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Federal Income Tax Dispute
−Removed: On September 17, 2015, the Company received a Statutory Notice of Deficiency (“Notice”) from the U.S.
−Removed: Internal Revenue Service (“IRS”) seeking approximately $ 3.3 billion of additional federal income tax for years 2007 through 2009.
+Added: On September 17, 2015, the Company received a Statutory Notice of Deficiency (“Notice”) from the United States Internal Revenue Service (“IRS”) seeking approximately $ 3.3 billion of additional federal income tax for years 2007 through 2009.
In the Notice, the IRS stated its intent to reallocate over $ 9 billion of income to the U.S.
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parent company in reliance upon the Closing Agreement should continue to be allowed to offset royalties, including those that would become payable to the Company in accordance with the Opinion.
−Removed: The Tax Court reserved ruling on the effect of Brazilian legal restrictions on the payment of royalties by the Company’s licensee in Brazil until after the Tax Court issues its opinion in the separate case of 3M Co.
−Removed: Commissioner, T.C.
−Removed: 5816-13 (filed March 11, 2013).
−Removed: The Tax Court issued its opinion in 3M Co.’s case (“3M Co.
−Removed: opinion”) on February 9, 2023.
−Removed: Once the Tax Court completes its analysis of the application of the 3M Co.
−Removed: opinion to the Company’s case, the Company expects the Tax Court to render another opinion, and ultimately a decision, in the Company’s case.
+Added: On November 8, 2023, the Tax Court issued a supplemental opinion (together with the original Tax Court opinion, “Opinions”), siding with the IRS in concluding both that the blocked-income regulations apply to the Company’s operations and that the Tax Court opinion in 3M Co.
+Added: Commissioner (February 9, 2023) controlled as to the validity of those regulations.
The Company believes that the IRS and the Tax Court misinterpreted and misapplied the applicable regulations in reallocating income earned by the Company’s foreign licensees to increase the Company’s U.S.
−Removed: Moreover, the Company believes that
−Removed: the retroactive imposition of such tax liability using a calculation methodology different from that previously agreed upon by the IRS and the Company, and audited by the IRS for over a decade, is unconstitutional.
+Added: Moreover, the Company believes that the retroactive imposition of such tax liability using a calculation methodology different from that previously agreed upon by
+Added: the IRS and the Company, and audited by the IRS for over a decade, is unconstitutional.
The Company intends to assert its claims on appeal and vigorously defend its position.
In determining the amount of tax reserve to be recorded as of December 31, 2020, the Company completed the required two-step evaluation process prescribed by Accounting Standards Codification 740, Accounting for Income Taxes .
−Removed: In doing so, we consulted with outside advisors, and we reviewed and considered relevant laws, rules, and regulations, including, but not limited to, the Opinion and relevant caselaw.
+Added: In doing so, we consulted with outside advisors, and we reviewed and considered relevant laws, rules, and regulations, including, but not limited to, the Opinions and relevant caselaw.
We also considered our intention to vigorously defend our positions and assert our various well-founded legal claims via every available avenue of appeal.
We concluded, based on the technical and legal merits of the Company’s tax positions, that it is more likely than not the Company’s tax positions will ultimately be sustained on appeal.
−Removed: In addition, we considered a number of alternative transfer pricing methodologies, including the methodology asserted by the IRS and affirmed in the Opinion (“Tax Court Methodology”), that could be applied by the courts upon final resolution of the litigation.
+Added: In addition, we considered a number of alternative transfer pricing methodologies, including the methodology asserted by the IRS and affirmed in the Opinions (“Tax Court Methodology”), that could be applied by the courts upon final resolution of the litigation.
Based on the required probability analysis, we determined the methodologies we believe the federal courts could ultimately order to be used in calculating the Company’s tax.
As a result of this analysis, we recorded a tax reserve of $ 438 million during the year ended December 31, 2020 related to the application of the resulting methodologies as well as the different tax treatment applicable to dividends originally paid to the U.S.
−Removed: parent company by its foreign licensees, in reliance upon the Closing Agreement, that would be recharacterized as royalties in accordance with the Opinion and the Company’s analysis.
−Removed: The Company’s conclusion that it is more likely than not the Company’s tax positions will ultimately be sustained on appeal is unchanged as of September 29, 2023.
+Added: parent company by its foreign licensees, in reliance upon the Closing Agreement, that would be recharacterized as royalties in accordance with the Opinions and the Company’s analysis.
+Added: The Company’s conclusion that it is more likely than not the Company’s tax positions will ultimately be sustained on appeal is unchanged as of March 29, 2024.
