Proctor and Gamble 2011 Annual Report Download - page 71

Notes to Consolidated Financial StatementsThe Procter & Gamble Company 69
Amounts in millions of dollars except per share amounts or as otherwise specified.
Income taxes on continuing operations consisted of the following:
Years ended June 0 2010 2009
CURRENT TAX EXPENSE
U.S. federal $1,809 $2,154 $1,619
International 1,188 1,616 1,268
U.S. state and local 266 295 229
3,263 4,065 3,116
DEFERRED TAX EXPENSE
U.S. federal 205 253 595
International and other (76) (217)22
129 36 617
TOTAL TAX EXPENSE 3,392 4,101 3,733
A reconciliation of the U.S. federal statutory income tax rate to our
actual income tax rate on continuing operations is provided below:
Years ended June 30  2010 2009
U.S. federal statutory
incometax rate 35.0% 35.0% 35.0%
Country mix impacts of
foreignoperations (8.0)% (7.5)% (7.1)%
Changes in uncertain
taxpositions (3.5)% (0.4)% (1.3)%
Patient Protection and
Affordable Care Act 0.0% 1.0% 0.0%
Other (1.2)% (0.8)% (0.7)%
EFFECTIVE INCOME TAX RATE 22.3% 27.3% 25.9%
Changes in uncertain tax positions represent changes in our net
liability related to prior year tax positions.
In March 2010, the Patient Protection and Affordable Care Act (PPACA)
was signed into law. One of the provisions of the PPACA changed the
taxability of federal subsidies received by plan sponsors that provide
retiree prescription drug benefits at least equivalent to Medicare PartD
coverage. As a result of the change in taxability of thefederal subsidy,
we were required to make adjustments to deferred tax asset balances,
resulting in a $152 charge to income tax expense in 2010.
Tax benefits credited to shareholders’ equity totaled $510 and $5for
the years ended June30,2011 and 2010, respectively. These primarily
relate to the tax effects of net investment hedges, excess tax benefits
from the exercise of stock options and the impacts of certain adjust-
ments to pension and other retiree benefit obligations recorded in
shareholders’ equity.
We have undistributed earnings of foreign subsidiaries of approximately
$35 billion at June30,2011, for which deferred taxes have not been
provided. Such earnings are considered indefinitely invested in the
foreign subsidiaries. If such earnings were repatriated, additional tax
expense may result, although the calculation of such additional taxes
is not practicable.
A reconciliation of the beginning and ending liability for uncertain tax
positions is as follows:
 2010 2009
BEGINNING OF YEAR $1,797 $2,003 $2,582
Increases in tax positions for prior years 323 128 116
Decreases in tax positions for prior years (388)(146)(485)
Increases in tax positions for current year 222 193 225
Settlements with taxing authorities(168)(216)(172)
Lapse in statute of limitations (94) (45)(68)
Currency translation 156 (120)(195)
END OF YEAR 1,848 1,797 2,003
The Company is present in over 150 taxable jurisdictions and, at any
point in time, has 50–60 audits underway at various stages of comple-
tion. We evaluate our tax positions and establish liabilities for uncertain
tax positions that may be challenged by local authorities and may not
be fully sustained, despite our belief that the underlying tax positions
are fully supportable. Uncertain tax positions are reviewed on an
ongoing basis and are adjusted in light of changing facts and circum-
stances, including progress of tax audits, developments in case law
and closing of statute of limitations. Such adjustments are reflected in
the tax provision as appropriate. The Company is making a concerted
effort to bring its audit inventory to a more current position. We
have done this by working with tax authorities to conduct audits for
several open years at once. We have tax years open ranging from 2002
and forward. We are generally not able to reliably estimate the ultimate
settlement amounts until the close of the audit. While we do not expect
material changes, it is possible that the amount of unrecognized
benefit with respect to our uncertain tax positions will significantly
increase or decrease within the next 12 months related to the audits
described above. At this time, we are not able to make a reasonable
estimate of the range of impact on the balance of uncertain tax
positions or the impact on the effective tax rate related to these items.
Included in the total liability for uncertain tax positions at June30,2011,
is $1,424 that, depending on the ultimate resolution, could impact the
effective tax rate in future periods.
We recognize accrued interest and penalties related to uncertain tax
positions in income tax expense. As of June30,2011,2010 and 2009,
we had accrued interest of $475, $622 and $636 and penalties of
$80, $89 and $100, respectively, that are not included in the above
table. During the fiscal years ended June30,2011,2010 and 2009,
werecognized $(197), $38 and $119 in interest expense/(benefit) and
$(16), $(8) and $(4) in penalties expense/(benefit), respectively.