Kraft 2004 Annual Report Download - page 22

which were based on the cost to Altria Corporate Services, Inc. to provide such services and a
management fee, were $310 million, $318 million and $327 million for the years ended December 31,
2004, 2003 and 2002, respectively. These costs were paid to Altria Corporate Services, Inc. monthly.
Although the cost of these services cannot be quantified on a stand-alone basis, management has
assessed that the billings are reasonable based on the level of support provided by Altria Corporate
Services, Inc., and that they reflect all services provided. The cost and nature of the services are
reviewed annually by the Company’s Audit Committee, which is comprised of independent directors.
The effects of these transactions are included in operating cash flows in the Company’s consolidated
statements of cash flows.
In December 2004, the Company purchased two corporate aircraft from Altria Corporate
Services, Inc. for an aggregate purchase price of approximately $47 million. The Company also entered
into an Aircraft Management Agreement with Altria Corporate Services, Inc. in December 2004, pursuant
to which Altria Corporate Services, Inc. agreed to perform aircraft management, pilot services,
maintenance and other aviation services for the Company.
During 2004, Altria Corporate Services, Inc. provided to the Company certain financial services,
including payroll and accounts payable processing, at a cost of approximately $25 million, which was
included in the $310 million charge shown above. Beginning in 2005, the Company will perform these
functions for itself at a similar cost.
At December 31, 2004 and 2003, the Company had short-term amounts payable to Altria
Group, Inc. of $227 million and $543 million, respectively. Interest on these borrowings is based on the
applicable London Interbank Offered Rate.
Income Taxes. The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards (‘‘SFAS’’) No. 109, ‘‘Accounting for Income Taxes.’’ The accounts of the
Company are included in the consolidated federal income tax return of Altria Group, Inc. Income taxes
are generally computed on a separate company basis. To the extent that foreign tax credits, capital
losses and other credits generated by the Company, which cannot currently be utilized on a separate
company basis, are utilized in Altria Group, Inc.’s consolidated federal income tax return, the benefit is
recognized in the calculation of the Company’s provision for income taxes. Based on the Company’s
current estimate, this benefit is calculated to be approximately $70 million, $100 million and $240 million
for the years ended December 31, 2004, 2003 and 2002, respectively. The benefit is dependent on a
variety of tax attributes that have a tendency to vary year to year. The Company makes payments to, or is
reimbursed by, Altria Group, Inc. for the tax effects resulting from its inclusion in Altria Group, Inc.’s
consolidated federal income tax return. The provision for income taxes is based on domestic and
international statutory income tax rates and tax planning opportunities available to the Company in the
jurisdictions in which it operates. Significant judgment is required in determining income tax provisions
and in evaluating tax positions. The Company establishes additional provisions for income taxes when,
despite the belief that existing tax positions are fully supportable, there remain certain positions that are
likely to be challenged and that may not be sustained on review by tax authorities. The Company adjusts
these additional accruals in light of changing facts and circumstances. The consolidated tax provision
includes the impact of changes to accruals that are considered appropriate, as well as the related net
interest. If the Company’s filing positions are ultimately upheld under audits by respective taxing
authorities, it is possible that the provision for income taxes in future years may reflect favorable
adjustments.
On October 22, 2004, the American Jobs Creation Act (‘‘the Jobs Act’’) was signed into law. The
Jobs Act provides for a deduction of 85% of certain foreign earnings that are repatriated. The Company
may elect to apply this provision to qualifying earnings repatriations in 2005 and is conducting analyses
of its effects. The U.S. Treasury Department recently provided additional clarifying language on key
elements of the provision, which is under consideration as part of the Company’s evaluation. The
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