Medtronic 2009 Annual Report Download - page 88

84 Medtronic, Inc.
Notes to Consolidated Financial Statements
(continued)
The Company’s effective income tax rate varied from the U.S.
Federal statutory tax rate as follows:
Fiscal Year
2009 2008 2007
U.S. Federal statutory tax rate 35.0% 35.0% 35.0%
Increase (decrease) in tax rate resulting from:
U.S. state taxes, net of Federal tax benefit 0.6 1.1 1.2
Research and development credit (1.5) (0.6) (0.4)
Domestic production activities (0.5) (0.4) (0.2)
International (19.5) (18.3) (12.9)
Impact of special, restructuring, certain
litigation and IPR&D charges 9.0 5.9 0.3
Reversal of excess tax accruals (5.1) — (3.7)
Other, net (1.6) — 1.0
Effective tax rate 16.4% 22.7% 20.3%
In fiscal year 2009, the Company recorded a $132 million certain
tax benefit associated with the reversal of excess tax accruals in
connection with the settlement of certain issues reached with
the U.S. Internal Revenue Service (IRS) involving the review of the
Company’s fiscal year 2005 and fiscal year 2006 domestic income
tax returns, the resolution of various state audit proceedings
covering fiscal years 1997 through 2007 and the completion of
foreign audits covering various years. The $132 million certain tax
benefit was recorded in the provision for income taxes in the
consolidated statement of earnings for fiscal year 2009.
In fiscal year 2007, the Company recorded a $129 million certain
tax benefit associated with the reversal of excess tax accruals in
connection with the settlement reached with the IRS involving
the review of the Company’s fiscal year 2003 and fiscal year 2004
domestic income tax returns, and the resolution of competent
authority issues for fiscal year 1992 through fiscal year 2000. The
$129 million certain tax benefit was recorded in the provision for
income taxes in the consolidated statement of earnings for fiscal
year 2007.
The Company has not provided U.S. income taxes on certain of
its non-U.S. subsidiaries’ undistributed earnings as such amounts
are permanently reinvested outside the U.S. At April 24, 2009
and April 25, 2008, such earnings were approximately $9.738
billion and $8.338 billion, respectively. Currently, the Company’s
operations in Puerto Rico, Switzerland and Ireland have various
tax incentive grants. Unless these grants are extended, they will
expire between fiscal years 2010 and 2027.
As a result of the implementation of FASB Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes” (FIN No. 48), effective
April 28, 2007, the Company recognized a $1 million decrease
in its existing liabilities for uncertain tax positions which has
been recorded as an increase to the opening balance of retained
earnings for fiscal year 2008. The Company had $431 million and
$455 million of gross unrecognized tax benefits as of April 24,
2009 and April 25, 2008, respectively. A reconciliation of the
beginning and ending amount of unrecognized tax benefits for
fiscal years 2009 and 2008 is as follows:
Fiscal Years
(in millions) 2009 2008
Gross unrecognized tax benefits at beginning of
fiscal year $ 455 $408
Gross increases:
Prior year tax positions 321
Current year tax positions 106 51
Gross decreases:
Prior year tax positions (116) (23)
Settlements (15) (2)
Statute of limitation lapses (2) —
Gross unrecognized tax benefits at end of fiscal year $ 431 $455
If all of the Company’s unrecognized tax benefits as of April 24,
2009 and April 25, 2008 were recognized, $360 million and $370
million would impact the Company’s effective tax rate, respectively.
Although the Company believes that it has adequately provided
for liabilities resulting from tax assessments by taxing authorities,
positions taken by these tax authorities could have a material
impact on the Company’s effective tax rate in future periods. The
Company has recorded the FIN No. 48 liability as a long-term
liability, as it does not expect significant payments to occur or the
total amount of unrecognized tax benefits to change significantly
over the next 12 months. Prior to the adoption of FIN No. 48, the
Company classified uncertain tax positions in current accrued
income taxes on the consolidated balance sheet.
The Company recognizes interest and penalties related to
income tax matters in the provision for income taxes in the
consolidated statement of earnings and records the liability in
the current or long-term income taxes payable, as appropriate.
The Company had $114 million and $126 million of accrued gross
interest and penalties as of April 24, 2009 and April 25, 2008,
respectively. During the fiscal year ended April 24, 2009, the
Company recognized interest expense, net of tax benefit, of
approximately $18 million in the provision for income taxes in
the consolidated statement of earnings.