognized tax benefits as of April 25, 2014, April 26, 2013, and April 27, 2012 were recognized,
$1.104 billion, $1.028 billion, and $858 million would impact the Company’s effective tax rate, respectively. Although the
Company believes that it has adequately provided for liabilities resulting from tax assessments by taxing authorities, positions
taken by these tax authorities could have a material impact on the Company’s effective tax rate in future periods. The Company
has recorded the gross unrecognized tax benefits as a long-term liability, as it does not expect significant payments to occur or
the total amount of unrecognized tax benefits to change significantly over the next 12 months.
The Company recognizes interest and penalties related to income tax matters in the provision for income taxes in the
consolidated statements of earnings and records the liability in the current or long-term accrued income taxes in the
consolidated balance sheets, as appropriate. The Company had $141 million, $88 million, and $120 million of accrued gross
interest and penalties as of April 25, 2014, April 26, 2013, and April 27, 2012, respectively. During the fiscal years ended
April 25, 2014, April 26, 2013, and April 27, 2012, the Company recognized gross interest expense of approximately
$36 million, $33 million, and $32 million in the provision for income taxes in the consolidated statements of earnings,
respectively.
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 the Company’s allocation are required between jurisdictions with
different tax rates. Tax authorities periodically review the Company’s tax returns and propose adjustments to the Company’s tax
filings. The IRS has settled its audits with the Company for all years through fiscal year 2004. 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. The major foreign jurisdictions where the Company conducts
business have generally concluded all material tax matters through fiscal year 2004. In addition, substantially all material state
and local tax matters have been concluded through fiscal year 2004.
In March 2009, the IRS issued its audit report for fiscal years 2005 and 2006. The Company reached agreement with the IRS on
some, but not all matters related to these fiscal years. On December 23, 2010, the IRS issued a statutory notice of deficiency
with respect to the remaining issues. The Company filed a Petition with the U.S. Tax Court on March 21, 2011 objecting to the
deficiency. During October and November 2012, the Company reached resolution with the IRS on various matters, including
the deductibility of a settlement payment. The remaining unresolved issues relate to the allocation of income between
Medtronic, Inc. and its wholly-owned subsidiary operating in Puerto Rico, which is one of the Company’s key manufacturing
sites.
In October 2011, the IRS issued its audit report for fiscal years 2007 and 2008. The Company reached agreement with the IRS
on some but not all matters related to these fiscal years. The significant issues that remain unresolved relate to the allocation of
income between Medtronic, Inc. and its wholly-owned subsidiary operating in Puerto Rico, and proposed adjustments
associated with the tax effects of the Company’s acquisition of Kyphon Inc. (Kyphon). Associated with the Kyphon acquisition,
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