for Income Taxes:   The effective tax rate in all periods is the result of the mix of income earned in various tax jurisdictions that apply a broad range of income tax rates. The provision for income taxes differs from the tax computed at the federal statutory income tax rate due primarily to state taxes and earnings considered as indefinitely reinvested in foreign operations. Future effective tax rates could be adversely affected if earnings are lower than anticipated in countries where we have lower statutory rates, by unfavorable changes in tax laws and regulations, or by adverse rulings in tax related litigation.

 

The effective tax rate was 28.8%, 32.0% and 32.6% in fiscal 2005, 2004 and 2003, respectively. In fiscal 2005, the effective tax rate before significant items was 29.4% as compared to 32.0% for fiscal 2004. Our effective tax rate for fiscal 2005 includes a number of significant items identified in the third and fourth quarters. The effective tax rate for fiscal 2005 was increased as a result of (1) non-deductible expenses related to in-process research and development charges and additional taxes associated with tender offer costs incurred from June 9, 2003 to December 12, 2004 for PeopleSoft that, upon acquisition, had to be capitalized into the basis of the stock for tax purposes and (2) the federal and state tax accrued on the $3.1 billion dividend payment made in May 2005 pursuant to the Jobs Creation Act of 2004. This increase was offset by (1) the favorable settlement of several domestic and international audits, (2) the expiration of statutes of limitation on assessments and (3) a net favorable revision to estimated tax accruals upon filing fiscal 2004 tax returns.

 

The following table reconciles our fiscal 2005 effective tax rate before and after significant items:

 

 

The decrease in our effective tax rate before significant items for fiscal 2005 is attributable to higher earnings in low tax rate jurisdictions.

 

We provide for United States income taxes on the earnings of foreign subsidiaries unless they are considered indefinitely reinvested outside of the United States. At May 31, 2005, the cumulative earnings upon which United States income taxes have not been provided were approximately $2.2 billion. If these earnings were repatriated to the United States, they would generate foreign tax credits that could reduce the federal tax liability associated with the foreign dividend. Assuming a full utilization of the foreign tax credits, the potential deferred tax liability for these earnings would be approximately $500 million. In May 2005, we repatriated $3.1 billion of the earnings of foreign subsidiaries in accordance with the American Jobs Creation Act of 2004 and recorded a federal tax expense of $118 million and a state tax expense (net of the federal tax benefit) of $3 million. We repatriated the maximum amount available for repatriation under the American Jobs Creation Act of 2004.

 

This distribution from previously indefinitely reinvested earnings does not change our position going forward that future earnings of certain of our foreign subsidiaries will be indefinitely reinvested.

 

Liquidity