However, we updated our calculation of the methodologies we believe the federal courts could ultimately order to be used in calculating the Company’s tax.
−Removed: As a result of the application of the required probability analysis to these updated calculations and the accrual of interest through the current reporting period, we updated our tax reserve as of September 29, 2023 to $ 432 million.
−Removed: While the Company strongly disagrees with the IRS’ positions and the portions of the Opinion affirming such positions, it is possible that some portion or all of the adjustment proposed by the IRS and sustained by the Tax Court could ultimately be upheld.
+Added: As a result of the application of the required probability analysis to these updated calculations and the accrual of interest through the current reporting period, we updated our tax reserve as of March 29, 2024 to $ 447 million.
+Added: While the Company strongly disagrees with the IRS’ positions and the portions of the Opinions affirming such positions, it is possible that some portion or all of the adjustment proposed by the IRS and sustained by the Tax Court could ultimately be upheld.
In that event, the Company would likely be subject to significant additional liabilities for tax years 2007 through 2009, and potentially also for subsequent years, which could have a material adverse impact on the Company’s financial position, results of operations and cash flows.
−Removed: The Company calculated the potential impact of applying the Tax Court Methodology to reallocate income from foreign licensees potentially covered within the scope of the Opinion, assuming such methodology were to be ultimately upheld by the courts and the IRS were to decide to apply that methodology to subsequent years with consent of the federal courts.
+Added: The Company calculated the potential impact of applying the Tax Court Methodology to reallocate income from foreign licensees potentially covered within the scope of the Opinions, assuming such methodology were to be ultimately upheld by the courts, and the IRS were to decide to apply that methodology to subsequent years, with consent of the federal courts.
This impact would include taxes and interest accrued through December 31, 2023 for the 2007 through 2009 litigated tax years and for subsequent tax years from 2010 through 2023.
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Additional income tax and interest would continue to accrue until the time any such potential liability, or portion thereof, were to be paid.
−Removed: The Company estimates the impact of the continued application of the Tax Court Methodology for the three and nine months ended September 29, 2023 would increase the potential aggregate incremental tax and interest liability by approximately $ 400 million and $ 1,200 million, respectively.
−Removed: Additionally, we currently project the continued application of the Tax Court Methodology in future years, assuming similar facts and circumstances as of December 31, 2022, would result in an incremental annual tax liability that would increase the Company’s effective tax rate by approximately 3.5 %.
−Removed: The Company does not know when the Tax Court will issue its opinion regarding the effect of Brazilian legal restrictions on the payment of royalties by the Company’s licensee in Brazil for the 2007 through 2009 tax years.
−Removed: After the Tax Court issues its opinion on the Company’s Brazilian licensee, the Company and the IRS will be provided time to agree on the tax impact of both opinions, after which the Tax Court would render a decision in the case.
+Added: The Company estimates the impact of the continued application of the Tax Court Methodology for the three months ended March 29, 2024 would increase the potential aggregate incremental tax and interest liability by approximately $ 500 million.
+Added: We currently project the continued application of the Tax Court Methodology in future years, assuming similar facts and circumstances as of December 31, 2023, would result in an incremental annual tax liability that would increase the Company’s effective tax rate by approximately 3.5 %.
+Added: The Company and the IRS are now in the process of agreeing on the tax impacts of the Opinions.
+Added: Subsequent to the completion of this process, the Tax Court will render a decision in the case.
The Company will have 90 days thereafter to file a notice of appeal to the U.S.
−Removed: Court of Appeals for the Eleventh Circuit and pay the tax liability and interest related to the 2007 through 2009 tax years.
−Removed: The Company currently estimates that the payment to be made at that time related to the 2007 through 2009 tax years, which is included in the above estimate of the potential aggregate incremental tax and interest liability, would be approximately $ 5.6 billion (including interest accrued through September 29, 2023), plus any additional interest accrued through the time of payment.
−Removed: Some or all of this amount would be refunded if the Company were to prevail on appeal.
+Added: Court of Appeals for the Eleventh Circuit.
+Added: The IRS will then seek to collect, and the Company expects to pay, any additional tax related to the 2007 through 2009 tax years reflected in the Tax Court decision (and interest thereon).
+Added: The Company currently estimates that the payment to be made at that time related to the 2007 through 2009 tax years, which is included in the above estimate of the potential aggregate incremental tax and interest liability, would be approximately $ 5.9 billion (including interest accrued through March 29, 2024), plus any additional interest accrued through the time of payment.
+Added: Some or all of this amount, plus accrued interest, would be refunded if the Company were to prevail on appeal.
Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.