Costco 2005 Annual Report Download - page 58

Note 7—Income Taxes (Continued)
Reconciliation between the statutory tax rate and the effective rate for fiscal 2005, 2004 and 2003 is as fol-
lows:
2005 2004 2003
Federal taxes at statutory rate ................. $542,137 35.00% $490,218 35.00% $405,382 35.00%
State taxes, net ............................. 39,193 2.53 48,157 3.44 37,875 3.27
Foreign taxes, net .......................... (15,506) (1.00) (5,729) (0.41) (396) (0.03)
Transfer pricing settlement ................... (54,155) (3.50) — 0.00 — 0.00
Tax benefit on unremitted earnings ............. (30,602) (1.98) — 0.00 — 0.00
Translation gain on unremitted earnings ......... 10,010 0.65 — 0.00 — 0.00
Other .................................... (5,207) (0.33) (14,415) (1.03) (5,628) (0.49)
$485,870 31.37% $518,231 37.00% $437,233 37.75%
The components of the deferred tax assets and liabilities are as follows:
August 28,
2005
August 29,
2004
StockOptions .................................................... $ 30,480 $ 14,483
Deferred income/membership fees .................................... 36,594 29,432
Excess foreign tax credits ........................................... 30,602 —
Accrued liabilities and reserves ...................................... 266,337 208,409
Other ........................................................... 3,880 16,296
Total deferred tax assets ........................................ 367,893 268,620
Property and equipment ............................................ 273,794 271,798
Merchandise inventories ............................................ 91,407 73,913
Translation gain ................................................... 16,047 —
Total deferred tax liabilities ..................................... 381,248 345,711
Net deferred tax liabilities ........................................... $(13,355) $ (77,091)
The deferred tax accounts at August 28, 2005 and August 29, 2004 include current deferred income tax as-
sets of $159,197 and $116,291, respectively, included in other current assets; non-current deferred income tax
assets of $7,962 and $6,755, respectively, included in other assets; and non-current deferred income tax liabilities
of $180,514 and $200,137, respectively, included in deferred income taxes and other liabilities.
The effective income tax rate on earnings was 31.4% in fiscal 2005, 37% in fiscal 2004, and 37.8% in fiscal
2003. The decrease in the effective income tax rate in fiscal 2005 from fiscal 2004 is primarily attributable to a
$54,155 income tax benefit resulting from the settlement of a transfer pricing dispute between the United States
and Canada (covering the years 1996-2003) and a net tax benefit on unremitted foreign earnings of $20,592. The
Company recognized a tax benefit of $30,602, resulting from excess foreign tax credits on unremitted foreign
earnings and recognized a tax expense of $10,010, resulting from tax expense on translation gains accumulated to
the date that the Company determined that certain unremitted foreign earnings were no longer permanently re-
invested. The net benefit of $20,592 relates to that portion of unremitted foreign earnings that the Company plans
to repatriate in the foreseeable future. Excluding these benefits the effective income tax rate on earnings in fiscal
2005 was 36.2%.
For the fourth quarter of fiscal 2005 and 2004, the effective tax rate was 28.9% and 37.0%, respectively.
The decrease in the fourth quarter tax rate for fiscal 2005 is primarily attributable to a net tax benefit of $20,592,
57