Estee Lauder 2010 Annual Report Download - page 128

THE EST{E LAUDER COMPANIES INC. 127
Included in the balance of gross unrecognized tax bene-
fits at June 30, 2010 are $27.4 million of tax positions
for which the ultimate deductibility is highly certain
but for which there is uncertainty about the timing of
such deductibility. Because of the impact of deferred
tax accounting, other than interest and penalties, the
disallowance of the shorter deductibility period would
not affect the annual effective tax rate but would acceler-
ate the payment of cash to the taxing authority to an
earlier period.
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
and examined in these jurisdictions. The Company
provides tax reserves for U.S. federal, state, local and inter-
national unrecognized tax benefits for periods subject to
audit. The development of reserves for these exposures
requires judgments about tax issues, potential outcomes
and timing, and is a subjective critical estimate. The
Company assesses its tax positions and records tax bene-
fits for all years subject to examination based upon man-
agement’s evaluation of the facts, circumstances, and
information available at the reporting dates. For those tax
positions where it is more-likely-than-not that a tax benefit
will be sustained, the Company has recorded the largest
amount of tax benefit with a greater than 50% likelihood
of being realized upon settlement with a tax authority that
has full knowledge of all relevant information. For those
tax positions where it is not more-likely-than-not that a tax
benefit will be sustained, no tax benefit has been recog-
nized in the consolidated financial statements. Where
applicable, associated interest and penalties have also
been recognized. 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 significant uncertainties which render
them inestimable. If actual outcomes differ materially from
these estimates, they could have a material impact on the
Company’s consolidated financial statements.
The Company is currently undergoing a U.S. federal
income tax audit as well as examinations and controver-
sies in several state, local and international jurisdictions.
These matters are in various stages of completion and
involve complex multi-jurisdictional issues common
among multinational enterprises, including transfer pric-
ing, that may require an extended period of time for
resolution. During the fourth quarter of fiscal 2008, the
IRS completed the examination phase of fiscal years 2002
through 2005. During fiscal 2008, the Company presented
disputed computations concerning U.S. foreign tax credit
determinations to the Appeals Division of the IRS and a
claim was entered pursuant to an administrative process
of the tax treaty between the U.S. and Belgium (com-
monly referred to as the “Competent Authority” process).
During the fourth quarter of fiscal 2009, the Company
reached a formal settlement with the Appeals Division. As
a result of the settlement, the Company recognized a tax
and interest benefit of $19.2 million, net of tax. A resolu-
tion of remaining computations in dispute was subject to
the outcome of the Company’s Competent Authority
claim. As of June 30, 2010, the Company’s Competent
Authority claim remained unresolved. However, subse-
quent to June 30, 2010, the Company’s Competent
Authority claim was settled, thereby resolving the remain-
ing U.S. foreign tax credit determinations formerly in
dispute. The impact from the settlement is not anticipated
to have a material impact on the Company’s consolidated
financial statements.
During the fourth quarter of fiscal 2010, the Company
reached a formal agreement with the IRS concerning the
examination adjustments proposed for fiscal years 2002
through 2005. As a result, the Company has applied a
prior cash payment of $35.0 million made to the U.S.
Treasury as an advance deposit toward these agreed-to
adjustments. Separately, during fiscal 2010 the IRS contin-
ued their examination of fiscal years 2006 through 2008.
In the fourth quarter of fiscal 2010, the Company made a
cash payment of $20.5 million to the U.S. Treasury as an
advance deposit in anticipation of a formal resolution to
examination adjustments proposed for fiscal years 2006
through 2008. Although the advance deposit limits the
accrual of additional interest that would be due to the U.S.
Treasury, there is no impact on the amount of unrecog-
nized tax benefits until a final agreement is reached.
During the third quarter of fiscal 2010, the Company
accepted an invitation from the IRS to join the Compli-
ance Assurance Program (“CAP”) beginning with the fis-
cal year ending June 30, 2011. The objective of CAP is to
reduce taxpayer burden and uncertainty while assuring
the IRS of the accuracy of income tax returns prior
to filing, thereby reducing or eliminating the need for
post-filing examinations.
The Company had been notified of a disallowance of
tax deductions claimed by its subsidiary in Spain for fiscal
years 1999 through 2002. As a result, the subsidiary was
reassessed corporate income tax of $2.5 million for this
period, at current exchange rates. An appeal against
this reassessment was filed with the Chief Tax Inspector.