XML 52 R22.htm IDEA: XBRL DOCUMENT v2.4.0.6
Income Taxes
9 Months Ended
Jan. 25, 2013
Income Tax Disclosure [Abstract]  
Income Taxes
Income Taxes
The Company’s effective tax rates from continuing operations for the three and nine months ended January 25, 2013 were 14.46 percent and 19.34 percent, respectively, compared to 19.75 percent and 18.85 percent, respectively, for the three and nine months ended January 27, 2012. The changes in the Company’s effective tax rate for the three and nine months ended January 25, 2013 were primarily due to the net tax impact of acquisition-related items, certain litigation charges, net, the retroactive renewal and extension of the U.S. federal research and development tax credit, the finalization of certain income tax returns, resolution of certain income tax audits, changes to uncertain tax position reserves, and the tax impact of foreign dividend distributions.
During the three months ended January 25, 2013, the Company recorded a $29 million net benefit associated with the retroactive renewal and extension of the U.S. federal research and development tax credit for the first four months of calendar year 2012, finalization of certain income tax returns, the resolution of certain income tax audits, and changes to uncertain tax position reserves. These tax adjustments are operational in nature and are recorded in provision for income taxes on the condensed consolidated statement of earnings.
During the nine months ended January 25, 2013, the Company’s gross unrecognized tax benefits increased from $917 million to $924 million. In addition, the Company has accrued interest and penalties of $82 million as of January 25, 2013. If all of the Company’s unrecognized tax benefits were recognized, approximately $888 million would impact the Company’s effective tax rate. The Company records the gross unrecognized tax benefit in long-term accrued income taxes in the condensed consolidated balance sheets, 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.
The Company will continue to recognize interest and penalties related to income tax matters in the provision for income taxes in the condensed consolidated statements of earnings and record the liability in the current or long-term accrued income taxes in the condensed consolidated balance sheets, as appropriate.
Tax audits associated with the allocation of income, and other complex issues, may require an extended period of time to resolve and may result in income tax adjustments if changes to the Company’s allocation are required between jurisdictions with different tax rates. Tax authorities periodically review the Company’s tax returns and propose adjustments to the Company’s tax filings. The U.S. Internal Revenue Service (IRS) has settled its audits with the Company for all years through fiscal year 2004. Tax years settled with the IRS may remain open for foreign tax audits and competent authority proceedings. Competent authority proceedings are a means to resolve intercompany pricing disagreements between countries.
In March 2009, the IRS issued its audit report for fiscal years 2005 and 2006. The Company reached agreement with the IRS on some but not all matters. On December 23, 2010, the IRS issued a statutory notice of deficiency with respect to the remaining issues. The Company filed a Petition with the U.S. Tax Court on March 21, 2011 objecting to the deficiency. During October and November of 2012, the Company reached resolution with the IRS on various matters, including the deductibility of a settlement payment. The remaining unresolved issues relate to the allocation of income between Medtronic, Inc. and its wholly-owned subsidiary operating in Puerto Rico, which is one of the Company's key manufacturing sites.
In October 2011, the IRS issued its audit report for fiscal years 2007 and 2008. The Company reached agreement with the IRS on some but not all matters related to these fiscal years. The significant issues that remain unresolved relate to the allocation of income between Medtronic, Inc. and its wholly-owned subsidiary in Puerto Rico, and proposed adjustments associated with the tax effects of the Company's acquisition of Kyphon. Associated with the Kyphon acquisition, Medtronic entered into an intercompany transaction whereby the Kyphon U.S. tangible assets were sold to another wholly-owned Medtronic subsidiary in a taxable transaction. The IRS has disagreed with the Company's valuation of these assets and proposed that all U.S. goodwill, the value of the ongoing business, and the value of the workforce in place related to the Kyphon acquisition be included in the tangible asset sale. The Company disagrees that these items were sold, as well as with the IRS valuation of these items. The IRS continues to evaluate the overall transaction that Medtronic entered into and because a foreign subsidiary acquired part of Kyphon directly from the Kyphon shareholders, the IRS has argued that a deemed taxable event occurred. The Company disagrees with the IRS and is currently attempting to resolve these matters at the IRS Appellate level and will proceed through litigation, if necessary.
The Company's reserve for the uncertain tax positions related to these significant unresolved matters with the IRS, as described above, is subject to a high degree of estimation and management judgment. Resolution of these significant unresolved matters, or positions taken by the IRS or foreign tax authorities during future tax audits, could have a material impact on the Company's financial results in future periods. The Company continues to believe that its reserves for uncertain tax positions are appropriate and have meritorious defenses for its tax filings and will vigorously defend them during the audit process, appellate process, and through litigation in courts, as necessary.