Pfizer 2011 Annual Report Download - page 36

Financial Review
Pfizer Inc. and Subsidiary Companies
PROVISION FOR TAXES ON INCOME
YEAR ENDED DECEMBER 31, INCR./(DECR.)
(MILLIONS OF DOLLARS) 2011 2010 2009 11/10 10/09
Provision for taxes on income $4,023 $1,071 $2,145 276% (50)%
Effective tax rate on continuing operations 31.5% 11.5% 20.1%
During the fourth quarter of 2010, we reached a settlement with the U.S. Internal Revenue Service (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). We 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 reversed the related interest accruals by approximately $600 million, both of which had been
classified in Other taxes payable, and recorded a corresponding tax benefit in Provision for taxes on income (see Notes to
Consolidated Financial Statements––Note 5. Taxes on Income).
2011 vs. 2010
The higher effective tax rate in 2011 compared to 2010 is primarily the result of:
•the non-recurrence of the aforementioned $1.4 billion reduction in unrecognized tax benefits and $600 million in interest on those
unrecognized tax benefits in 2010, which were recorded as a result of the favorable tax audit settlement pertaining to prior years; and
•the non-recurrence of a $320 million reduction in unrecognized tax benefits and $140 million in interest on those unrecognized tax
benefits in 2010 resulting from the resolution of certain tax positions pertaining to prior years with various foreign tax authorities as well
as from the expiration of the statute of limitations;
partially offset by:
•the decrease and jurisdictional mix of certain impairment charges related to assets acquired in connection with the Wyeth acquisition;
and
•the change in the jurisdictional mix of earnings.
2010 vs. 2009
The lower tax rate for 2010, compared to 2009, is primarily due to:
•the aforementioned $1.4 billion reduction in unrecognized tax benefits and $600 million in interest on those unrecognized tax benefits in
2010, which were recorded as a result of the favorable tax audit settlement pertaining to prior years;
•the aforementioned $320 million reduction in unrecognized tax benefits and $140 million in interest on those unrecognized tax benefits
in 2010 resulting from the resolution of certain tax positions pertaining to prior years with various foreign tax authorities, as well as from
the expiration of the statute of limitations; and
•the tax impact of the charge incurred in 2010 for asbestos litigation;
partially offset by:
•the tax impact of higher expenses, incurred as a result of our acquisition of Wyeth, and the mix of jurisdictions in which those expenses
were incurred;
•the write-off in 2010 of the deferred tax asset of approximately $270 million related to the Medicare Part D subsidy for retiree
prescription drug coverage, resulting from the provisions of the U.S. Healthcare Legislation concerning the tax treatment of that subsidy
effective for tax years beginning after December 31, 2012; and
•the non-recurrence of a tax benefit of $174 million that was recorded in the third quarter of 2009 related to the final resolution of certain
investigations concerning Bextra and various other products that resulted in the receipt of information that raised our assessment of the
likelihood of prevailing on the technical merits of our tax position, and the non-recurrence of the $556 million tax benefit recorded in the
fourth quarter of 2009 related to the sale of one of our biopharmaceutical companies, Vicuron Pharmaceuticals, Inc.
Tax Law Changes
On August 10, 2010, the President of the United States signed into law the Education Jobs and Medicaid Assistance Act of 2010
(the Act), which includes education and Medicaid funding provisions, the cost of which is offset with revenues that result from
changes to certain aspects of the tax treatment of the foreign-source income of U.S.-based companies. Given the effective dates of
the various provisions of the Act, it had no impact on our 2010 results. The Act did not have a significant negative impact on our
results in 2011 and is not expected to have a significant negative impact on results in 2012. The impact of the Act is recorded in
Provision for taxes on income. The impact this year is reflected in our financial guidance for 2012.
2011 Financial Report 35