2008 Annual Report - Harman

During the fourth quarter of fiscal 2007, we changed our accounting for U.S. foreign tax credits.
Previously, we did not record the tax benefit of U.S. foreign tax credits resulting from German income
tax. We have changed our position because recent case law has provided a probable degree of certainty
regarding the treatment of these foreign tax credits. We have amended previously filed U.S. Federal
income tax returns to claim foreign tax credits for German income tax for which our Company is legally
liable. The tax years that were amended are 2003 through 2006. For fiscal years 2008 and beyond, the
Internal Revenue Service has issued proposed regulations that will preclude taxpayers from claiming
foreign tax credits using the same methodology. We intend to follow the proposed regulations when they
become effective.
We have not provided U.S. Federal or foreign withholding taxes on foreign subsidiary undistributed
earnings as of June 30, 2008, because these foreign earnings are intended to be permanently reinvested.
The U.S. Federal income tax liability, if any, that would be payable if such earnings were not permanently
reinvested would not be material.
Effective July 1, 2007, we adopted FIN 48, Accounting for Uncertainty in Income Taxes – an
interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in
income taxes by prescribing rules for recognition, measurement and classification in our consolidated
financial statements of tax positions taken or expected to be taken in a tax return. For tax benefits to be
recognized under FIN 48, a tax position must be more-likely-than-not to be sustained upon examination
by taxing authorities. The amount recognized is measured as the largest amount of benefit that is greater
than 50% likely of being realized upon settlement. The cumulative effect of applying the recognition and
measurement provisions upon adoption of FIN 48 resulted in a decrease of $7.2 million of unrealized tax
benefits to our balance of $31.2 million. This reduction was included as an increase to the July 1, 2007
balance of retained earnings.
Changes in the total amount of gross unrecognized tax benefits are as follows:
59
($000s omitted)
Balance at July 1, 2007 $ 31,219
Increases based on tax positions related to the current year 3,956
Decreases due to settlements with taxing authorities (14,093)
Decreases due to tax positions of prior years (3,401)
Decrease due to adoption of FIN 48 (7,219)
Balance at June 30, 2008 $ 10,462
The unrecognized tax benefits at June 30, 2008 are permanent in nature and, if recognized, would reduce
our effective tax rate. However, our federal, certain state and certain non-U.S. income tax returns are
currently under various stages of audit or potential audit by applicable tax authorities and the amounts
ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ materially
from the amounts accrued for each year. Our material tax jurisdictions are Germany and the United
States.
The tax years subject to examination in Germany are fiscal years 2005 through the current year. The tax
years subject to examination in the United States are fiscal years 2005 through the current year. Due to