Estee Lauder 2011 Annual Report Download - page 136

134 THE EST{E LAUDER COMPANIES INC.
Included in the balance of gross unrecognized tax bene-
fits at June 30, 2011 are $11.3 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 dis-
allowance of the shorter deductibility period would not
affect the annual effective tax rate but would accelerate
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 pro-
vides tax reserves for U.S. federal, state, local and foreign
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 benefits for all
years subject to examination based upon management’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 posi-
tions where it is not more-likely-than-not that a tax benefit
will be sustained, no tax benefit has been recognized in
the consolidated financial statements. Where applicable,
associated interest and penalties have also been recog-
nized. Although the outcome related to these exposures
is uncertain, in management’s opinion, adequate provi-
sions 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 an income tax
audit by the U.S. Internal Revenue Service (the “IRS”) as
well as examinations and controversies in several state,
local and foreign jurisdictions. These matters are in
various stages of completion and involve complex multi-
jurisdictional issues common among multinational enter-
prises, including transfer pricing, which may require an
extended period of time for resolution. During fiscal
2008, the Company entered a claim pursuant to an
administrative process of the tax treaty between the U.S.
and Belgium (commonly referred to as the “Competent
Authority” process). In the first quarter of fiscal 2011, the
Company’s Competent Authority claim was settled.
The settlement did not have a material impact on the
Company’s consolidated financial statements.
During the second quarter of fiscal 2011, the Company
reached a formal agreement with the IRS concerning
the examination adjustments proposed for fiscal 2006
through 2008. As a result, the Company applied a prior
cash payment of $20.5 million made to the U.S. Treasury
as an advance deposit toward these agreed-to adjust-
ments. As a result of the settlement, the Company
recognized a tax and interest benefit of $11 million, net
of tax. Separately, during the second and third quarters of
fiscal 2011, the IRS commenced its examination of fiscal
2009 and 2010, respectively.
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 fiscal
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. During
fiscal 2011, the Company commenced participation in
the CAP program with respect to fiscal 2011 and, as of
June 30, 2011, the compliance process was ongoing.
The Company had been notified of a disallowance of
tax deductions claimed by its subsidiary in Spain for fiscal
years 1999 through 2002. An appeal against this reassess-
ment was filed with the Chief Tax Inspector. On July 18,
2005, the final assessment made by the Chief Tax Inspec-
tor was received, confirming the reassessment made by
the tax auditors. During fiscal 2006, an appeal against this
final assessment was filed with the Madrid Regional
Economic Administrative Tribunal (“TEAR”). In view of the
TEAR’s silence, during fiscal 2007 the claim was presumed
to be dismissed and an appeal was filed against it with the
Central Economic-Administrative Tribunal (“TEAC”).
During the fiscal 2008 fourth quarter, the TEAC dismissed
the claim and, on June 10, 2008, the Company filed an
appeal for judicial review with the National Appellate
Court. During fiscal 2009, the Company completed the
appeal proceedings with the National Appellate Court
and, as of June 30, 2011, awaited the court’s decision.
Subsequent to June 30, 2011, the National Appellate
Court notified the Company that the appeal was denied.
The Company has been assessed corporate income tax
and interest of $4.0 million, net of tax, at current exchange
rates. On July 21, 2011, the Company filed an appeal with
the Spain Supreme Court. While no assurance can be
given as to the outcome in respect of this assessment and