Carnival Cruises 2012 Annual Report Download - page 84

Table of Contents
NOTE 8 – Contingencies
Litigation
In the normal course of our business, various claims and lawsuits have been filed or are pending against us. Most of these claims and lawsuits are covered by
insurance and, accordingly, the maximum amount of our liability, net of any insurance recoverables, is typically limited to our self-insurance retention levels.
Management believes the ultimate outcome of these claims and lawsuits will not have a material adverse impact on our consolidated financial statements. See
Note 7 for a discussion of loss contingencies related to the ship incident.
Contingent Obligations – Lease Out and Lease Back Type (“LILO”) Transactions
At November 30, 2012, Carnival Corporation had estimated contingent obligations totaling $429 million, excluding termination payments as discussed below,
to participants in LILO transactions for two of its ships. At the inception of these leases, the aggregate of the net present value of these obligations was paid by
Carnival Corporation to a group of major financial institutions, who agreed to act as payment undertakers and directly pay these obligations. As a result, these
contingent obligations are considered extinguished and neither the funds nor the contingent obligations have been included in our Consolidated Balance Sheets.
In the event that Carnival Corporation were to default on its contingent obligations and assuming performance by all other participants, we estimate that we
would, as of November 30, 2012, be responsible for a termination payment of $40 million. In 2017, we have the right to exercise options that would terminate
these LILO transactions at no cost to us.
In certain cases, if the credit ratings of the financial institutions who are directly paying the contingent obligations fall below AA-, then Carnival Corporation
will be required to replace these financial institutions with other financial institutions whose credit ratings are at least AA or meet other specified credit
requirements. In such circumstances, we would incur additional costs, although we estimate that they would not be material to our consolidated financial
statements. For the two financial institution payment undertakers subject to this AA- credit rating threshold, one has a credit rating of AA and the other has a
credit rating of AA-. If Carnival Corporation’s credit rating, which is BBB+, falls below BBB, it will be required to provide a standby letter of credit for $43
million, or, alternatively, provide mortgages for this aggregate amount on these two ships.
Contingent Obligations – Indemnifications
Some of the debt contracts that we enter into include indemnification provisions that obligate us to make payments to the counterparty if certain events occur.
These contingencies generally relate to changes in taxes and changes in laws that increase lender capital costs and other similar costs. The indemnification
clauses are often standard contractual terms and were entered into in the normal course of business. There are no stated or notional amounts included in the
indemnification clauses, and we are not able to estimate the maximum potential amount of future payments, if any, under these indemnification clauses. We
have not been required to make any material payments under such indemnification clauses in the past and, under current circumstances, we do not believe a
request for material future indemnification payments is probable.
NOTE 9 – Income and Other Taxes
A summary of our principal taxes and exemptions in the jurisdictions where our primary businesses are located is as follows:
U.S. Income Tax
We are primarily foreign corporations engaged in the business of operating cruise ships in international transportation. We also own and operate, among other
businesses, the U.S. hotel and transportation business of Holland America Princess Alaska Tours through U.S. corporations.
Our North American cruise ship businesses and certain ship-owning subsidiaries are engaged in a trade or business within the U.S. Depending on the
itinerary of any particular ship, that ship may generate income from sources within the U.S. We believe that our U.S. source income and the income of our
ship-owning subsidiaries, to the extent derived from, or incidental to, the international operation of a ship or ships, is currently exempt from U.S. federal
income and branch profits tax.
In general, under Section 883 of the Internal Revenue Code, certain non-U.S. corporations (such as our North American cruise ship businesses) are not subject
to U.S. federal income tax or branch profits tax on U.S. source income derived from, or incidental to, the international operation of a ship or ships. Applicable
U.S. Treasury regulations provide in general that a foreign corporation will qualify for the benefits of Section 883 if, in relevant part, (i) the foreign country in
which the foreign corporation is organized grants an equivalent exemption to corporations organized in the U.S. (an “equivalent exemption jurisdiction”) and
(ii) the foreign corporation meets a defined publicly-traded test. Subsidiaries of foreign corporations that are organized in an equivalent exemption jurisdiction
and meet the publicly-traded test also benefit from Section 883. We believe that Panama is an equivalent exemption jurisdiction and Carnival Corporation
currently qualifies as a publicly-traded corporation under the regulations. Accordingly, substantially all of Carnival Corporation’s income is exempt from U.S.
federal income and branch profits tax.
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