Income Taxes

9 Months Ended

Jun. 30, 2011

Income Taxes

The more significant components of the Company’s income tax provision are as follows (in millions):


	Three Months Ended					Nine Months Ended
	June 30,					June 30,
	2011		2010			2011		2010
Federal, state and foreign income tax expense at annual effective rate	$	89	$	82		$	274	$	218

Valuation allowance adjustment		—		(13	)		—		(106	)
Uncertain tax positions		—		(38	)		—		(7	)
Medicare Part D		—		—			—		18

Provision for income taxes	$	89	$	31		$	274	$	123

		*Effective Tax Rate*

		In calculating the provision for income taxes, the Company uses an estimate of the annual effective tax rate based upon the facts and circumstances known at each interim period. On a quarterly basis, the actual effective tax rate is adjusted, as appropriate, based upon changed facts and circumstances, if any, as compared to those forecasted at the beginning of the fiscal year and each interim period thereafter. For the three and nine months ended June 30, 2011, the Company’s estimated annual effective income tax rate from continuing operations is 19% versus the prior year rate of 18%.

		*Valuation Allowance*

		The Company reviews its deferred tax asset valuation allowances on a quarterly basis, or whenever events or changes in circumstances indicate that a review is required. In determining the requirement for a valuation allowance, the historical and projected financial results of the legal entity or consolidated group recording the net deferred tax asset are considered, along with any other positive or negative evidence. Since future financial results may differ from previous estimates, periodic adjustments to the Company’s valuation allowances may be necessary.

		It is reasonably possible that over the remainder of fiscal 2011, valuation allowances against deferred tax assets in certain jurisdictions of up to $50 million may be released.

		In the third quarter of fiscal 2010, the Company performed an analysis of its worldwide deferred tax assets. As a result, and after considering tax planning initiatives and other positive and negative evidence, the Company determined that it was more likely than not that the deferred tax assets within a Slovakia automotive entity would be utilized. Therefore, the Company released $13 million of valuation allowances in the three month period ended June 30, 2010.

		In the first quarter of fiscal 2010, the Company determined that it was more likely than not that a portion of the deferred tax assets within the Brazil automotive entity would be utilized. Therefore, the Company released $69 million of valuation allowances. This was comprised of a $93 million decrease in income tax expense offset by a $24 million reduction in cumulative translation adjustments.

		*Uncertain Tax Positions*

		At September 30, 2010, the Company had gross tax effected unrecognized tax benefits of $1,262 million of which $1,063 million, if recognized, would impact the effective tax rate. Total net accrued interest at September 30, 2010 was approximately $68 million (net of tax benefit). The net change in interest and penalties during the nine months ended June 30, 2011 was $27 million, and for the same period in fiscal 2010 was $52 million, including $26 million of periodic interest expense on existing uncertain tax positions and $26 million related to the events described below. The Company recognizes interest and penalties related to unrecognized tax benefits as a component of income tax expense.

		Based on published case law in a non-U.S. jurisdiction and the settlement of a tax audit during the third quarter of fiscal 2010, the Company released net $38 million of reserves for uncertain tax positions, including interest and penalties.

		As a result of certain events related to prior year tax planning initiatives, during the first quarter of fiscal 2010, the Company increased the reserve for uncertain tax positions by $31 million, including $26 million of interest and penalties, which impacted the effective tax rate.

		The Company is subject to income taxes in the U.S. and numerous foreign jurisdictions. Judgment is required in determining its worldwide provision for income taxes and recording the related assets and liabilities. In the ordinary course of the Company’s business, there are many transactions and calculations where the ultimate tax determination is uncertain. The Company is regularly under audit by tax authorities, including major jurisdictions noted below:


Tax		Statute of
Jurisdiction		Limitations

Austria		5 years
Belgium		3 years
Brazil		5 years
Canada		5 years
China		3 to 5 years
Czech Republic		3 years
France		3 years
Germany		4 to 5 years
Italy		4 years
Japan		5 to 7 years
Mexico		5 years
Poland		5 years
Spain		4 years
United Kingdom		4 years
United States — Federal		3 years
United States — State		3 to 5 years

In the U.S., the fiscal years 2007 through 2009 are currently under exam by the Internal Revenue Service (IRS) and 2004 through 2006 are currently under IRS Appeals. Additionally, the Company is currently under exam in the following major foreign jurisdictions:


Tax Jurisdiction		Tax Years Covered

Austria		2006 — 2008
Belgium		2008 — 2009
Brazil		2005 — 2008
Canada		2007 — 2008
Czech Republic		2007 — 2008
France		2002 — 2010
Germany		2001 — 2009
Italy		2005 — 2007
Mexico		2003 — 2004
Poland		2007 — 2008
Spain		2006 — 2008

		It is reasonably possible that certain tax examinations, appellate proceedings and/or tax litigation will conclude within the next 12 months, the impact of which could be up to a $100 million adjustment to tax expense.

		*Impacts of Tax Legislation*

		On March 23, 2010, the U.S. President signed into law comprehensive health care reform legislation under the Patient Protection and Affordable Care Act (HR3590). Included among the major provisions of the law is a change in the tax treatment of a portion of Medicare Part D medical payments. The Company recorded a noncash charge of approximately $18 million in the second quarter of fiscal year 2010 to reflect the impact of this change.

		During the nine month period ended June 30, 2011, tax legislation was adopted in various jurisdictions. None of these changes had a material impact on the Company’s consolidated financial condition, results of operations or cash flows.