Hertz 2008 Annual Report Download - page 183

HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The reduction in the 2008 effective tax rate is primarily due to the tax benefits associated with an increase
in the valuation allowance for losses in certain non-U.S. jurisdictions and recording a valuation
allowance on certain U.S. deferred tax assets where management determined the likelihood exists the
assets may not be realized as well as goodwill impairment charges for which no benefit can be realized.
As of December 31, 2008, our foreign subsidiaries have immaterial net undistributed earnings. Deferred
tax liabilities have not been recorded for such earnings because it is management’s current intention to
permanently reinvest undistributed earnings offshore and it is not practicable to determine such deferred
tax liabilities. If, in the future, undistributed earnings are repatriated to the United States, or it is
determined such earnings will be repatriated in the foreseeable future, deferred tax liabilities will be
recorded.
The provisions of FASB Interpretation No. 48, ‘‘Accounting for Uncertainty in Income Taxes—an
Interpretation of FASB Statement No. 109,’’ or ‘‘FIN 48,’’ were adopted on January 1, 2007. Upon
adoption, an $18.9 million increase to liabilities for unrecognized tax benefits was recorded. The
increase in liabilities was recorded as of January 1, 2007 as a decrease of $3.6 million ‘‘Retained
Earnings’’ which is reflected in our consolidated balance sheet and an increase of $15.3 million to
‘‘Goodwill’’ which is reflected in our consolidated balance sheet.
On the adoption date, total unrecognized tax benefits were $20.3 million. As of December 31, 2008, total
unrecognized tax benefits were $21.7 million, of which $21.3 million, if recognized, would favorably
impact the effective tax rate in future periods. The remaining balance of $0.4 million relates to temporary
difference items. To the extent these items reverse in the future, the temporary items will affect current
and deferred income tax expense in continuing operations with no impact to the effective tax rate.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in
thousands of dollars):
2008 2007
Balance at January 1 .......................................... $35,549 $20,281
Increase (decrease) attributable to tax positions taken during prior periods . . . (5,693) 6,465
Increase attributable to tax positions taken during the current year ......... 5,202 9,496
Decrease attributable to settlements with taxing authorities ............... (13,349) (693)
Balance at December 31 ....................................... $21,709 $35,549
We conduct business globally and, as a result, file one or more income tax returns in the U.S. federal
jurisdiction and various state and non-U.S. jurisdictions. In the normal course of business we are subject
to examination by taxing authorities throughout the world. The open tax years for these jurisdictions
span from 1998 to 2008. A tax indemnification agreement entered into with Ford on the Closing Date
indemnifies Hertz from U.S. federal and unitary state, and certain combined non-U.S. income tax
liabilities for all periods prior to December 21, 2005. We are not currently under audit by the Internal
Revenue Service. Several U.S. state and non-U.S. jurisdictions are under audit.
In many cases the uncertain tax positions are related to tax years that remain subject to examination by
the relevant taxing authorities. It is reasonable that approximately $7.7 million of unrecognized tax
benefits may reverse within the next twelve months due to settlement with the relevant taxing authorities
and/or the filing of amended income tax returns.
Net, after-tax interest and penalties related to the liabilities for unrecognized tax benefits are classified as
a component of ‘‘(Provision) benefit for taxes on income’’ in the consolidated statement of operations.
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