Activision 2012 Annual Report Download - page 36

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For 2011, the Company’s income before income tax expense was $1.3 billion. Our income tax expense of $246 million resulted in an
effective tax rate of 18.5%. The difference between our effective tax rate and the U.S. statutory tax rate of 35% is due to earnings taxed at
relatively lower rates in foreign jurisdictions, recognition of federal and California research and development credits, the federal domestic
production deduction and a favorable impact from discrete items recognized in connection with the filing of our 2010 tax returns.
In 2012 and 2011, our U.S. income before income tax expense was $668 million and $623 million, respectively, and comprised 46%
and 47%, respectively, of our consolidated income before income tax expense. In 2012 and 2011, the foreign income before income tax expense
was $790 million and $708 million, respectively, and comprised 54% and 53%, respectively, of our consolidated income before income tax
expense. In 2012 and 2011, the impact of earnings taxed at lower rates in foreign jurisdictions versus our U.S. federal statutory tax rate was 17%
and 15%, respectively.
As previously disclosed, on July 9, 2008, the Business Combination occurred among Vivendi, the Company and certain of their
respective subsidiaries pursuant to which Vivendi Games, then a member of the consolidated U.S. tax group of Vivendi’s subsidiary, Vivendi
Holdings I Corp. (“VHI”), became a subsidiary of the Company. As a result of the business combination, the favorable tax attributes of Vivendi
Games carried forward to the Company. In late August 2012, VHI settled a federal income tax audit with the Internal Revenue Service (“IRS”)
for the tax years ended December 31, 2002, 2003, and 2004. In connection with the settlement agreement, VHI’s consolidated federal net
operating loss carryovers were adjusted and allocated to various companies that were part of its consolidated group during the relevant periods.
This allocation resulted in a $132 million federal net operating loss allocation to Vivendi Games. In September 2012, the Company filed an
amended tax return for its December 31, 2008 tax year to utilize these additional federal net operating losses allocated as a result of the
aforementioned settlement, resulting in the recording of a one-time tax benefit of $46 million. Prior to the settlement, and given the uncertainty of
the VHI audit, the Company had insufficient information to allow it to record or disclose any information related to the audit until the quarter
ended September 30, 2012, as disclosed in the Company’s Form 10-Q for that period.
Vivendi Games results for the period January 1, 2008 through July 2009 are included in the consolidated federal and certain foreign
state and local income tax returns files by Vivendi or its affiliates while Vivendi Games results for the period July 10, 2008 through
December 31, 2008 are included in the consolidated federal and certain foreign, state and local income tax returns filed by Activision Blizzard.
Vivendi Games tax years 2005 through 2008 remain open to examination by the major taxing authorities. The IRS is currently examining Vivendi
Games tax returns for the 2005 through 2008 tax years.
Activision Blizzard’s tax years 2008 through 2011 remain open to examination by the major taxing jurisdictions to which we are
subject. The IRS is currently examining the Company’s federal tax returns for the 2008 and 2009 tax years. The Company also has several state
and non-U.S. audits pending.
Although the final resolution of the Company’s global tax disputes is uncertain, based on current information, in the opinion of our
management, the ultimate resolution of these matters will not have a material adverse effect on the Company’s consolidated financial position,
liquidity or results of operations. However, an unfavorable resolution of the Company’s global tax disputes could have a material adverse effect
on our business and results of operations in the period in which the matters are ultimately resolved.
On January 2, 2013, the American Taxpayer Relief Act of 2012 was signed into law by the President of the United States. Under the
provisions of the American Taxpayer Relief Act of 2012, the research and development (“R&D”) tax credit that had expired December 31, 2011,
was reinstated retroactively to January 1, 2012, and is now scheduled to expire on December 31, 2013. The Company will record the impact of
the extension of the R&D tax credit related to the tax year ended December 31, 2012, as a discrete item the first quarter of 2013. The impact of
the extension of the R&D tax credit is expected to result in a tax benefit of approximately $11 million related to the tax year ended December 31,
2012.
The overall effective income tax rate in future periods will depend on a variety of factors, such as changes in the mix of income by tax
jurisdiction, applicable accounting rules, applicable tax laws and regulations, and rulings and interpretations thereof, developments in tax audits
and other matters, and variations in the estimated and actual level of annual pretax income or loss. Further, the effective tax rate could fluctuate
significantly on a quarterly basis and could be adversely affected by the extent that income (loss) before income tax expenses (benefit) is lower
than anticipated in foreign regions where taxes are levied at relatively lower statutory rates and/or higher than anticipated in the United States
where taxes are levied at relatively higher statutory rates.
A more detailed analysis of the differences between the U.S. federal statutory rate and the consolidated effective tax rate, as well as
other information about our income taxes, is provided in Note 15 of the Notes to Consolidated Financial Statements included in this Annual
Report.