Adobe 2012 Annual Report Download - page 69

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During fiscal 2012, total investment gains (losses), net improved primarily due to an increase in net realized gains from the
sale of marketable equity securities. This was offset in part by a decrease in realized gains related to our direct investments in
privately held companies in fiscal 2011 that did not recur during fiscal 2012.
During fiscal 2011, total investment gains (losses), net improved to net gains primarily due to unrealized losses related to
our indirect investments in privately held companies in fiscal 2010 that did not recur during fiscal 2011. This was offset in part
by a decrease in net realized gains from the sale of marketable equity securities during fiscal 2011 due to less sales of these
investments.
Provision for Income Taxes (dollars in millions)
Fiscal
2012 Fiscal 2011 Fiscal 2010 % Change 2012-2011 % Change 2011-2010
Provision ..................................................................... $ 286.0 $ 202.4 $ 168.5 41% 20%
Percentage of total revenue....................................... 6% 5% 4%
Effective tax rate....................................................... 26% 20% 18%
Our effective tax rate increased by approximately six percentage points during fiscal 2012 as compared to fiscal 2011. In
fiscal 2011, the increase was primarily related to the expiration of the U.S. research and development credit, as well as tax benefits
associated with a favorable state income tax ruling and tax costs associated with licensing acquired company assets to Adobe's
trading companies.
Our effective tax rate increased by approximately two percentage points during fiscal 2011 as compared to fiscal 2010. The
increase was primarily due to tax costs of licensing acquired company assets to Adobe's trading companies. These costs were
partially offset by tax benefits related to a favorable state income tax ruling and the reinstatement of the federal research and
development tax credit.
In January 2013, the United States Congress passed an extension of the federal research and development tax credit through
December 31, 2013. As a result, we expect that our income tax provision for the first quarter of fiscal 2013 will include a discrete
tax benefit which will reduce our effective tax rate for the quarter and to a lesser extent the effective annual tax rate.
We are a United States-based multinational company subject to tax in multiple U.S. and foreign tax jurisdictions. A significant
portion of our foreign earnings for the current fiscal year were earned by our Irish subsidiaries. In addition to providing for U.S.
income taxes on earnings from the U.S., we provide for U.S. income taxes on the earnings of foreign subsidiaries unless the
subsidiaries' earnings are considered permanently reinvested outside the U.S. While we do not anticipate changing our intention
regarding permanently reinvested earnings, if certain foreign earnings previously treated as permanently reinvested are repatriated,
the related U.S. tax liability may be reduced by any foreign income taxes paid on these earnings. Currently, there are a significant
amount of foreign earnings upon which U.S. income taxes have not been provided.
Accounting for Uncertainty in Income Taxes
The gross liability for unrecognized tax benefits at November 30, 2012 was $160.5 million, exclusive of interest and
penalties. If the total unrecognized tax benefits at November 30, 2012 were recognized in the future, $147.6 million of unrecognized
tax benefits would decrease the effective tax rate, which is net of an estimated $12.9 million federal benefit related to deducting
certain payments on future state tax returns.
As of November 30, 2012, the combined amount of accrued interest and penalties related to tax positions taken on our tax
returns was approximately $12.5 million. This amount is included in non-current income taxes payable.
The timing of the resolution of income tax examinations is highly uncertain as are the amounts and timing of tax payments
that are part of any audit settlement process. These events could cause large fluctuations in the balance sheet classification of
current and non-current assets and liabilities. We believe that within the next 12 months, it is reasonably possible that either certain
audits will conclude or statutes of limitations on certain income tax examination periods will expire, or both. Given the uncertainties
described above, we can only determine a range of estimated potential decreases in underlying unrecognized tax benefits ranging
from $0 to approximately $5 million.
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