Income Taxes
|
| | | | | | | | | | | |
| Years Ended March 31, |
(In millions) | 2013 | | 2012 | | 2011 |
Income from continuing operations before income taxes | | | | | |
U.S. | $ | 1,578 |
| | $ | 1,316 |
| | $ | 1,161 |
|
Foreign | 341 |
| | 603 |
| | 474 |
|
Total income from continuing operations before income taxes | $ | 1,919 |
| | $ | 1,919 |
| | $ | 1,635 |
|
The provision for income taxes related to continuing operations consists of the following:
|
| | | | | | | | | | | |
| Years Ended March 31, |
(In millions) | 2013 | | 2012 | | 2011 |
Current | | | | | |
Federal | $ | (85 | ) | | $ | 271 |
| | $ | 283 |
|
State and local | 14 |
| | 52 |
| | 40 |
|
Foreign | 46 |
| | 28 |
| | 54 |
|
Total current | (25 | ) | | 351 |
| | 377 |
|
| | | | | |
Deferred | | | | | |
Federal | 542 |
| | 129 |
| | 121 |
|
State and local | 80 |
| | 29 |
| | 1 |
|
Foreign | (16 | ) | | 7 |
| | 6 |
|
Total deferred | 606 |
| | 165 |
| | 128 |
|
Income tax provision | $ | 581 |
| | $ | 516 |
| | $ | 505 |
|
In 2013, 2012 and 2011, income tax expense included $29 million, $66 million and $34 million of net income tax benefits for discrete items, which primarily relate to the recognition of previously unrecognized tax benefits and accrued interest. Included in the 2012 discrete tax benefit is a $31 million credit to income tax expense as a result of the reversal of an income tax reserve relating to our AWP litigation. The 2013 federal, state and local current provisions decreased substantially from prior years due to utilizing alternative minimum tax credit carryforwards.
We have received tax assessments of $98 million from the U.S. Internal Revenue Service (“IRS”) relating to 2003 through 2006. We disagree with a substantial portion of the tax assessments primarily relating to transfer pricing. We are pursuing administrative relief through the appeals process. We have also received assessments from the Canada Revenue Agency (“CRA”) for a total of $199 million related to transfer pricing for 2003 through 2008. Payments of most of the assessments to the CRA have been made to stop the accrual of interest. We have appealed the assessment for 2003 to the Tax Court of Canada and have filed a notice of objection for 2004 through 2007 and are in the process of filing a notice of objection for 2008. The trial between McKesson Canada Corporation and the CRA, argued in the Tax Court of Canada, concluded in early February 2012, and we are waiting for the decision. We continue to believe in the merits of our tax positions and that we have adequately provided for any potential adverse results relating to these examinations in our financial statements. However, the final resolution of these issues could result in a significant increase or decrease to income tax expense.
In November 2011, the IRS began its examination of 2007 through 2009. We anticipate the audit fieldwork will last more than two years. In nearly all jurisdictions, the tax years prior to 2003 are no longer subject to examination.
Significant judgments and estimates are required in determining the consolidated income tax provision and evaluating income tax uncertainties. Although our major taxing jurisdictions are the U.S. and Canada, we are subject to income taxes in numerous foreign jurisdictions. Our income tax expense, deferred tax assets and liabilities and uncertain tax liabilities reflect management's best assessment of estimated current and future taxes to be paid. We believe that we have made adequate provision for all income tax uncertainties.
The reconciliation between our effective tax rate on income from continuing operations and statutory tax rate is as follows:
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| | | | | | | | | | | |
| Years Ended March 31, |
(In millions) | 2013 | | 2012 | | 2011 |
Income tax provision at federal statutory rate | $ | 672 |
| | $ | 672 |
| | $ | 572 |
|
State and local income taxes net of federal tax benefit | 58 |
| | 57 |
| | 33 |
|
Foreign income taxed at various rates | (139 | ) | | (176 | ) | | (105 | ) |
Unrecognized tax benefits and settlements | 1 |
| | (18 | ) | | 14 |
|
Tax credits | (13 | ) | | (13 | ) | | (16 | ) |
Other, net | 2 |
| | (6 | ) | | 7 |
|
Income tax provision | $ | 581 |
| | $ | 516 |
| | $ | 505 |
|
At March 31, 2013 undistributed earnings of our foreign operations totaling $3.8 billion were considered to be permanently reinvested. No deferred tax liability has been recognized on the basis difference created by such earnings since it is our intention to utilize those earnings in the foreign operations as well as to fund certain research and development activities for an indefinite period of time. The determination of the amount of deferred taxes on these earnings is not practicable because the computation would depend on a number of factors that cannot be known until a decision to repatriate the earnings is made.
