Pfizer 2012 Annual Report Download - page 76

Notes to Consolidated Financial Statements
Pfizer Inc. and Subsidiary Companies
2012 Financial Report 75
D. Tax Contingencies
We are subject to income tax in many jurisdictions, and a certain degree of estimation is required in recording the assets and liabilities related
to income taxes. All of our tax positions are subject to audit by the local taxing authorities in each tax jurisdiction. These tax audits can involve
complex issues, interpretations and judgments and the resolution of matters may span multiple years, particularly if subject to negotiation or
litigation. Our assessments are based on estimates and assumptions that have been deemed reasonable by management, but 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. We treat these events as
discrete items in the period of resolution.
For a description of our accounting policies associated with accounting for income tax contingencies, see Note 1O. Basis of Presentation and
Significant Accounting Policies: Deferred Tax Assets and Liabilities and Income Tax Contingencies. For a description of the risks associated
with estimates and assumptions, see Note 1C. Basis of Presentation and Significant Accounting Policies: Estimates and Assumptions.
Uncertain Tax Positions
As tax law is complex and often subject to varied interpretations, it is uncertain whether some of our tax positions will be sustained upon audit.
As of December 31, 2012 and 2011, we had approximately $5.0 billion and $6.1 billion, respectively, in net liabilities associated with uncertain
tax positions, excluding associated interest:
• Tax assets associated with uncertain tax positions primarily 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. As of December 31, 2012 and 2011, we had
approximately $1.3 billion and $1.2 billion, respectively, in assets associated with uncertain tax positions. In 2012, these amounts were
included in Taxes and other noncurrent assets ($887 million) and Noncurrent deferred tax liabilities ($446 million). In 2011, these amounts
were included 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) 2012 2011 2010
Balance, beginning $ (7,309) $(6,759)$ (7,657)
Acquisitions(a) —(72)(49)
Divestitures(b) 85 ——
Increases based on tax positions taken during a prior period(c) (139)(502)(513)
Decreases based on tax positions taken during a prior period(c), (d) 1,442 271 2,384
Decreases based on cash payments for a prior period 647 575 280
Increases based on tax positions taken during the current period(c) (1,125) (855)(1,396)
Impact of foreign exchange 78 (89)104
Other, net(c), (e) 6122 88
Balance, ending(f) $ (6,315) $(7,309)$ (6,759)
(a) The amount in 2011 primarily relates to the acquisition of King. See also Note 2A. Acquisitions, Divestitures, Collaborative Arrangements and Equity-Method
Investments: Acquisitions.
(b) Primarily relates to the sale of our Nutrition business. See also Note 2B. Acquisitions, Divestitures, Collaborative Arrangements and Equity-Method
Investments: Divestitures.
(c) Primarily included in Provision for taxes on income.
(d) Primarily related to effectively settling certain issues with the U.S. and foreign tax authorities. See also Note 5A. Tax Matters: Taxes on Income from
Continuing Operations.
(e) Includes decreases as a result of a lapse of applicable statutes of limitations.
(f) In 2012, included in Income taxes payable ($36 million), Taxes and other current assets ($30 million), Taxes and other noncurrent assets ($169 million),
Noncurrent deferred tax liabilities ($231 million) and Other taxes payable ($5.8 billion). 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).
• 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 2012, we recorded net interest income of $120 million primarily as a result of
settling certain issues with the U.S. and various foreign tax authorities; in 2011, we recorded net interest expense of $203 million; and 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. Gross accrued interest totaled $766 million as of December 31, 2012 (reflecting a decrease of approximately $63 million as a
result of cash payments) and $951 million as of December 31, 2011 (reflecting a decrease of approximately $203 million as a result of cash
payments). In 2012, these amounts were included in Taxes and other current assets ($14 million) and Other taxes payable ($752 million). In