Pfizer 2009 Annual Report Download - page 67

Notes to Consolidated Financial Statements
Pfizer Inc. and Subsidiary Companies
regulations are subject to interpretation and tax litigation inherently is uncertain, these evaluations can involve a series of complex
judgments about future events and can rely heavily on estimates and assumptions. Our evaluations are based on estimates and
assumptions that have been deemed reasonable by management. However, if our estimates and assumptions are not
representative of actual outcomes, our results could be materially impacted. For a description of our accounting policies associated
with accounting for income tax contingencies, see Note 1P. Significant Accounting Policies: Income Tax Contingencies and Note
1C. Significant Accounting Policies: Estimates and Assumptions.
Tax assets associated with uncertain tax positions represent our estimate of the potential tax benefits in one tax jurisdiction that
could result from the payment of income taxes in another tax jurisdiction. These potential benefits generally result from cooperative
efforts among taxing authorities, as required by tax treaties to minimize double taxation, commonly referred to as the competent
authority process. The recoverability of these assets, which we believe to be more likely than not, is dependent upon the actual
payment of taxes in one tax jurisdiction and, in some cases, the successful petition for recovery in another tax jurisdiction.
The United States is one of our major tax jurisdictions. We currently are appealing two issues related to the Internal Revenue
Service’s (IRS) audits of the Pfizer Inc. tax returns for the years 2002 through 2005. The 2006, 2007 and 2008 tax years currently
are under audit. The 2009 tax year is not yet under audit. All other tax years in the U.S. for Pfizer Inc. are closed under the statute of
limitations. With respect to Pharmacia, the IRS currently is conducting an audit for the year 2003 through the date of merger with
Pfizer (April 16, 2003). With respect to Wyeth, the years 2002 through 2005 currently are under IRS audit, and tax years 2006
through the Wyeth acquisition date (October 15, 2009) have not been audited yet. In addition to the open audit years in the U.S., we
have open audit years in other major tax jurisdictions, such as Canada (1998-2009), Japan (2006-2009), Europe (1997-2009,
primarily reflecting Ireland, the United Kingdom, France, Italy, Spain and Germany) and Puerto Rico (2003-2009). Finalizing audits
with the relevant taxing authorities can include formal administrative and legal proceedings, and, as a result, it is difficult to estimate
the timing and range of possible change to our uncertain tax positions. If our estimates and assumptions are not representative of
actual outcomes, any change could have a significant impact.
In 2008, we effectively settled certain issues common among multinational corporations with various foreign tax authorities primarily
relating to tax years 2000 to 2005. As a result, we recognized $305 million in tax benefits.
Tax liabilities associated with uncertain tax positions represent unrecognized tax benefits, which arise when the estimated benefit
recorded in our financial statements differs from the amounts taken or expected to be taken in a tax return because of the
uncertainties described above. These unrecognized tax benefits relate primarily to issues common among multinational
corporations. Substantially all of these unrecognized tax benefits, if recognized, would impact our effective income tax rate.
A reconciliation of the beginning and ending amounts of gross unrecognized tax benefits is as follows:
(MILLIONS OF DOLLARS) 2009 2008
Balance, January 1 $(5,372) $(5,466)
Acquisition of Wyeth (1,785) —
Decreases based on tax positions taken during a prior period(a) 38 880
Increases based on tax positions taken during the current period(b) (941) (990)
Decreases based on tax positions taken during the current period(c) 712 —
Impact of foreign exchange (284) 211
Other, net(d) (25) (7)
Balance, December 31(e) $(7,657) $(5,372)
(a) Decreases are primarily a result of effectively settling certain issues with various foreign tax authorities.
(b) Primarily included in Provision for taxes on income.
(c) Primarily included in Income taxes payable.
(d) Includes increases based on tax positions taken during a prior period, decreases due to settlements with taxing authorities primarily resulting in
cash payments and decreases as a result of a lapse of applicable statutes of limitations.
(e) In 2009, included in Income taxes payable ($144 million), Current deferred tax assets and other current assets ($78 million), Noncurrent deferred
tax liabilities ($208 million) and Other taxes payable ($7.2 billion). In 2008, included in Income taxes payable ($85 million), Current deferred tax
assets and other current assets ($44 million) and Other taxes payable ($5.2 billion).
Interest expense related to our unrecognized tax benefits is recorded in Provision for taxes on income in our consolidated
statements of income and totaled $191 million in 2009, $106 million in 2008 and $214 million in 2007. Gross accrued interest totaled
$1.9 billion as of December 31, 2009 (including $300 million recorded upon the acquisition of Wyeth) and $1.3 billion as of
December 31, 2008. In 2009, these amounts were included in Income taxes payable ($90 million), Current deferred tax assets and
other current assets ($55 million) and Other taxes payable ($1.8 billion). In 2008, these amounts were primarily included in Other
taxes payable. Accrued penalties are not significant.
Any settlements or statute of limitations expirations would likely result in a significant decrease in our uncertain tax positions. We
estimate that within the next 12 months, our gross uncertain tax positions, exclusive of interest could decrease by as much as
$900 million, as a result of settlements with taxing authorities or the expiration of the statute of limitations. Our estimates of
unrecognized tax benefits and potential tax benefits may not be representative of actual outcomes, and variation from such
estimates could materially affect our financial statements in the period of settlement or when the statutes of limitations expire, as we
treat these events as discrete items in the period of resolution. Finalizing audits with the relevant taxing authorities can include
formal administrative and legal proceedings, and, as a result, it is difficult to estimate the timing and range of possible change
related to our uncertain tax positions and such changes could be significant.
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