Kraft 2012 Annual Report Download - page 18

Risks Relating to our Recent Spin-Off
If the Distribution, together with certain related transactions, were to fail to qualify for non-recognition treatment
for U.S. federal income tax purposes, then we, Mondele¯ z International and our shareholders could be subject to
significant tax liability.
Mondele¯z International, our former parent, received a private letter ruling from the Internal Revenue Service (“IRS”) and an
opinion of tax counsel, each substantially to the effect that, subject to the accuracy of and compliance with certain
representations, assumptions and covenants, (i) the Distribution will qualify for non-recognition of gain or loss to Mondele¯z
International and Mondele¯ z International’s shareholders pursuant to Section 355 of the Internal Revenue Code of 1986, as
amended (“Code”), except to the extent of cash received in lieu of fractional shares, and (ii) certain internal transactions
undertaken in connection with the Distribution (“Internal Spin-Off Transactions”), qualify for non-recognition of gain or loss
to us and Mondele¯ z International pursuant to Sections 355 and 368 of the Code (except, in the case of the private letter
ruling, to the extent the IRS generally will not rule on certain transfers of intellectual property, which are covered solely by
the opinion).
Notwithstanding the receipt of the private letter ruling and the opinion of tax counsel, the IRS could determine that the
Distribution and Internal Spin-Off Transactions should be treated as taxable transactions if it determines that any of the
representations, assumptions or covenants on which the private letter ruling is based are untrue or have been violated.
Furthermore, as part of the IRS’s policy, the IRS did not determine whether the Distribution and Internal Spin-Off
Transactions satisfy certain conditions that are necessary to qualify for non-recognition treatment. Rather, the private letter
ruling is based on representations by us and Mondele¯z International that these conditions have been satisfied. The opinion
of tax counsel addressed the satisfaction of these conditions. Similarly, the IRS generally will not rule on contributions of
intellectual property that do not satisfy certain criteria. As a result, the private letter ruling does not address whether
transfers of certain intellectual property included in the Internal Spin-Off Transactions qualify for non-recognition treatment.
Rather, the opinion of tax counsel addressed the qualification.
The opinion of tax counsel is not binding on the IRS nor the courts, and there is no assurance that the IRS or a court will
not take a contrary position. In addition, the opinion of tax counsel relied on certain representations and covenants
delivered by us and Mondele¯ z International.
If the IRS ultimately determines that the Distribution and/or the Internal Spin-Off Transactions are taxable, we and
Mondele¯z International could incur significant U.S. federal income tax liabilities. Generally, taxes resulting from the failure
of the Spin-Off to qualify for non-recognition treatment for U.S. federal income tax purposes would be imposed on
Mondele¯z International or Mondele¯z International’s shareholders and, under the Tax Sharing and Indemnity Agreement we
entered into in connection with the Spin-Off, Mondele¯z International is generally obligated to indemnify us against such
taxes. However, under the Tax Sharing and Indemnity Agreement, we could be required, under certain circumstances, to
indemnify Mondele¯ z International and its affiliates against all tax-related liabilities caused by those failures, to the extent
those liabilities result from an action we or our affiliates take or from any breach of our or our affiliates’ representations,
covenants or obligations under the Tax Sharing and Indemnity Agreement, or any other agreement we entered into in
connection with the Spin-Off.
If the Canadian aspects of the Internal Spin-Off Transactions were to fail to qualify for tax-deferred treatment for
Canadian federal and provincial income tax purposes, then our and/or Mondele¯z International’s Canadian
subsidiaries could be subject to significant tax liability.
The Internal Spin-Off Transactions included steps to separate the assets and liabilities in Canada held in connection with
Mondele¯z International’s global snacks business from the assets and liabilities in Canada held in connection with our North
American grocery business.
Our Canadian subsidiary received an advance income tax ruling from the Canada Revenue Agency (“CRA”) to the effect
that, subject to the accuracy of and compliance with certain representations, assumptions, and covenants and based on
the current provisions of the Canadian Tax Act, such separation is treated for purposes of the Canadian Tax Act as
resulting in a “butterfly” reorganization with no material Canadian federal income tax payable by our Canadian subsidiary,
Mondele¯z International’s Canadian subsidiary or their respective shareholders.
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