Kraft 2006 Annual Report Download - page 82

The Company also recognized net state tax reversals of $39 million, resulting in a total net earnings benefit of $405 million for the year ended December 31,
2006.
The loss from discontinued operations for the year ended December 31, 2005, includes additional tax expense of $280 million from the sale of the sugar
confectionery business. The loss from discontinued operations for the year ended December 31, 2004, included a deferred income tax benefit of $43 million.
At December 31, 2006, applicable United States federal income taxes and foreign withholding taxes had not been provided on approximately $3.2 billion of
accumulated earnings of foreign subsidiaries that are expected to be permanently reinvested.
In October 2004, the American Jobs Creation Act ("the Jobs Act") was signed into law. The Jobs Act includes a deduction for 85% of certain foreign
earnings that are repatriated. In 2005, the Company repatriated approximately $500 million of earnings under the provisions of the Jobs Act. Deferred taxes had
previously been provided for a portion of the dividends remitted. The reversal of the deferred taxes more than offset the tax costs to repatriate the earnings and
resulted in a net tax reduction of $28 million in the consolidated income tax provision during 2005.
The effective income tax rate on pre-tax earnings differed from the U.S. federal statutory rate for the following reasons for the years ended December 31,
2006, 2005 and 2004:
2006 2005 2004
U.S. federal statutory rate 35.0% 35.0% 35.0%
Increase (decrease) resulting from:
State and local income taxes, net of federal tax benefit excluding IRS audit impacts 1.8 1.8 1.8
Benefit principally related to reversal of federal and state reserves on conclusion of IRS audit (9.4)
Reversal of other tax accruals no longer required (1.3) (2.6) (2.9)
Foreign rate differences, net of repatriation impacts (0.3) (2.8) (0.1)
Other (2.1) (2.0) (1.5)
Effective tax rate 23.7% 29.4% 32.3%
The tax rate in 2006 includes a reimbursement from Altria Group, Inc. in cash for unrequired federal tax reserves of $337 million, and also includes net state
tax reversals of $39 million, due to the conclusion of an audit of Altria Group, Inc.'s consolidated federal income tax returns for the years 1996 through 1999 in
the first quarter of 2006. Included within the change in tax rates, among other things, are a benefit of $52 million in 2006 from the resolution of outstanding items
in the Company's international operations, the majority of which occurred in the first quarter. The tax rate in 2005 includes the settlement of an outstanding U.S.
tax claim of $24 million in the second quarter; $82 million from the resolution of outstanding items in the Company's international operations, the majority of
which was in the first quarter, and $33 million of tax impacts associated with the sale of a U.S. biscuit brand. The 2005 rate also includes a $53 million aggregate
benefit from the domestic manufacturers' deduction provision and the dividend repatriation provision of the Jobs Act. The tax provision in 2004 includes an
$81 million favorable resolution of an outstanding tax item, the majority of which occurred in the third quarter of 2004, and the reversal of $35 million of tax
accruals that were no longer required due to tax events that occurred during the first quarter of 2004.
As previously discussed in Note 2.Summary of Significant Accounting Policies, the Company's adoption of FIN 48 will result in an increase to shareholders'
equity as of January 1, 2007 of approximately $200 million to $225 million.
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Source: KRAFT FOODS INC, 10-K, March 01, 2007