Pfizer 2011 Annual Report Download - page 76

Notes to Consolidated Financial Statements
Pfizer Inc. and Subsidiary Companies
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. As of
December 31, 2011 and 2010, we had approximately $1.2 billion and $1.0 billion, respectively, in assets associated with uncertain tax
positions recorded in Taxes and other noncurrent assets.
•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.
The reconciliation of the beginning and ending amounts of gross unrecognized tax benefits follows:
(MILLIONS OF DOLLARS) 2011 2010 2009
Balance, January 1 $(6,759) $(7,657) $(5,372)
Acquisitions(a) (72) (49) (1,785)
Increases based on tax positions taken during a prior period(b) (502) (513) (79)
Decreases based on tax positions taken during a prior period(b), (c) 271 2,384 38
Decreases based on cash payments for a prior period 575 280 —
Increases based on tax positions taken during the current period(b) (855) (1,396) (941)
Decreases based on tax positions taken during the current period —— 712
Impact of foreign exchange (89) 104 (284)
Other, net(d) 122 88 54
Balance, December 31(e) $(7,309) $(6,759) $(7,657)
(a) The amount in 2011 primarily relates to the acquisition of King and the amounts in 2010 and 2009 primarily relate to the acquisition of Wyeth.
(b) Primarily included in Provision for taxes on income.
(c) In 2011, 2010, and 2009, the decreases are primarily a result of effectively settling certain issues with the U.S. and foreign tax authorities. See
discussions below.
(d) Primarily includes decreases as a result of a lapse of applicable statutes of limitations.
(e) In 2011, included in Income taxes payable ($357 million), Taxes and other current assets ($11 million), Taxes and other noncurrent assets ($225
million), Noncurrent deferred tax liabilities ($677 million) and Other taxes payable ($6.0 billion). In 2010, included in Income taxes payable ($421
million), Taxes and other current assets ($279 million), Taxes and other noncurrent assets ($169 million), Noncurrent deferred tax liabilities ($369
million) and Other taxes payable ($5.5 billion).
•Interest related to our unrecognized tax benefits is recorded in accordance with the laws of each jurisdiction and is recorded in
Provision for taxes on income in our consolidated statements of income. In 2011, we recorded net interest expense of $203 million. In
2010, we recorded net interest income of $545 million, primarily as a result of settling certain issues with the U.S. and various foreign
tax authorities, which are discussed below. In 2009, we recorded net interest expense of $191 million. Gross accrued interest totaled
$951 million as of December 31, 2011 (reflecting a decrease of approximately $203 million as a result of cash payments) and $952
million as of December 31, 2010. In 2011, these amounts were included in Income taxes payable ($120 million), Taxes and other
current assets ($2 million) and Other taxes payable ($829 million). In 2010, these amounts were included in Income taxes payable
($112 million), Taxes and other current assets ($122 million) and Other taxes payable ($718 million). Accrued penalties are not
significant.
Status of Tax Audits and Potential Impact on Accruals for Uncertain Tax Positions
The United States is one of our major tax jurisdictions:
•During the first quarter of 2011, we reached a settlement with the U.S. Internal Revenue Service (IRS) with respect to the audits of the
Wyeth tax returns for the years 2002 through 2005. The settlement resulted in an income tax benefit to Pfizer of approximately $80
million for income tax and interest. Tax years 2006 through the Wyeth acquisition date (October 15, 2009) are currently under audit.
•During the fourth quarter of 2010, we reached a settlement with the IRS related to issues we had appealed with respect to the audits of
the Pfizer Inc. tax returns for the years 2002 through 2005, as well as the Pharmacia audit for the year 2003 through the date of merger
with Pfizer (April 16, 2003). The IRS concluded its examination of the aforementioned tax years and issued a final Revenue Agent’s
Report (RAR). The Company agreed with all of the adjustments and computations contained in the RAR. As a result of settling these
audit years, in the fourth quarter of 2010, we reduced our unrecognized tax benefits by approximately $1.4 billion and recorded a
corresponding tax benefit. The fourth quarter and full year 2010 effective tax rates were also favorably impacted by the reversal of $600
million of accruals related to interest on these unrecognized tax benefits. The tax years 2006-2010 are currently under audit and the tax
year 2011 is open but not under audit. All other tax years in the U.S. for Pfizer Inc. are closed under the statute of limitations.
•King’s tax year 2008 and Alpharma, Inc.’s (a company acquired through the King acquisition) tax years 2005-2007 are currently under
audit. Tax years 2009 through the date of acquisition (January 31, 2011) are open but not under audit. King’s tax years prior to 2008
have been settled with the IRS. The open tax years and audits of King and its subsidiaries are not considered significant to Pfizer.
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-
2011), Japan (2006-2011), Europe (2002-2011, primarily reflecting Ireland, the United Kingdom, France, Italy, Spain and Germany)
and Puerto Rico (2007-2011). During 2011, we recognized approximately $190 million in tax benefits resulting from the resolution of
certain tax positions pertaining to prior years with various foreign tax authorities, as well as from the expiration of certain statutes of
limitations. The 2011 effective tax rate was also favorably impacted by approximately $77 million related to the reversal of accruals
for interest on these unrecognized tax benefits. During 2010, we also recognized approximately $320 million in tax benefits resulting
from the resolution of certain tax positions pertaining to prior years with various foreign tax authorities, as well as from the expiration
of certain statutes of limitations. The 2010 effective tax rate was also favorably impacted by approximately $140 million related to the
reversal of accruals for interest on these unrecognized tax benefits.
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