Income Taxes

3 Months Ended

Oct. 01, 2011

Income Taxes [Abstract]

Income Taxes

9. Income Taxes

The following table sets out the tax expense and the effective tax rate for the corporation from continuing operations:

	First Quarter
(In millions)	2012			2011
Continuing operations
Income before income taxes	$	90		$	98
Income tax expense		124			37
Effective tax rate		137.1	%		38.0	%

First quarter of 2012

In the first quarter of 2012, the corporation recognized tax expense of $124 million on pretax income from continuing operations of $90 million, or an effective tax rate of 137.1%. The tax expense and related effective tax rate on continuing operations was determined by applying a 42.7% estimated annual effective tax rate to pretax earnings and then recognizing $85 million of discrete tax items. The discrete tax items relate to the following:

• $75 million of tax expense to establish a valuation allowance on net operating losses in France.

• $81 million of tax expense to establish a deferred tax liability related to earnings that are no longer permanently reinvested in Spain offset by a tax benefit of $71 million primarily related to a decrease in the amount of unrecognized tax positions in Spain.

The corporation's 2012 estimated annual effective rate increased from 34.7% in the first quarter of 2011 to 42.7% due primarily to an increase in the tax charge for the expected repatriation of a portion of 2012 earnings. The expected repatriation of a portion of 2012 earnings increases the 2012 estimated annual effective tax rate by 9%, which includes a 4% impact related to pretax charges for restructuring and other actions to be incurred by the international operations.

First quarter of 2011

In the first quarter of 2011, the corporation recognized tax expense of $37 million on pretax income from continuing operations of $98 million, or an effective tax rate of 38.0 %. The tax expense and related effective tax rate on continuing operations was determined by applying a 34.7% estimated annual effective tax rate to pretax earnings and then recognizing various discrete tax items, none of which were material individually or in the aggregate. The expected repatriation of a portion of 2011 earnings increased the 2011 estimated annual effective tax rate by 2%.

Unrecognized Tax Benefits

Each quarter, the corporation makes a determination of the tax liability needed for unrecognized tax benefits that should be recorded in the financial statements. For tax benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by the taxing authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement.

The year-to-date net decrease in the liability for unrecognized tax benefits was $69 million, resulting in an ending balance of $393 million as of October 1, 2011. There was a decrease in the gross liability for uncertain tax positions of $72 million, of which $50 million relates to prior year decreases , $1 million relates to expiration of statutes of limitation, $1 million relates to audit settlements, and $20 million relates to favorable foreign currency exchange translation. The decrease in gross liability was partially offset by an increase in the gross liability for uncertain tax positions of $3 million related to 2012 increases.

At this time, the corporation estimates that it is reasonably possible that the liability for unrecognized tax benefits will decrease between $25 million to $50 million in the next twelve months from a variety of uncertain tax positions as a result of the completion of various worldwide tax audits currently in process and the expiration of statutes of limitations in several jurisdictions.

The corporation's tax returns are routinely audited by federal, state, and foreign tax authorities and these audits are at various stages of completion at any given time. The Internal Revenue Service (IRS) has completed examinations of the company's U.S. income tax returns through 2006. Fiscal years remaining open to examination in the Netherlands include 2003 and forward. Other foreign jurisdictions remain open to audits after 2000. With few exceptions, the company is no longer subject to state and local income tax examinations by tax authorities for years prior to 2005.