Deferred tax balances consisted of the following:
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| | | | | | | |
| March 31, |
(In millions) | 2013 | | 2012 |
Assets | | | |
Receivable allowances | $ | 84 |
| | $ | 44 |
|
Deferred revenue | 106 |
| | 114 |
|
Compensation and benefit related accruals | 553 |
| | 447 |
|
AWP litigation accrual | 17 |
| | 175 |
|
Loss and credit carryforwards | 341 |
| | 400 |
|
Other | 264 |
| | 256 |
|
Subtotal | 1,365 |
| | 1,436 |
|
Less: valuation allowance | (118 | ) | | (101 | ) |
Total assets | 1,247 |
| | 1,335 |
|
Liabilities | | | |
Inventory valuation and other assets | (2,089 | ) | | (1,635 | ) |
Fixed assets and systems development costs | (267 | ) | | (263 | ) |
Intangibles | (734 | ) | | (544 | ) |
Other | (24 | ) | | (53 | ) |
Total liabilities | (3,114 | ) | | (2,495 | ) |
Net deferred tax liability | $ | (1,867 | ) | | $ | (1,160 | ) |
| | | |
Current net deferred tax asset | $ | 16 |
| | $ | — |
|
Current net deferred tax liability | (1,626 | ) | | (1,092 | ) |
Long-term deferred tax asset | 21 |
| | 20 |
|
Long-term deferred tax liability | (278 | ) | | (88 | ) |
Net deferred tax liability | $ | (1,867 | ) | | $ | (1,160 | ) |
We have federal, state and foreign income tax net operating loss carryforwards of $106 million, $2,697 million and $309 million. The federal and state net operating losses will expire at various dates from 2014 through 2033. Substantially all of our foreign net operating losses have indefinite lives. We believe that it is more likely than not that the benefit from certain state and foreign net operating loss carryforwards may not be realized. In recognition of this risk, we have provided valuation allowances of $7 million and $84 million on the deferred tax assets relating to these state and foreign net operating loss carryforwards. We also have federal and state capital loss carryforwards of $1 million and $30 million, which will expire at various dates from 2014 through 2018. We have provided valuation allowances of $1 million on the deferred tax assets relating to the state capital loss carryforwards. Recognition of a deferred tax asset for excess tax benefits due to stock option exercises that have not yet been realized through a reduction in income taxes payable is prohibited. Such unrecognized deferred tax benefits totaled $10 million as of March 31, 2013 and will be accounted for as a credit to shareholders' equity, if and when realized through a reduction in income taxes payable.
We also have federal and state income tax credit carryforwards of $91 million, which are primarily federal alternative minimum tax credit carryforwards that have an indefinite life. However, we believe that it is more likely than not that the benefit from certain state tax credits of $12 million may not be fully realized. In recognition of this risk, we have provided a valuation allowance of $2 million. In addition, we have Canadian research and development credit carryforwards of $11 million, and we believe it is more likely than not that these credits will be realized. The Canadian research and development credits will expire at various dates from 2029 to 2032.
The following table summarizes the activity related to our gross unrecognized tax benefits for the last three years:
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| | | | | | | | | | | |
| Years Ended March 31, |
(In millions) | 2013 | | 2012 | | 2011 |
Unrecognized tax benefits at beginning of period | $ | 595 |
| | $ | 635 |
| | $ | 619 |
|
Additions based on tax positions related to prior years | 46 |
| | 11 |
| | 32 |
|
Reductions based on tax positions related to prior years | (108 | ) | | (72 | ) | | (60 | ) |
Additions based on tax positions related to current year | 31 |
| | 37 |
| | 50 |
|
Reductions based on settlements | (2 | ) | | (1 | ) | | (6 | ) |
Reductions based on the lapse of the applicable statutes of limitations | (2 | ) | | (15 | ) | | — |
|
Unrecognized tax benefits at end of period | $ | 560 |
| | $ | 595 |
| | $ | 635 |
|
Of the total $560 million in unrecognized tax benefits at March 31, 2013, $402 million would reduce income tax expense and the effective tax rate if recognized. During the next twelve months, it is reasonably possible that audit resolutions and the expiration of statutes of limitations could potentially reduce our unrecognized tax benefits by up to $173 million. However, this amount may change because we continue to have ongoing negotiations with various taxing authorities throughout the year.
We report interest and penalties on tax deficiencies as income tax expense. We recognized a reduction in income tax expense of $8 million, before any tax effect, related to interest and penalties in our consolidated statements of operations during 2013. The income tax benefit for interest recognized during 2013 was primarily due to the reversal of accrued interest resulting from the reduction of our gross unrecognized tax benefits. At March 31, 2013, before any tax benefits, our accrued interest and penalties on unrecognized tax benefits amounted to $131 million.
