Pizza Hut 2007 Annual Report Download - page 74

78 YUM! BRANDS, INC.
The deferred tax provision includes $120 million and $39
million of benefit in 2007 and 2005, respectively, and $4 million
of expense in 2006 for changes in valuation allowances due to
changes in determinations regarding the likelihood of the use of
certain deferred tax assets that existed at the beginning of the
year. The deferred tax provisions also include $16 million,$72 mil-
lion and $26 million in 2007, 2006 and 2005, respectively, for
increases in valuation allowances recorded against deferred tax
assets generated during the year. Additionally, foreign currency
translation and other adjustments contributed to the fluctuations.
Total changes in valuation allowances were decreases of $37 mil-
lion and $36 million in 2007 and 2005, respectively, and an
increase of $112 million in 2006. See additional discussion of
federal valuation allowances adjustments in the effective tax rate
discussion below.
The deferred foreign tax provision includes $17 million and
$2 million of expense in 2007 and 2006, respectively, for the
impact of changes in statutory tax rates in various countries.
The $17 million of expense for 2007 includes $20 million for
the Mexico tax law change enacted during the fourth quarter of
2007. The 2007 deferred state tax provision includes $4 million
($3 million, net of federal tax) of benefit for the impact of state
law changes. The 2006 deferred state tax provision includes
$12 million ($8 million, net of federal tax) of expense for the
impact of state law changes. The 2005 deferred state tax provi-
sion includes $8 million ($5 million, net of federal tax) of expense
for the impact of state law changes.
U.S. and foreign income before income taxes are set forth
below:
2007 2006 2005
U.S. $ 527 $ 626 $ 690
Foreign 664 482 336
$ 1,191 $ 1,108 $ 1,026
The above U.S. income includes all income taxed in the U.S. even
if the income is earned outside the U.S.
The reconciliation of income taxes calculated at the U.S.
federal tax statutory rate to our effective tax rate is set forth
below:
2007 2006 2005
U.S. federal statutory rate 35.0% 35.0% 35.0%
State income tax, net of federal
tax benefit 1.0 2.0 1.6
Foreign and U.S. tax effects
attributable to foreign operations (5.7) (7.8) (8.4)
Adjustments to reserves and
prior years 2.6 (3.5) (1.1)
Repatriation of foreign earnings —(0.4) 2.0
Non-recurring foreign tax credit
adjustments —(6.2) (1.7)
Valuation allowance additions
(reversals) (9.0) 6.8 (1.1)
Other, net (0.2) (0.3) (0.5)
Effective income tax rate 23.7% 25.6% 25.8%
Our 2007 effective income tax rate was positively impacted by
valuation allowance reversals. In December 2007, the Company
finalized various tax planning strategies based on completing a
review of our international operations, distributed a $275 million
intercompany dividend and sold our interest in our Japan uncon-
solidated affiliate. As a result, in the fourth quarter of 2007, we
reversed approximately $82 million of valuation allowances asso-
ciated with foreign tax credit carryovers that we now believe are
more likely than not to be claimed on future tax returns. In 2007,
benefits associated with our foreign and U.S. tax effects attribut-
able to foreign operations were negatively impacted by $36 million
of expense associated with the $275 million intercompany divi-
dend and approximately $20 million of expense for adjustments
to our deferred tax balances as a result of the Mexico tax law
change enacted during the fourth quarter of 2007. These nega-
tive impacts were partially offset by a higher percentage of our
income being earned outside the U.S. Additionally, the effective
tax rate was negatively impacted by the year-over-year change in
adjustments to reserves and prior years.
Our 2006 effective income tax rate was positively impacted
by the reversal of tax reserves in connection with our regular U.S.
audit cycle as well as certain out-of-year adjustments to reserves
and accruals that lowered our effective income tax rate by 2.2
percentage points. The reversal of tax reserves was partially off-
set by valuation allowance additions on foreign tax credits of
approximately $36 million for which, as a result of the tax reserve
reversals, we believed were not likely to be utilized before they
expired. We also recognized deferred tax assets for the foreign
tax credit impact of non-recurring decisions to repatriate certain
foreign earnings in 2007. However, we provided full valuation
allowances on such assets as we did not believe it was more
likely than not that they would be realized at that time. The 2005
tax rate was favorably impacted by the reversal of valuation allow-
ances and the recognition of certain non-recurring foreign tax
credits that we were able to substantiate during 2005.
Adjustments to reserves and prior years include the effects
of the reconciliation of income tax amounts recorded in our Con-
solidated Statements of Income to amounts reflected on our tax
returns, including any adjustments to the Consolidated Balance
Sheets. Adjustments to reserves and prior years also includes
changes in tax reserves, including interest thereon, established
for potential exposure we may incur if a taxing authority takes a
position on a matter contrary to our position. We evaluate these
reserves, including interest thereon, on a quarterly basis to insure
that they have been appropriately adjusted for events, including
audit settlements, that we believe may impact our exposure.