Income taxes

3 Months Ended

Mar. 31, 2012

Income taxes [Abstract]

Income taxes

3. Income taxes

The effective tax rates for the three months ended March 31, 2012 and 2011 are different from the federal statutory rates primarily as a result of indefinitely invested earnings of our foreign operations. We do not provide for U.S. income taxes on undistributed earnings of our foreign operations that are intended to be invested indefinitely outside the United States. The effective tax rates for the three months ended March 31, 2012 and 2011 were further reduced by foreign tax credits associated with the Puerto Rico excise tax described below. The federal Research and Experimentation (R&E) tax credit expired as of December 31, 2011 and was not reinstated as of March 31, 2012. Therefore our effective tax rate for the three months ended March 31, 2012 does not include a benefit for the federal R&E tax credit.

Commencing January 1, 2011, Puerto Rico imposes a temporary excise tax on the purchase of goods and services from a related manufacturer in Puerto Rico. The excise tax is imposed over a six year period beginning in 2011 with the excise tax rate declining in each year (4% in 2011, 3.75% in 2012, 2.75% in 2013, 2.5% in 2014, 2.25% in 2015, and 1% in 2016). We account for the excise tax as a manufacturing cost that is capitalized in inventory and expensed in cost of sales when the related products are sold. For U.S. income tax purposes, the excise tax results in foreign tax credits that are generally recognized in our provision for income taxes when the excise tax is incurred. Our effective tax rates for the three months ended March 31, 2012 and 2011, would have been 18.5% and 18.8%, respectively, without the impact of the foreign tax credits associated with the Puerto Rico excise tax.

One or more of our legal entities file income tax returns in the U.S. federal jurisdiction, various U.S. state jurisdictions and certain foreign jurisdictions. Our income tax returns are routinely audited by the tax authorities in those jurisdictions. Significant disputes may arise with these tax authorities involving issues of the timing and amount of deductions, the use of tax credits and allocations of income among various tax jurisdictions because of differing interpretations of tax laws and regulations. We are no longer subject to U.S. federal income tax examinations for years ended on or before December 31, 2006, or to California state income tax examinations for years ended on or before December 31, 2003.

During the three months ended March 31, 2012, the gross amount of our uncertain tax benefits (UTBs) increased by approximately $75 million as a result of tax positions taken during the current year. Substantially all of the UTBs as of March 31, 2012, if recognized, would affect our effective tax rate. As of March 31, 2012, we believe it is reasonably possible that our gross liabilities for UTBs may decrease by approximately $330 million within the succeeding twelve months due to the resolution of federal and state audits.