Microsoft 2007 Annual Report Download - page 50

PAGE 49
The 2007 other reconciling items includes the impact of a $195 million reduction resulting from various changes in
tax positions taken in prior periods, related primarily to favorable developments in an IRS position and multiple
foreign audit assessments. The 2006 other reconciling item includes the impact of the $351 million non-deductible
European Commission fine. The 2005 other reconciling items include a $179 million repatriation tax benefit under
the American Jobs Creation Act of 2004.
The components of the deferred tax assets and liabilities were as follows:
(In millions)
June 30 2007 2006
Deferred income tax assets:
Stock-based compensation expense $2,859 $3,630
Other expense items 1,735 1,451
Unearned revenue 842 1,028
Impaired investments 710 989
Other revenue items 58 102
Deferred income tax assets $6,204 $7,200
Deferred income tax liabilities:
International earnings $(1,763) $(1,715)
Unrealized gain on investments (926) (801)
Other (227) (133)
Deferred income tax liabilities (2,916) (2,649)
Net deferred income tax assets $ 3,288 $ 4,551
Reported as:
Current deferred tax assets $1,899 $1,940
Long-term deferred tax assets 1,389 2,611
Net deferred income tax assets $3,288 $4,551
Deferred income tax balances reflect the effects of temporary differences between the carrying amounts of assets
and liabilities and their tax bases and are stated at enacted tax rates expected to be in effect when taxes are
actually paid or recovered.
We have not provided deferred U.S. income taxes or foreign withholding taxes on temporary differences of
approximately $6.10 billion resulting from earnings for certain non-U.S. subsidiaries which are permanently
reinvested outside the United States. The amount of unrecognized deferred tax liability associated with these
temporary differences is approximately $1.77 million.
The American Jobs Creation Act of 2004 (the “Act”) was enacted in October 2004. The Act creates a
temporary incentive for U.S. corporations to repatriate foreign subsidiary earnings by providing an elective 85%
dividends received deduction for certain dividends from controlled foreign corporations. Under these provisions,
we repatriated approximately $780 million in dividends subject to the elective 85% dividends received deduction
and we recorded a corresponding tax provision benefit of $179 million from the reversal of previously provided
U.S. deferred tax liabilities on these unremitted foreign subsidiary earnings in 2005. The dividend was paid in
June 2006.
Income taxes paid were $5.24 billion in fiscal year 2007, $4.78 billion in fiscal year 2006, and $4.33 billion in
fiscal year 2005.
Tax Contingencies. We are subject to income taxes in the United States and numerous foreign jurisdictions.
Significant judgment is required in determining our worldwide provision for income taxes and recording the related
assets and liabilities. In the ordinary course of our business, there are many transactions and calculations where
the ultimate tax determination is uncertain. We are regularly under audit by tax authorities. Accruals for tax
contingencies are provided for in accordance with the requirements of SFAS No. 5, Accounting for Contingencies.