Verizon Wireless 2008 Annual Report Download - page 67

Notes to Consolidated Financial Statements continued
65
NOTE 16
INCOME TAXES
The components of Income Before Provision for Income Taxes,
Discontinued Operations, Extraordinary Item and Cumulative Effect of
Accounting Change are as follows:
(dollars in millions)
Years Ended December 31, 2008 2007 2006
Domestic $ 8,838 $ 8,508 $ 7,000
Foreign 921 984 1,154
$ 9,759 $ 9,492 $ 8,154
The components of the provision for income taxes from continuing
operations are as follows:
(dollars in millions)
Years Ended December 31, 2008 2007 2006
Current
Federal $ 365 $ 2,568 $ 2,364
Foreign 240 461 141
State and local 543 545 421
1,148 3,574 2,926
Deferred
Federal 2,214 397 (9)
Foreign (91) 66 (45)
State and local 66 (48) (191)
2,189 415 (245)
Investment tax credits (6) (7) (7)
Total income tax expense $ 3,331 $ 3,982 $ 2,674
The following table shows the principal reasons for the difference
between the effective income tax rate and the statutory federal income
tax rate:
Years Ended December 31, 2008 2007 2006
Statutory federal income tax rate 35.0 % 35.0 % 35.0 %
State and local income tax, net of federal tax
benets 4.1 3.4 1.8
Distributions from foreign investments (0.8) 5.9 –
Equity in earnings from unconsolidated
businesses (2.4) (2.3) (3.8)
Other, net (1.8) – (0.2)
Eective income tax rate 34.1 % 42.0 % 32.8 %
The effective income tax rate is the provision for income taxes as a per-
centage of income from continuing operations before the provision
for income taxes. The effective income tax rate in 2008 was lower than
2007 primarily due to recording $610 million of foreign and domestic
taxes and expenses in 2007 specifically relating to our share of Vodafone
Omnitel’s distributable earnings. Verizon received net distributions from
Vodafone Omnitel in April 2008 and December 2007 of approximately
$670 million and $2,100 million, respectively.
The effective income tax rate in 2007 compared to 2006 was higher
primarily due to taxes recorded in 2007 related to distributions from
Vodafone Omnitel as discussed above. The 2007 rate was also increased
due to higher state taxes in 2007 as compared to 2006, as well as greater
benefits from foreign operations in 2006 compared to 2007. These
increases were partially offset by lower expenses recorded for unrecog-
nized tax benefits in 2007 as compared to 2006.
Deferred taxes arise because of differences in the book and tax bases of
certain assets and liabilities. Significant components of deferred tax are
shown in the following table:
(dollars in millions)
At December 31, 2008 2007
Employee benets $ 13,174 $ 7,067
Tax loss and credit carry forwards 2,634 2,711
Uncollectible accounts receivable 341 400
Other – assets 953 852
17,102 11,030
Valuation allowance (2,995) (2,944)
Deferred tax assets 14,107 8,086
Former MCI intercompany accounts receivable
basis dierence 1,818 1,977
Depreciation 8,157 7,045
Leasing activity 2,218 2,307
Wireless joint venture including wireless licenses 12,957 11,634
Other – liabilities 823 349
Deferred tax liabilities 25,973 23,312
Net deferred tax liability $ 11,866 $ 15,226
Employee benefits deferred tax assets include $10,344 million and
$4,929 million at December 31, 2008 and 2007, respectively, recognized
in accordance with SFAS No. 158 (see Notes 1 and 15).
At December 31, 2008, undistributed earnings of our foreign subsid-
iaries indefinitely invested outside of the United States amounted to
approximately $800 million. We have not provided deferred taxes on
these earnings because we intend that they will remain indefinitely
invested outside of the United States. Determination of the amount of
unrecognized deferred taxes related to these undistributed earnings is
not practical.
At December 31, 2008, we had tax loss and credit carry forwards for
income tax purposes of approximately $3,000 million. Of these tax
loss and credit carry forwards, approximately $2,420 million will expire
between 2009 and 2028 and approximately $580 million may be carried
forward indefinitely. The amount of tax loss and credit carry forwards
reflected as a deferred tax asset above has been reduced by approxi-
mately $614 million and $661 million at December 31, 2008 and 2007,
respectively, due to federal and state tax law limitations on utilization of
net operating losses.
During 2008, the valuation allowance increased $51 million. Beginning
January 1, 2009, due to the issuance of SFAS No. 141(R), the valuation
allowance as of December 31, 2008, if recognized, will be reflected in
income tax expense.