IBM » Topics » DEFERRED TAX LIABILITIES

This excerpt taken from the IBM 8-K filed Aug 3, 2007.

DEFERRED TAX LIABILITIES

 

(Dollars in millions)

 

AT DECEMBER 31:

 

2006

 

2005

 

Retirement-related benefits

 

$

2,906

 

$

7,267

 

Leases

 

1,385

 

964

 

Software development costs

 

505

 

348

 

Other

 

1,340

 

1,502

 

Gross deferred tax liabilities

 

$

6,136

 

$

10,081

 

 

The valuation allowance at December 31, 2006, principally applies to certain foreign, state and local and capital loss carry forwards that, in the opinion of management, are more likely than not to expire unutilized. However, to the extent that tax benefits related to these carryforwards are realized in the future, the reduction in the valuation allowance will reduce income tax expense.

 

In December 2006, the company and the IRS reached resolution of the company’s U.S. income tax audit for 2001 through 2003. The settlement of this audit resulted in a decrease in the 2006 effective tax rate of 3 points due to the release of previously recorded tax reserves. The company also expects to receive an immaterial tax refund for these years.

 

In the fourth quarter of 2006, as a continuation of its global strategy, the company aligned, through an intercompany transfer, certain non-U.S. intellectual property rights with existing non-U.S. rights currently owned by one of the company’s non-U.S. manufacturing subsidiaries. This transfer resulted in a one-time increase in the 2006 effective tax rate of 4 points.

 

For income tax return purposes, the company has foreign, domestic and capital loss carryforwards, the tax effect of which is $820 million. Substantially all of these carryforwards are available for at least two years or are available for 10 years or more.

 

With limited exception, the company is no longer subject to U.S. federal, state and local or non-U.S. income tax audits by taxing authorities for years through 2000. The years subsequent to 2000 contain matters that could be subject to differing interpretations of applicable tax laws and regulations as it relates to the amount and/or timing of income, deductions and tax credits. Although the outcome of tax audits is always uncertain, the company believes that adequate amounts of tax and interest have been provided for any adjustments that are expected to result for these years.

 

The company has not provided deferred taxes on $14.2 billion of undistributed earnings of non-U.S. subsidiaries at December 31, 2006, as it is the company’s policy to indefinitely reinvest these earnings in non-U.S. operations. However, the company periodically repatriates a portion of these earnings to the extent that it does not incur an additional U.S. tax liability. Quantification of the deferred tax liability, if any, associated with indefinitely reinvested earnings is not practicable.

 

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