MasterCard 2012 Annual Report Download - page 118

MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The 2012 and 2011 valuation allowances relate primarily to the Company’s ability to recognize tax benefits
associated with certain foreign net operating losses. The recognition of these benefits is dependent upon the
future taxable income in such foreign jurisdictions and the ability under tax law in these jurisdictions to utilize
net operating losses following a change in control.
A reconciliation of the beginning and ending balance for the Company’s unrecognized tax benefits for the
years ended December 31, is as follows:
2012 2011 2010
(in millions)
Beginning balance ............................................... $214 $165 $146
Additions:
Current year tax positions ......................................... 58 34 22
Prior year tax positions ........................................... 15 23 15
Reductions:
Prior year tax positions, due to changes in judgments ................... (21) (2) (12)
Settlements with tax authorities .................................... (2) (1) (6)
Expired statute of limitations ...................................... (7) (5) —
Ending balance ................................................. $257 $214 $165
The entire unrecognized tax benefits of $257 million, if recognized, would reduce the effective tax rate. It is
possible that the amount of unrecognized benefit with respect to the Company’s uncertain tax positions may
change within the next twelve months. An estimate of the range of possible changes cannot be made until the
issues are further developed, the examinations close or the statutes expire. The Company is subject to tax in the
United States, Belgium, Singapore and various other foreign jurisdictions, as well as state and local jurisdictions.
The Company has effectively settled its U.S. federal income tax obligations through 2008. With limited
exception, the Company is no longer subject to state and local or foreign examinations by tax authorities for
years before 2002.
It is the Company’s policy to account for interest expense related to income tax matters as interest expense
in its statement of operations, and to include penalties related to income tax matters in the income tax provision.
For the years ended December 31, 2012, 2011 and 2010, the Company recorded tax-related interest income of $1
million, $2 million and $5 million, respectively, in its consolidated statement of operations. At December 31,
2012 and 2011 the Company had a net income tax-related interest payable of $15 million and $16 million,
respectively, in its consolidated balance sheet. At December 31, 2012 and 2011, the amounts the Company had
recognized for penalties payable in its consolidated balance sheet were not significant.
Note 18. Legal and Regulatory Proceedings
MasterCard is a party to legal and regulatory proceedings with respect to a variety of matters in the ordinary
course of business. Some of these proceedings are based on complex claims involving substantial uncertainties
and unascertainable damages. Accordingly, except as discussed below, it is not possible to determine the
probability of loss or estimate damages. Further, except as discussed below, MasterCard has not established
reserves for any of these proceedings. Except as identified below, MasterCard does not believe that the outcome
of any existing legal or regulatory proceedings to which it is a party will have a material adverse effect on its
results of operations, financial condition or overall business. However, with respect to the matters discussed
below, an adverse judgment or other outcome or settlement with respect to any such proceedings could result in
fines or payments by MasterCard and/or could require MasterCard to change its business practices. In addition,
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