Expedia 2012 Annual Report Download - page 113

Reconciliation of U.S. Federal Statutory Income Tax Rate to Effective Income Tax Rate
A reconciliation of amounts computed by applying the statutory federal income tax rate to income from
continuing operations before income taxes to total income tax expense is as follows:
Year Ended December 31,
2012 2011 2010
(In thousands)
Income tax expense at the federal statutory rate of 35% $122,520 $140,725 $149,050
Foreign rate differential (78,094) (74,431) (27,921)
State income taxes, net of effect of federal tax benefit 1,280 5,262 4,290
Unrecognized tax benefits and related interest 16,038 8,297 (6,514)
Change in valuation allowance (11,838) (7,740) (3,000)
Other, net (2,828) 3,618 4,437
Income tax expense $ 47,078 $ 75,731 $120,342
Our effective tax rate in 2012, 2011 and 2010 was lower than the 35% federal statutory income tax rate
primarily due to earnings in foreign jurisdictions, primarily Switzerland, where our effective tax rate is lower.
Uncertain Tax Positions
We account for uncertain tax positions based on a two-step process of evaluating recognition and
measurement criteria. The first step assesses whether the tax position is more likely than not to be sustained upon
examination by the taxing authority, including resolution of any appeals or litigation, on the basis of the technical
merits of the position. If the tax position meets the more likely than not criteria, the portion of the tax benefit
greater than 50% likely to be realized upon settlement with the relevant tax authority is recognized in the
financial statements. Gross unrecognized tax benefits, interest, and penalties not expected to be settled within one
year are included in other long-term liabilities on the consolidated balance sheet.
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows:
2012 2011 2010
(In thousands)
Balance, beginning of year $ 81,682 $68,536 $187,075
Increases to tax positions related to the current year 20,453 15,679 12,414
Increases to tax positions related to prior years 4,837 1,047 1,207
Decreases to tax positions related to prior years (304) (2,142) (95,687)
Reductions due to lapsed statute of limitations (5,061) (3,352) (25,048)
Settlements during current year (607) — (913)
Interest and penalties 1,305 1,914 (10,512)
Balance, end of year $102,305 $81,682 $ 68,536
As of December 31, 2012, we had $102 million of gross unrecognized tax benefits, $83 million of which, if
recognized, would affect the effective tax rate. As of December 31, 2011, we had $82 million of gross
unrecognized tax benefits, $75 million of which, if recognized, would affect the effective tax rate.
We recognize interest and penalties related to unrecognized tax benefits in income tax expense. As of
December 31, 2012 and 2011, total gross interest and penalties accrued was $18 million and $14 million,
respectively. In connection with our unrecognized tax benefits, we recognized interest expense in 2012 and 2011
of $1 million and $2 million, respectively, and an interest benefit in 2010 of $11 million.
We file a U.S. federal income tax returns as well as income tax returns in various states and foreign
jurisdictions. The IRS is currently examining our U.S. federal income tax returns for the periods ended
F-31