Note 6: Income Taxes

3 Months Ended

Mar. 31, 2013

Notes to Condensed Consolidated Financial Statements [Abstract]

Note 6: Income Taxes

Income Taxes

We conduct business globally and, as a result, UTC or one or more of our subsidiaries files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business we are subject to examination by taxing authorities throughout the world, including such major jurisdictions as Australia, Belgium, Canada, China, France, Germany, Hong Kong, Italy, Japan, South Korea, Singapore, Spain, the United Kingdom and the United States. With few exceptions, we are no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations for years before 1998.

In the ordinary course of business, there is inherent uncertainty in quantifying our income tax positions. We assess our income tax positions and record tax benefits for all years subject to examination based upon management’s evaluation of the facts, circumstances, and information available at the reporting date. For those tax positions where we believe it is more likely than not that a tax benefit will be sustained, we have recorded the largest amount of tax benefit with a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where it is not more likely than not that a tax benefit will be sustained, no tax benefit has been recognized in the financial statements. Where applicable, associated interest has also been recognized; interest accrued in relation to unrecognized tax benefits is recorded in interest expense. Penalties, if incurred, would be recognized as a component of income tax expense.

It is reasonably possible that a net reduction within a range of $40 million to $340 million of unrecognized tax benefits may occur within the next twelve months as a result of additional worldwide uncertain tax positions, the revaluation of current uncertain tax positions arising from developments in examinations, in appeals or in the courts, or the closure of tax statutes. A portion of this net reduction may impact the Company’s income tax expense. Not included in the range is €176 million (approximately $228 million) of tax benefits related to certain deductions claimed in France for tax years 2008 through 2010 that the French Revenue Authority has proposed to disallow. During the quarter, the French Revenue Authority commenced examination activity for tax year 2011. Also, not included in the range is €203 million (approximately $263 million) of tax benefits that we have claimed related to a 1998 German reorganization. A portion of these tax benefits was denied by the German Tax Office on July 5, 2012, as a result of the audit of tax years 1999 to 2000. On August 3, 2012, the Company filed suit in the German Tax Court and expects to litigate this case. In 2008 the German Federal Tax Court denied benefits to another taxpayer in a case involving a German tax law relevant to our reorganization. The determination of the German Federal Tax Court on this other matter was appealed to the European Court of Justice (ECJ) to determine if the underlying German tax law is violative of European Union (EU) principles. On September 17, 2009 the ECJ issued an opinion in this case that is generally favorable to the other taxpayer and referred the case back to the German Federal Tax Court for further consideration of certain related issues. In May 2010, the German Federal Tax Court released its decision, in which it resolved certain tax issues that may be relevant to our audit and remanded the case to a lower court for further development. After consideration of the ECJ decision and the latest German Federal Tax Court decision, we continue to believe that it is more likely than not that the relevant German tax law is violative of EU principles and we have not accrued tax expense for this matter. As we continue to monitor developments related to this matter, it may become necessary for us to accrue tax expense and related interest.

UTC tax returns for the years 2006 through 2008 are currently before the Appeals Division of the IRS (IRS Appeals) for resolution discussions regarding certain proposed adjustments with which UTC does not agree. These discussions are expected to continue through 2013. Tax returns for the years 2009 and 2010 are under review by the Examination Division of the IRS (IRS Examination), which is expected to continue into 2014. Additionally, the Company expects a final settlement in 2013 of interest relating to the closure of IRS audits of UTC tax returns for the years through 2005. All audit activity for the years through 2005 was concluded in 2012, and the IRS is expected to resolve related interest matters before the end of 2013.

The Company is currently engaged in litigation regarding the proper timing of certain deductions taken by Goodrich in its tax years 2000 and 2001, prior to its acquisition by UTC. The Company is also engaged in litigation with respect to a separate issue involving the proper timing of deductions taken by Goodrich in its tax years 2005 and 2006, prior to its acquisition by UTC. Both of these matters are expected to continue through 2013. Goodrich tax years 2007 and 2008, prior to its acquisition by UTC, are currently before IRS Appeals for resolution discussions regarding certain disputed proposed adjustments and are expected to continue through 2013. Goodrich tax years 2009 and 2010, prior to its acquisition by UTC, are currently under review by IRS Examination, which is expected to conclude in 2013.