Estee Lauder 2007 Annual Report Download - page 70

As of June 30, 2007 and 2006, the Company had current
net deferred tax assets of $124.0 million and $139.1 mil-
lion, respectively, which are included in prepaid expenses
and other current assets in the accompanying consoli-
dated balance sheets. In addition, the Company had non-
current net deferred tax liabilities of $16.6 million and
$43.2 million as of June 30, 2007 and June 30, 2006,
respectively, which are included in other noncurrent liabil-
ities in the accompanying consolidated balance sheets.
On July 13, 2006, the Company announced a settle-
ment with the Internal Revenue Service (“IRS”) regarding
its examination of the Company’s consolidated Federal
income tax returns for the fi scal years ended June 30,
1998 through June 30, 2001. The settlement resolves pre-
viously disclosed issues raised during the IRS’s examina-
tion, including transfer pricing and foreign tax credit
computations. The settlement of these issues resulted in a
tax charge of approximately $46 million in the fourth
quarter of fi scal 2006 and represents the aggregate earn-
ings impact of the settlement through fi scal 2006. In addi-
tion, during the fourth quarter of fi scal 2006, the Company
completed the repatriation of foreign earnings through
intercompany dividends as required under the provisions
of the American Jobs Creation Act of 2004 (the “AJCA”).
In connection with the repatriation, the Company updated
the computation of the related aggregate tax impact,
resulting in a favorable adjustment of approximately $11
million. The tax settlement, coupled with the AJCA favor-
able tax adjustment, resulted in a net increase to the
Company’s fi scal 2006 income tax provision of approxi-
mately $35 million.
Federal income and foreign withholding taxes have not
been provided on approximately $539 million of undis-
tributed earnings of international subsidiaries at June 30,
2007. The Company intends to reinvest these earnings in
its foreign operations indefi nitely, except where it is able
to repatriate these earnings to the United States without
material incremental tax provision. As of June 30, 2006
and 2005, the Company had not provided federal income
and foreign withholding taxes on approximately $336 mil-
lion and $90 million, respectively, of undistributed earn-
ings of international subsidiaries.
As of June 30, 2007 and 2006, certain international
subsidiaries had tax loss carryforwards for local tax pur-
poses of approximately $11 million and $23 million,
respectively. With the exception of $6.4 million of losses
with an indefi nite carryforward period as of June 30, 2007,
these losses expire at various dates through fi scal 2022.
Deferred tax assets, net of valuation allowances, in the
amount of $1.2 million and $0.7 million as of June 30,
2007 and 2006, respectively, have been recorded to
refl ect the tax benefi ts of the losses not utilized to date.
A full valuation allowance has been provided for those
deferred tax assets for which, in the opinion of manage-
ment, it is more likely than not that the deferred tax assets
will not be realized.
Earnings before income taxes and minority interest
include amounts contributed by the Company’s interna-
tional operations of approximately $696 million, $603
million and $583 million for fi scal 2007, 2006 and 2005,
respectively. Some of these earnings are taxed in the
United States.
Earnings from the Company’s global operations are
subject to tax in various jurisdictions both within and out-
side the United States. The Company is routinely audited
in these jurisdictions and these reviews can involve
complex issues that may require an extended period of
time for resolution. The Company’s U.S. Federal income
tax returns have been examined and settled through
fi scal 2001.
The Company is currently under examination by the
Internal Revenue Service for fi scal years 2002 through
2005. In addition, the Company has ongoing audits in
various state and local jurisdictions, as well as audits
in various foreign jurisdictions.
The Company provides tax reserves for Federal, state,
local and international exposures relating to periods sub-
ject to audit. The development of reserves for these expo-
sures requires judgments about tax issues, potential
outcomes and timing, and is a subjective critical estimate.
Although the outcome related to these exposures is
uncertain, in management’s opinion, adequate provisions
for income taxes have been made for estimable potential
liabilities emanating from these exposures. In certain
circumstances, the ultimate outcome of exposures and
risks involve signifi cant uncertainties which render them
inestimable. If actual outcomes differ materially from
these estimates, including those that cannot be quanti-
fi ed, they could have a material impact on the Company’s
results of operations.
The Company has been notifi ed of a disallowance of
tax deductions claimed by its subsidiary in Spain for the
fi scal years 1999 through 2002. As a result, the subsidiary
was reassessed corporate income tax of approximately $3
million for this period. An appeal against this reassessment
was fi led with the Chief Tax Inspector. On July 18, 2005,
THE EST{E LAUDER COMPANIES INC. 69